1031 Exchange in Hawaii: HARPTA, Conveyance Tax and DST Options

HARPTA withholds 7.25% of the amount realized unless you hand the buyer Form N-289

Under HRS section 235-68, the buyer of Hawaii real property must withhold 7.25% of the amount realized and pay it to the Department of Taxation within 20 days of the transfer on Forms N-288 and N-288A. The rule targets nonresidents, but the Department's Tax Facts 2010-1 is explicit that a buyer must withhold from any seller, resident or not, who fails to deliver a certificate.

Form N-289 stops the withholding on three grounds: the seller is a resident person, the transfer is covered by a nonrecognition provision of the Internal Revenue Code as operative under chapter 235, or the property was the seller's principal residence sold for $300,000 or less. A 1031 exchange is the second ground, and the form asks for a short description of the transfer plus a summary of the law and facts supporting the claim.

The certificate goes to the buyer rather than to the state, so it has to be signed before closing and kept with the escrow file. A seller who lets the 7.25% be withheld anyway recovers it by filing Form N-288C for a tentative refund or by claiming the credit on that year's Hawaii return.

• Mainland owners exchanging out of Hawaii should confirm with escrow that the nonrecognition box on N-289 is completed, since the resident-person box does not apply to them.
• Cash boot taken at closing is outside the certificate; Form N-288B asks the Department for a withholding certificate that limits withholding to the tax actually expected, and it must be filed before the transfer.
• Resident person includes a corporation, partnership, LLC, trust or estate domiciled or administered in Hawaii, so a Hawaii LLC can certify on box 1 even when its members live elsewhere.

Hawaii caps long-term capital gains at 7.25%, and the exchange defers even that

Hawaii taxes an individual's net long-term capital gain at an alternative rate of 7.25% whenever that is lower than the ordinary rate, computed on the Tax on Capital Gains Worksheet in the Form N-11 instructions. For tax year 2025 the ordinary brackets run from 1.4% to 11%, with the top rate beginning at $325,000 of taxable income for single filers and $650,000 for joint filers.

Because the Hawaii return starts from the federal computation and the nonrecognition provisions of the Code are operative under chapter 235, gain deferred federally is deferred for Hawaii as well. Nothing is paid at the 7.25% rate until a later taxable sale, which is precisely why the N-289 certificate exists.

A 2026 House bill (HB 1850) would have raised the individual capital gains rate to 9%; it crossed over to the Senate in March 2026 and died in committee when the session ended, so the 7.25% cap remains in place for tax year 2026.

The conveyance tax is the grantor's, and an exchange does not avoid it

Hawaii's conveyance tax is owed by the grantor on the actual and full consideration, with Form P-64A and payment due to the Bureau of Conveyances within 90 days of the transaction. The standard schedule in the P-64A instructions (Rev. 2025) starts at $0.10 per $100 below $600,000 and steps up through $0.20, $0.30, $0.50, $0.70 and $0.90 to $1.00 per $100 at $10 million and above.

A condominium or single-family residence whose buyer will not qualify for a county homeowner's exemption is taxed on a higher schedule, from $0.15 per $100 under $600,000 to $1.25 per $100 at $10 million or more. Investor buyers of your rental fall in that column, which shapes what they can pay even though you remit the tax.

The instructions treat an exchange of properties as two taxable conveyances measured by fair market value, and a deferred exchange run through a qualified intermediary is, for the Bureau of Conveyances, simply a sale for consideration. Conveyance tax bills moved through both chambers in the 2026 session, so confirm the tiers on the current P-64A before you close.

Leasehold versus fee simple: the 30-year test decides what can be exchanged

A large share of Hawaii's condominium stock is leasehold, where the seller conveys a lease from a fee owner rather than the land itself. Federal regulations at 26 CFR 1.1031(a)-1(c) treat a leasehold with 30 or more years to run as like kind to a fee interest, so a leasehold with a long remaining term can be exchanged, while one with fewer than 30 years generally cannot.

Hawaii's conveyance tax follows the document: a lease, sublease or assignment of lease is a taxable conveyance unless the unexpired term is under five years, and an assignment is taxed on the consideration paid plus the capitalized value of any increase in lease rent, discounted at 6% under the P-64A tables.

The HARPTA forms are written for any disposition of a Hawaii real property interest, so plan the N-289 certificate for a leasehold sale exactly as you would for fee simple.

General excise tax and county property tax end when the Hawaii rental is gone

Renting or leasing real property is a business activity subject to Hawaii's general excise tax at 4%, plus the 0.5% county surcharge that Honolulu, Maui, Kauai and Hawaii County all levy through December 31, 2030, according to Tax Facts 37-1 and the Department's GET guidance. A seller who moves the equity into mainland DSTs collects no Hawaii rent afterward, and final GET returns should be discussed with a CPA.

Property tax is set by the four counties, not the state, and non-owner-occupied classes carry the highest residential rates. For the year beginning July 1, 2025, Honolulu's Residential A class charges $4.00 per $1,000 on the first $1 million of value and $11.40 above it, while Maui's non-owner-occupied tiers run from $5.87 to $17.00 per $1,000.

Those county bills fall away with the sale, and DST interests hold no Hawaii real property, so a resident's only remaining Hawaii item is the income tax return.

Honolulu's Residential A class bills non-owner-occupied property at $11.40 per $1,000 above $1 million, and a third tier starts July 1, 2027

Under section 8-7.1(c)(4) of the Revised Ordinances of Honolulu, a parcel improved with no more than two single-family dwellings, or a condominium unit, is classified Residential A when its assessed value is $1,000,000 or more and it carries no home exemption. A rental, a second home or a unit held by an LLC fits that definition by design, because only an owner-occupant can claim the exemption. For the tax year running July 1, 2026 to June 30, 2027 the Real Property Assessment Division's final rates put Residential A Tier 1 at $4.00 per $1,000 of net taxable value on the first $1,000,000 and Tier 2 at $11.40 per $1,000 above it, unchanged from the prior year, while the ordinary Residential class pays $3.50.

The Division's own worked example shows the gap. A $1,600,000 unit with a home exemption is taxed as Residential at $3.50 on $1,480,000, or $5,180 a year; the same unit without the exemption is Residential A and pays $4,000 on the first million plus $6,840 on the remaining $600,000, or $10,840. The second figure is the one an investor pays, and it is what the rent has to cover before any return.

Ordinance 25-44, which began as Bill 34 (2024) and passed the Council on October 1, 2025, rewrites the class for tax years beginning July 1, 2027. The entry threshold rises from $1,000,000 to $1,300,000 of assessed value, Tier 1 then covers net taxable value up to $1,300,000, Tier 2 runs from $1,300,000 to $3,500,000, and a new Tier 3 applies above $3,500,000. Transient vacation units get the same three-tier treatment at $900,000 and $2,000,000. The ordinance sets the tiers; the Council's annual rate resolution in 2027 will set the dollar rate for each, so the cost of the top tier is not yet known.

A Delaware Statutory Trust is outside this tax entirely. Residential A is a classification of Oahu real property, assessed and billed to the owner of record of the parcel, and a DST interest is a beneficial interest in a trust that owns property in another state. The trust pays that state's property tax out of its rents before it distributes anything, so the cost does not disappear, but it is set by a mainland county at mainland rates and never arrives as a Honolulu bill. A Honolulu owner who completes the exchange hands Form N-289 to the buyer, pays the conveyance tax, and receives no further Residential A assessment after the sale.