Your Rental Property and the Maui Fires: Lessons Every Property Owner Should Know

I've worked with real estate owners in the aftermath of natural disasters, and the Maui fires were a stark reminder of how exposed many property owners are, not because they were careless, but because the risks evolved faster than their preparation did. In a matter of hours, well-maintained rental properties were gone. And then the real complexity began.

The Insurance Gap That Showed Up in Maui

Many properties were insured for their purchase price or original appraised value, not their current replacement cost. In a market like Maui, where construction costs are among the highest in the nation and had risen significantly since 2020, the gap between coverage and actual replacement cost was staggering for some owners.

Rental properties also need specific coverage provisions that standard homeowner's policies may not include: loss of rental income during the reconstruction period (sometimes called "fair rental value" or "loss of rents" coverage), additional living expenses if the owner was also residing on-site, and coverage for detached structures like garages, storage buildings, and carports.

A rental property's largest hidden insurance gap is often the loss-of-rents provision, or the absence of one. Check yours before you need it.

The Tax Question Nobody Was Prepared For

When insurance pays out more than a property's adjusted cost basis, the difference is a taxable gain, even when the property was destroyed. For long-term owners of Maui properties, that gain could be enormous. Section 1033 of the tax code allows those gains to be deferred by reinvesting in replacement property, but only if you know about it and act within the applicable time windows.

Many affected property owners learned about Section 1033 from their CPA, after the disaster. The ones who came out ahead were those who had professional relationships with advisors who understood this provision and moved quickly.

Insurance proceeds on a destroyed property can trigger a large capital gain tax event. Section 1033 can defer it, but only if you act within the applicable time window.

What Every Rental Property Owner Should Do Now

Review your coverage limit against current construction costs, not purchase price. Confirm your policy includes loss-of-rents coverage for the full estimated reconstruction period, often 12 to 24 months. If you're in a wildfire, hurricane, or flood zone, review whether your current insurer will continue to offer coverage at renewal, because this is no longer guaranteed in many markets. And meet with a CPA who understands Section 1033 so you know your options in the event of a total loss.

• Reset dwelling limits to current local reconstruction cost, not market value or basis
• Confirm loss-of-rents or fair rental value coverage, and the number of months it pays
• Check coverage for detached structures, liability, and debris removal
• Document the property with dated photos and video stored off-site
• Ask your broker directly about renewal likelihood in your market