Capital gains tax in Hawaii (2026): selling a business, real estate or farm

Two rates in one return: 7.25% for gain, up to 11% for the rest

Hawaii is one of the few states that still taxes long-term gain more lightly than wages. HRS 235-51(f) gives individuals, estates and trusts an alternative tax: if it produces less tax, net capital gain is taxed at 7.25% and the rest of income at the regular rates (2026). The regular schedule under Act 46, SLH 2024 tops out at 11% on joint taxable income over $650,000 for 2025 and 2026 (Hawaii Department of Taxation, May 2026 legislative update).

That spread drives Hawaii planning. Long-term gain and unrecaptured Section 1250 gain (part of net capital gain) get the 7.25% cap; Section 1245 recapture, short-term gain and interest on a seller-financed note do not. A 2026 bill, HB 476, would have raised the cap to 9%, but no conference draft or act followed.

Federal tax comes first in dollars: 0%, 15% or 20% on long-term gain, with 20% above $613,700 of joint taxable income in 2026 (Rev. Proc. 2025-32), plus the 3.8% net investment income tax (IRC 1411). See the capital gains hub.

Worked examples: building, business and the cost of recapture

The Honolulu couple in the first example sells a rental. All $1.7 million is net capital gain, so the Hawaii layer is $123,250, close to a straight 7.25% (2026), and the all-in total is $552,203. Compare the third example, a construction company sale of about the same size where $400,000 is equipment recapture: Hawaii tax rises to $131,000 because that slice is taxed at the 11% ordinary rate rather than the 7.25% cap.

For business sellers that makes the purchase price allocation worth more in Hawaii than in a flat-rate state. Dollars moved from equipment to goodwill or land save federal tax and about 3.75 percentage points of Hawaii tax (11% versus 7.25%, 2026), though the buyer prefers the opposite. See depreciation recapture and selling a construction company.

2027 and later: a 13% bracket widens the gap

Senate Bill 3125 became Act 24, SLH 2026. Beginning with tax year 2027 it adds a 13% top bracket over $1,000,000 of joint taxable income, while the 7.25% capital gains cap is unchanged (DOTAX legislative update, May 2026). A seller who closes in 2027 or later and has a large block of recapture, a short-term gain or a big interest year on a note could see that ordinary slice taxed at 13% in Hawaii.

That changes the usual installment logic. A Section 453 installment sale still spreads long-term gain at the same 7.25%, but all Section 1245 recapture is taxed in the year of sale regardless of payments, and the interest the buyer pays you is ordinary income each year. Model 2026 against 2027 before you set a closing date.

HARPTA: 7.25% of the price, not the gain

The Hawaii Real Property Tax Act requires the buyer to withhold 7.25% of the amount realized when a nonresident sells Hawaii real property (HRS 235-68(b), 2026). Because it is computed on price, it often far exceeds the actual tax. In the second example a Texas couple sells a Maui condo for $2.0 million: HARPTA withholding is $145,000, while the Hawaii tax the engine computes on their gain is $90,625. The difference comes back only when they file a Hawaii nonresident return, unless they act before closing.

• Form N-288B is the application to reduce or waive withholding, for example when the gain is small or the sale is part of a like-kind exchange.
• Form N-289 certifies an exemption, such as a seller who is a Hawaii resident.
• On an installment sale, the amount realized for the year is the principal portion of the payments received that year (Form N-288 instructions), so withholding tracks principal rather than the full price at closing.

Texas has no income tax to credit the Hawaii payment against, so their full bill is $410,972. See capital gains on a second home.

Conveyance tax and Hawaii basis

Hawaii's conveyance tax is paid at recording on the full consideration. The published rates in HRS 247-2 run from 10 cents per $100 under $600,000 to $1.00 per $100 at $10 million or more, with a higher schedule (15 cents to $1.25 per $100) when a condo or single-family home is sold to a buyer who cannot claim a county homeowner exemption; confirm the current tiers with your escrow officer, because the legislature revisits them.

Hawaii also decouples from federal bonus depreciation: HRS 235-2.4 makes IRC 168(k) not operative. Owners who took bonus depreciation federally have a higher Hawaii basis, so the Hawaii gain on equipment or a cost-segregated building is smaller than the federal gain. Keep the Hawaii depreciation schedule, and read cost segregation before a sale.

Hawaii estate tax and holding for the step-up

Hawaii keeps its own estate tax with an exclusion tied to the 2017 federal amount, $5,490,000, and rates reaching 20% on Hawaii taxable estates over $10,000,000 (HRS 236E-6 and 236E-8). For an older Oahu or Maui owner of appreciated land, holding for the step-up at death removes the 7.25% income tax and federal gain but leaves the property in a Hawaii taxable estate, so the comparison needs both taxes. For a full comparison of selling now, an installment note, a 1031 exchange or holding, get the Big Sale Tax Analysis.

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