Internal Revenue Code (“IRC”) Section 1031 provides that capital gain is not imposed on a taxpayer when property held for use in a trade or business or for investment is exchanged for “like-kind” property which is also intended to be used in a trade or business or for investment. IRC § 1031 is one of the few exceptions under Federal tax law to the requirement that gain be taxed on the disposition of property. Real estate is the most common property used in like-kind exchanges since the combination of depreciation, which reduces a taxpayer’s cost basis in the real estate, and appreciation in the value of the real estate, often creates a formidable tax bill when the real estate is sold. Utilizing the like-kind exchange rules allows the taxpayer to defer the Federal taxes by using the proceeds from the sale of the first property (referred to as the “relinquished property”) to purchase a second property (the “replacement property”). There are certain misconceptions about exchanging. For example, exchanges do not require two parties who want to swap each other’s properties. And exchanges are not required to take place simultaneously. In addition, the types of property which are considered “like-kind” for purposes of IRC § 1031 is extremely broad and permits, for example, the exchange of a parking lot for a multi-story office building. The basic rules for a like-kind exchange are as follows: 1. The total purchase price of the replacement “like kind” property must be equal to, or greater than, the total net sales price of the relinquished property. 2. All the equity received from the sale, of the relinquished property must be used to acquire the replacement, “like kind”, property. 3. The replacement property(ies) must be identified no later than (exactly) 45 days from the day of selling the relinquished property. 4. The replacement property(ies) must generally be acquired no later than (exactly) 180 days after the date on which the taxpayer closed on the sale of the relinquished property. 5. The proceeds from the sale of the relinquished property must not be held by the taxpayer pending the purchase of the replacement property but is instead generally deposited into an escrow account with a professional intermediary company. Taxpayers are cautioned to use professionals to guide them through the IRC road map to assure the transaction qualifies for this tax-favored treatment. A failure to follow the road map will result in the IRS challenging the transaction after the fact and assessing the tax when the taxpayer has already completed the exchange and reinvested all of the money into a replacement property. Finally, with good planning, the like-kind exchange rules can be combined with another favorable provision in the IRC which permits heirs to inherit property at a new cost basis equal to the property’s fair market value on the date of the property owner’s death. Accordingly, it is possible to “defer, defer, and die”, ultimately avoiding forever the untaxed cumulative capital gains from all the relinquished properties. Maury B. Reiter is managing principal and a founding member of Kaplin Stewart.