Don’t sell your investment property until you do the math

BY: Greg Bloss | 1031 Exchange | Jul 14, 2026

Don’t sell your investment property until you do the math.

A 1031 Exchange is a powerful tool for real estate investors, but it is often misunderstood. It gets its name from Section 1031 of the Internal Revenue Code and lets you sell an investment or income property and put off paying capital gains taxes by reinvesting the money into a similar property. The important thing to remember is that you are deferring taxes, not avoiding them. In real estate, though, time is money, and keeping your capital invested instead of sending it to the IRS can make a big difference in your long-term wealth.

This strategy helps sellers on Kauai who want to exchange into another property, whether that new property is on the island or on the mainland. It also works for buyers bringing 1031 funds from a sale elsewhere and looking to invest in Hawaii. It is important to understand how the numbers work before you make any decisions.

How Your Capital Gain Is Actually Calculated

This is where many people are surprised. You can sell a property, see little cash profit, and still owe a lot in capital gains tax. That is because your taxable gain is not based on what you take home. Instead, it is the difference between your adjusted basis and your sale price, minus your closing costs.

Your adjusted basis is what you paid for the property, plus any improvements you made, minus the depreciation you have claimed over the years. The depreciation deduction lowers your taxable income each year you own a rental, but when you sell, it reduces your basis and increases your taxable gain. The IRS calls this depreciation recapture, and it is taxed at a flat federal rate of 25%.

Step 1 — Calculate Your Adjusted Basis

Step 2 — Calculate Your Capital Gain

Step 3 — Estimate Your Tax Bill Without an Exchange

A Note on Tax Rates (General Reference — 2025/2026)

Federal long-term capital gains: 0%, 15%, or 20% depending on your taxable income. The 20% rate applies to single filers above $533,401 and married filers above $600,051. Depreciation recapture: flat 25% federal rate. Hawaii long-term capital gains: flat 7.25% state rate. Net Investment Income Tax (NIIT): 3.8% surtax for single filers with AGI above $200,000 or married filers above $250,000. The example above uses the 15% federal rate. Your actual rate depends on your income.

Consult your CPA or tax advisor for figures specific to your situation.
* See disclaimer below

Achieving Full Tax Deferral

To fully defer both federal and Hawaii capital gains taxes, you need to reinvest all of your exchange proceeds. You must also take on equal or greater debt in the replacement property or add extra cash to cover any difference. If you only reinvest part of the proceeds, the IRS calls the leftover amount “boot,” and that portion becomes taxable right away.

Relinquished Property — What You Are Selling

Replacement Property — What You Are Buying

Your minimum down payment on the replacement property must be at least as much as the net proceeds from your sale. In this example, both amounts are $445,000, which means you have a fully deferred exchange. If you put in less, the difference is considered taxable boot.

The Rules You Must Follow

You cannot decide to do a 1031 Exchange after closing. The setup must be ready before you get any sale proceeds, and the IRS has strict deadlines that apply no matter what is happening in the market or on the calendar.

Critical Timelines

45 Days — From the closing of your relinquished property, you have 45 calendar days to

formally identify your replacement property in writing. No exceptions.

180 Days — You must close on the replacement property within 180 calendar days of your sale.

Qualified Intermediary — A QI must hold your sale proceeds throughout the process. You cannot touch the funds. If you do, the exchange is disqualified.

Like-Kind Requirement — Any U.S. investment real property qualifies as like-kind to any other U.S. investment

real property.

A Kauai rental for mainland commercial? That works. Equal or Greater Value — To fully defer taxes,

the replacement property must be of equal or greater value than the property you sold.

The Reverse Exchange — Buy First, Sell Later

A standard 1031 Exchange follows a simple order: you sell first, the proceeds go to a Qualified Intermediary, and then you have 45 days to identify your replacement property and 180 days to close. This works well if you have plenty of time. In a competitive market like Kauai, though, you often do not.

A Reverse Exchange changes the order completely. You buy the replacement property first and sell your current property afterward, still following the 1031 rules and still deferring your capital gains. For buyers coming to Kauai with exchange funds who find the right property before their sale closes, or for Kauai owners who find their next property before selling their current one, a Reverse Exchange can mean the difference between closing a deal and missing out.

How It Works — The Parking Structure

Because IRS rules do not allow you to hold title to both the relinquished and replacement property simultaneously during an exchange, a Reverse Exchange uses a parking arrangement governed by IRS Revenue Procedure 2000-37.

Here is how it works: a specially created entity called an Exchange Accommodation Titleholder, or EAT, takes legal title to one of the properties for you while the exchange is in progress. The EAT is usually a single-member LLC set up by your Qualified Intermediary. It holds the title only for a short time. You still control and benefit from the property during this period, but this legal separation is what lets the IRS recognize the transaction as a valid exchange.

Two Structures — Which One Applies to You

Structure 1 — Park the Replacement Property (Most Common)

You find the property you want to buy before your current property sells.

The EAT acquires the replacement property and holds title.

You work to sell your existing property within 180 days.

When your sale closes, the EAT transfers the replacement property to you and the exchange is complete.

Best for: Buyers coming into Kauai, or Kauai owners who find their next property before their current one sells.

Structure 2 — Park the Relinquished Property (Less Common)

The EAT takes title to your existing property first. You acquire the replacement property directly. The EAT then sells your existing property to the end buyer.

Best for: Situations involving specific financing structures or where improvements are being made to the relinquished property.

The Critical Deadlines — Same Clock, Different Start

The 45-day and 180-day rules still apply in a Reverse Exchange, but the timing is different. In a standard exchange, the clock starts when you close on the sale of your old property. In a Reverse Exchange, it starts when the EAT takes ownership of the parked property.

Reverse Exchange Timeline

Day 0 — EAT takes title to the parked property. The clock starts.

Days 1 to 45 — You must formally identify the relinquished property in writing.

Days 1 to 180 — The full exchange must be completed. The parked property must be transferred (sold or conveyed to you) within this window.

Within 5 Business Days of Day 0 — The Qualified Exchange Accommodation Arrangement (QEAA) must be fully signed and in place. Missing this deadline forfeits the safe harbor.

Missing either the 45-day or 180-day deadline disqualifies the exchange. The full gain becomes taxable immediately. There are no extensions.

What a Reverse Exchange Actually Costs

Reverse Exchanges are more complicated and cost more than standard exchanges. It is important to understand the costs before you start.

Bridge financing is often the biggest factor. Since you are buying before you sell, you need money to close on the replacement property before you get your equity from the sale. Depending on your situation, this could mean a bridge loan, using existing credit, or other short-term financing. Lenders who do not know EAT structures can slow things down, so it is important to work with professionals who have experience with both the legal and lending sides.

When a Reverse Exchange Makes Sense

A Reverse Exchange is a good choice when the extra complexity costs less than losing the deal or paying the tax. Because selling a Kauai investment property can create a large capital gains tax, the numbers often make the exchange structure the better option.

Strong Candidates for a Reverse Exchange

You have found the right replacement property and cannot risk losing it while you wait for your current property to sell.

You are coming into Kauai with exchange funds from a mainland sale that has not yet closed.

Your relinquished property is difficult to time — tenant leases, permitting, or market conditions make the sale date unpredictable.

The capital gains tax you would pay without the exchange is significant enough to justify the additional cost and complexity — which on a $1M-plus Kauai property, it almost always is.

Let’s Talk Through Your Numbers

The numbers here are meant to give you a basic framework, not an exact tax bill. Every exchange is unique, and your numbers are what matter most. What we can say is that Kauai real estate moves quickly, values are strong, and the capital gains tax on an investment property you have owned for any time is usually significant.

Whether you are selling here and buying elsewhere, buying here with funds from a mainland sale, or trying to act on an opportunity before your current property is ready to close, knowing your options before you start is what makes the difference between a smart move and an expensive one.

We have handled 1031 situations in all of these scenarios and are happy to talk with you about your numbers and what makes sense for your situation.

* Disclaimer

Greg Bloss and Monica Swapp are licensed real estate professionals, not attorneys or CPAs. The information on this page is provided for general educational purposes only and does not constitute legal, tax, or financial advice. Tax laws change; rates vary based on individual circumstances, and the examples shown use general assumptions that may not reflect your specific situation. Before making any decisions related to a 1031 Exchange, please consult a qualified tax advisor, CPA, or attorney.

Greg Bloss and Monica Swapp | Bloss Swapp Collective | The Agency

From Mauka to Makai

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