LOS ANGELES—Like-kind exchanges under Section 1031 of theInternal Revenue Code are an excellent way to defer recognition oftaxable gain on the sale of real property.

In these transactions, a seller of real property assigns thepurchase agreement to an exchange accommodator before the closing,and the accommodator sells the property and retains the saleproceeds to use to buy a replacement property for theseller.

If the seller identifies the replacement property within 45days, and closes on the replacement property within 180 days afterthe sale (and otherwise complies with some additional rules), gainon the sale is not recognized. However, the tax basis in thereplacement property is the seller's basis in the sold (or“relinquished”) property at the time of its sale, not the price ofthe replacement property. When the replacement property islater sold, the seller in effect eventually pays the tax on thegain on the first sale as well as any additional gain.