Kauai: Qualifed Opportunity Zones vs 1031 Exchanges

According to a recent article by Daniel Goodwin, founder of Provident Wealth Advisors, when it comes to deferring taxes, a 1031 “Like-Kind” Exchange has the advantage. However when it comes to profit realization, the advantage shifts to Qualified Opportunity Zones.

Kukui'ula in South Kauai Qualified Opportunity Zone

Kukui’ula is located within the South Kauai Qualified Opportunity Zone

Qualified Opportunity Zones vs. 1031 Exchanges

According to Goodwin, real estate investors have utilized the Section 1031 Exchange for decades to trade assets while deferring taxable gains.  The Qualified Opportunity Zone program provides for investors to eliminate taxable profits altogether. The Tax Cuts and Jobs Act of 2017 created the framework for state governors to nominate over 8,000 Qualified Opportunity Zones in the nation: 25 zones were certified in Hawaii by the US Treasury Department; two zones on the island of Kauai.

The Act offers tax incentives for investing in communities to encourage economic growth and job creation. Those Kauai communities are the north shore’s Hanalei-Haena census tract, and the south shore’s Koloa-Lawai census tract.

lawai road poipu along the ocean

Oceanfront Lawai Road in Poipu is located within the South Kauai Qualified Opportunity Zone

The tax benefits are for those individuals who invest through a Qualified Opportunity Fund (QOF), an entity such as a corporation or a partnership, specifically created to invest in real estate in a Qualified Opportunity Zone (QOZ). As Goodwin points out, it is prohibited to purchase existing real estate without making significant improvement.

The improvement will be deemed signficant if the investment is equal to or greater than the value of the asset, and the improvement must be completed within 30 months.

For example, an investor would form a Kauai QOF LLC for the purpose of investing in Kauai QOZ real estate. The investor deposits capital gains from the sale of real estate, stocks or from the sale of a business, into that fund, and the fund purchases a $1.4 million Kukui’ula vacant lot located within the South Kauai QOZ. Within 30 months the fund improves the vacant lot by building a home at a cost of $1.4 million. Total investment: $2.8 million. The QOF’s business income required under the Act is earned by renting out the improved asset as a vacation rental home, as permitted under the County of Kauai zoning ordinance and the Kukui’ula community rules.

According to Goodwin, the tax owing on that $2.8 million in capital gains in our example, is generally considered payable in 2027. However if the fund holds its QOF asset for 10 years or more, 100% of the appreciation from the sale of that asset is tax free. In this example, if the home is held for 10 years, and then sold for $4.8 million, the $2 million appreciation is tax free.


According to Goodwin, the combination of tax deferral and tax-free investing can provide a significant advantage to QOF investments versus other traditional investments that are taxed on investment gains. You may want to ask your advisor to provide a side-by-side comparison.

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Kennth D Allison

December 17, 2022

Read the above article and have visited the area in question last year. Please if possible provide a map of the areas discussed. I travelled all around the island for 2 weeks in a rental car poking my nose around wherever it was allowed. We are going to Kona this winter in an attempt to visit all 4 islands but so far Kauai is by far our favorite . This article and specifically the north shore is where we would like to build or buy.
Looking forward to your response . KenA

Jim Deville

July 12, 2023

Thanks Lori. Great read. Do you know how strict the 30 month rule is? For instance, if it takes a little longer than 30 months to build once the lot is purchased? Or is there a required amount of completion (or dollars spent) at the 30 month mark?

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