2025 Kauai Real Estate Investing: 1031 Exchanges vs Opportunity Zones

On Kauai, there are designated vacation rental home areas (VDA) as well as ready-to-build homesites in a qualified opportunity zone (QOZ) for the savvy real estate investor to consider. Kukui’ula is a 1,000-acre resort community with VDA status located in the South Kauai Opportunity Zone and currently has both investment vehicles available for sale.

According to Daniel Goodwin, Chief Investment Strategist for Provident Wealth Advisor, the preference of a 1031 exchange over a QOF investment is a function of the investor’s circumstances and needs. There are four key factors to consider: 1) flexibility 2) tax benefits 3) investment potential and 4) timing and deadlines.

1. Flexibility

The 1031 exchange vehicle allows an investor to exchange almost any type of real estate for another, for example a California apartment building for a Kauai vacation rental home.

The County of Kauai has designated Visitor Destination Areas (VDA) where short-term vacation rental homes and condominiums are allowed.  South Kauai’s 1,000-acre Kukui’ula resort community has this Kauai VDA designation and there are currently a limited number of homes for sale in the community.

The opportunity zone vehicle limits investment to specific geographic areas designated as opportunity zones, and gains from the sale of real estate, stocks, and a business may be invested.

The South Kauai Opportunity Zone encompasses the 1,000-acre Kukui’ula resort community, and there are currently a limited number of homesites shovel-ready for a vacation rental home improvement for sale.

I know of no other area like Kukui’ula where both investment vehicles are available for investors: 1031 exchange homes and opportunity zone homesites.

Kahalawai Street Homesite 30: $975,000. MLS 716347 Homes sold for $8-$10 million in Kahalawai Neighborhood during 2024.

2. Tax Benefits

According to Goodwin, the main draw of a 1031 exchange is tax deferral. It’s like a game of musical chairs and you get to choose when to stop the music, and pay the tax.

With opportunity zones, you get a tax deferral on your initial gains until 2026, and if you hold your opportunity zone investment for more than 10 years, any gains on that improved investment are completely tax free.

3. Investment Potential

1031 exchanges allow you to leverage your entire investment, including the gains, into a new property.

While you can invest only gains from the sale of real estate, stock or a business (not the entire proceeds from a sale), the potential for growth in the up-and-coming opportunity zone can be significant.

As Goodwin notes, if immediate cash flow is of high importance, then the 1031 exchange might be more attractive. However if growth is more important than cash flow, then the opportunity zone could be the winner.

Aepo Nei Homesite 13: $1,430,000. MLS 669283. Aepo Nei Neighborhood homes are currently being offered for sale in the $7 million range.

4. Timing and Deadlines

1031 exchanges have strict deadlines. You have 45 days to identify potential replacement properties and 180 days to close the transaction.

While you have 180 days to invest your gains into a qualified opportunity fund (QOF) which one may form by filing Form 8996 with the IRS, the QOF must invest at least 90% of its fund into opportunity zone property in compliance with the specific tests set by the program.  For 2024 gains, the investor has until June 2025. For 2025 gains, the date is June 2026.

Discuss your investment plans with your tax and financial advisors.

Looking for Opportunity Zone property on Kauai?

Contact me, Lori Decker, Kauai Opportunity Zone specialist.