1031 Exchange from Hawaii to Mainland

[Ashish G.]

Hi

I have a rental property in Hawaii that I want to do a 1031 exchange and buy a primary residence on Mainland. Is that possible? If yes, will Hawaii hold capital gain tax back? And will I need to recapture depreciation?

[Dave Foster]

@Ashish G., You can 1031 exchange from any US investment property to any other investment property located in the US.  Going from HI to the mainland is not a problem.

What is a problem is that you cannot 1031 from investment to your primary residence.  1031 is only available for property you have the intent of holding for investment use.  So if your timelines are tight you will just have to sell the HI property and pay all . the tax and depreciation recapture and use the leftover funds to buy your primary.

However if you've got a little time and patience you can still use the 1031 exchange to buy an investment property that you later convert into your primary residence.  When you use the 1031 exchange this way you will defer all federal and HI capital gains and depreciation recapture.  There is no statutory holding period before you change the use of the property.  Only that you must be able to demonstrate that your intent in purchasing the property was to hold it for investment.  There is an IRS safe harbor at 2 years.  A lot of folks feel good at anything more than one year.  And there could always be circumstances present that may allow for something shorter (or longer).

I believe that HI does have a withholding that you'll need to exempt out of if you want to avoid that in your 1031.