Benefits of tax-free exchange explained.

Section 1031 of the Internal Revenue Service Code allows owners of "like kind" property to put off tax gain consequences to the future.

Explained Lary S. Wolf, a partner with the law firm of Roberts & Holland, which concentrates in tax law, the issues involved with identifying "like kind" property are liberal but tricky.

For instance, he noted, if you were buying and selling race horses, they would have to be of the same sex.

"For purposes of the code, livestock of different sexes are not property of 'a like kind,'" he explained.

While there are a few real estate owners who also buy race horses, most stick to bricks.

Also, partnership interests in real estate cannot be exchanged for a building.

"People do these deals for different reasons," Wolf said. "They diversify. They sometimes exchange an interest in an operating building for a net lease. It can get very complicated."

Andrew Gerringer, senior vice president of the Douglas Elliman's Investment Division, noted that when a building is sold, it's not always that easy to replace.

"If you can't replace it quickly, sometimes buyers start panicking because they have a potential tax problem," he said. He advises identifying up to the allowed 10 properties "because you might not get the property you are going for."

Often, Wolf said, to qualify properties as "like kind," cash is run through a title company acting as a "qualified intermediary."

"If I find a buyer, I transfer the office building to the buyer for cash," explained Wolf. "The cash goes to the qualified intermediary, who uses the cash to buy the replacement property I eventually identify. The IRS issued regs years ago to bless this," he added: "I can't get the cash, but it's okay if this qualified intermediary holds the cash."

That's how the Malkins, for instance, would be able to sell an office building in New York and buy a residential apartment complex on the Great Lakes, if they so desired.

In order to take advantage of the so-called tax deferred exchange, the IRS rules allow 45 days after your transfer of the property to a third party to identify the next property, or properties, that will be acquired, and then the rules provide another 180 days to close on those, said Wolf.

The transactions can take many permutations, and Wolf advises that owners have competent representation to look over the deals.

"You have to know what you're doing," he stressed. "It can be dangerous. But these deals are done all the time."

According to Peter Hauspurg, chairman of Eastern Consolidated Properties, who is also an attorney, as long as the owner properly exchanges the real estate, they can carry over their initial basis in the first property to the second.

"You can avoid that again by swapping into a third piece and so on," said Hauspurg.

If you bought the first property for $1 million, and now sell it for $10 million; and as part of the swap you buy a shopping center for $10 million, "Even though you paid ten, for tax purposes, you have the old basis of one," Hauspurg explained.

What happens when you die? Hauspurg laughed, "That's the good news. The lucky kids get the stepped-up basis in the real estate at the date of death, and you and your children will in fact have avoided that entire $9 million gain."