Opportunity Zones Update: Kauai TVR Condos May Qualify as OZ Business

As a real estate professional on Kauai’s South Shore, I work with many buyers who are reinvesting proceeds from the sale of a business or other highly appreciated assets.

For the right investor, Opportunity Zones can provide a compelling long-term strategy when purchasing and operating a vacation rental property in select areas of Kauai.

However it’s important to set expectations correctly. Opportunity Zones are not about avoiding capital gains taxes in the short term. In today’s environment, capital gains invested into an Opportunity Zone are generally deferred only until the end of 2026. That means investors should plan on paying the tax on their original gain relatively soon. This requires thoughtful cash-flow planning and is not a substitute for a short-term tax deferral strategy.

Why Do Investors Still Pursue Opportunity Zone Properties?

With Opportunity Zones on Kauai, the real benefit is long-term.

If an Opportunity Zone investment is held for ten years or more, the future appreciation of that investment can be completely tax-free. According to Brian Evans, CPA, founder and wealth advisor, Madrona Financial & CPAs, that includes not only capital gains on sale, but also depreciation recapture. In practical terms, this means the growth of the new investment — not the original gain — may never be taxed, regardless of future changes to step-up-in-basis rules.

Oceanfront Whalers Cove at Poipu is located in South Kauai Opportunity Zone

South Kauai Opportunity Zone

Certain areas of the South Shore of Kauai, including parts of Lawai and Koloa, fall within designated Opportunity Zones and are well suited to this strategy. These areas combine strong vacation-rental demand, limited inventory, and older condo stock that naturally lends itself to renovation. When a property is substantially improved and operated as an active short-term rental business, it can qualify under Opportunity Zone rules. Vacation rental condo complexes in South Kauai’s Opportunity Zone include Whalers Cove at Poipu, Kuhio Shores at Poipu, Prince Kuhio, and Lawai Beach Resort.

Exception to the Substantial Improvement Rule

It’s my understanding there is one exception to the substantial improvement rule for an Opportunity Zone business. If the Qualified Opportunity Zone business is the first to place the Opportunity Zone property in service, substantial improvement is not required. For example. Whalers Cove #115 has no rental history according to the current Kauai MLS listing. Therefore this oceanfront condo, zoned for vacation renting, may qualify for the “original use” exception for a Qualified OZ business.

1031 Exchange versus Opportunity Zones

According to Mr. Evans, investors often compare Opportunity Zones to 1031 exchanges, but they serve different goals. A 1031 exchange is excellent for deferring taxes indefinitely and works particularly well for investors whose primary objective is to pass property to the next generation and receive a step-up in basis at death (or a partial step-up in Hawaii, which is a common-law state). Opportunity Zones, by contrast, are designed for investors who may want to sell during their lifetime and permanently eliminate tax on future appreciation, rather than relying on estate-planning outcomes.

The Real Estate Itself Must Make Sense First

Opportunity Zone investments tend to work best for investors with a long-term mindset, sufficient liquidity to handle the near-term tax bill, and a desire to own high-quality Kauai real estate for the long run. As with any strategy, the real estate itself must make sense first — the tax benefits should enhance a good investment, not justify a bad one.

South Kauai Opportunity Zone Expires December 2026

For the right buyer, an Opportunity Zone vacation rental on Kauai’s South Shore can be more than just a property — it can be a long-term, tax-efficient real estate strategy in one of Hawaii’s most desirable markets. Since South Kauai’s Opportunity Zone is scheduled to expire December 31, 2026 now is the time to consider if a South Kauai OZ investment works for you.

Kuhio Shores 413 was listed by Lori Decker and sold for $1,750,000. Find out more at MLS 720113.