The 1031 exchange is a powerful tool for real estate investors looking to defer capital gains taxes while continuing to build wealth through strategic reinvestments. However, executing a successful 1031 exchange requires more than swapping one property for another—it demands careful compliance with a stringent set of rules and timelines outlined by the IRS.

If you’re considering a 1031 exchange in Honolulu or anywhere across Hawaii, working with a seasoned expert like Christina Dwight at Commercial Investment Strategies, LLC can ensure your investment journey stays on the right side of the law—and the profit line.

A 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows investors to defer capital gains taxes on the sale of investment property, provided the proceeds are reinvested into a like-kind property of equal or greater value. This strategy enables investors to upgrade their portfolio, diversify assets, and compound wealth without immediate tax liability.

However, the benefits of a 1031 exchange can quickly evaporate if the process is mishandled. Strict requirements govern every step of the exchange, from the type of property involved to the timeline for reinvestment. Let’s take a closer look at the essentials of compliance and how you can navigate them successfully.

The replacement property must be of the same nature or character as the one being sold. In real estate, this is interpreted broadly. For example, you can exchange an apartment complex for a retail center, or raw land for an office building. As long as both properties are held for investment or productive use in a business, they generally qualify.

However, personal residences and properties held primarily for resale (flipping) do not qualify.

This is a frequently misunderstood area. Both the relinquished and replacement properties must be held for investment or used in a trade or business. If the IRS determines that either property was acquired for personal use or with the intent to flip, the exchange may be disqualified and taxes applied retroactively.

Proper documentation—such as lease agreements or business use records—can help support your position in case of an audit.

You have exactly 45 days from the date of closing on the relinquished property to identify potential replacement properties. The identification must be in writing and submitted to a qualified intermediary (QI). You must then close on one or more of those identified properties within 180 days of the original closing.

There are no extensions—even for weekends or holidays. Missing these deadlines, even by a single day, can nullify the entire exchange and trigger a capital gains tax bill.

You cannot handle the proceeds from the sale of your property. All funds must go through a qualified intermediary—an independent third party who facilitates the exchange process. If you receive the funds at any point, even temporarily, it may be considered a sale rather than an exchange, making the transaction taxable.

It’s important to choose a reputable QI, as this individual holds your funds and is critical in maintaining the integrity of the transaction.

To fully defer capital gains taxes, the new property must be of equal or greater value than the property sold. You must also reinvest all the equity and take on the same amount of debt—or more—unless you bring in additional cash to offset the difference.

If you receive any cash or reduce your mortgage liability without reinvesting it (called “boot”), it will be subject to capital gains tax.

The exchange must be properly reported on IRS Form 8824, filed with your annual tax return. This form outlines the timeline, properties involved, and the financial details of the transaction.

Any misstatements or inconsistencies can raise red flags, resulting in penalties or disqualification.

A tax professional familiar with 1031 exchanges is essential to ensure this reporting is done accurately.

Improper Identification of Properties: Investors sometimes list vague or non-specific replacement properties, which can be rejected by the IRS.

• Missing Deadlines: The 45- and 180-day time limits are unforgiving.
• Holding Properties for Too Short a Period: Selling a replacement property shortly after acquisition may indicate it wasn’t held for investment purposes.
• Incorrect Use of Proceeds: Using exchange proceeds to pay off unrelated debt or personal expenses may result in disqualification.
• Improper Use of Intermediaries: Using a friend, family member, or real estate agent as a QI can create conflicts of interest and may violate the rules.

Given the complexity of 1031 exchange rules and the high financial stakes involved, working with professionals who specialize in this field is not just a smart move—it’s essential. A seasoned commercial real estate expert can help you:

• Strategically plan your exchanges over the long term
• Ensure properties qualify as like-kind
• Manage timelines and documentation
• Coordinate with a qualified intermediary, CPA, and attorney
• Navigate local zoning, permit, and regulatory nuances—especially in Hawaii, where property laws can vary by island

Christina Dwight, principal broker at Commercial Investment Strategies, LLC, brings deep knowledge of Hawaii’s commercial real estate landscape and a proven track record of guiding clients through successful 1031 exchanges.

With her guidance, you can:

• Maximize deferral benefits while staying fully compliant
• Tap into exclusive investment opportunities across Oʻahu and beyond
• Gain clarity on timing, structure, and reinvestment strategies
• Minimize risk and streamline the transaction process

Whether exchanging a Waikīkī apartment building for a commercial retail center or selling mainland property to reinvest in Hawaii, Christina offers the strategic insight and local expertise you need.

Don’t let regulatory complexity derail your investment goals. Reach out to Christina Dwight at Commercial Investment Strategies, LLC for personalized guidance through every phase of your 1031 exchange.

Schedule a consultation today and take the first step toward building long-term wealth through smart, tax-deferred real estate investing.