have not realized a positive capital gain. Also, unlike the proceeds from a "cash out"

refinancing, tax-deferred exchanges do not provide a method for drawing tax-free cash

out of the relinquished property. This is because any cash received in the year of the

exchange is fully taxable.

Exchanges and Price Effects

 If a taxpayer is successful in completing a simultaneous or delayed tax-deferred

exchange, the realized tax liability will be deferred until the replacement property is

subsequently disposed of in a fully taxable sale. A portion of the realized gain will be

recognized in the tax year in which the exchange occurs to the extent that the value of the

relinquished property exceeds the value of the replacement property. The present value of

the income tax deferral benefit is therefore a function of the magnitude of the deferred

capital gain, the expected holding period of the replacement property, and the applicable

discount rate.

 A taxpayer entering into a tax-deferred exchange can afford to accept an offer for

the relinquished property that is lower than the investment value he or she places on the

property by an amount that is equal to, or less than, the present value of the income tax

deferral benefit. That is, depending on current market conditions, including liquidity, the

negotiating abilities of the taxpayer and potential buyers, and whether or not potential

buyers are aware the taxpayer is initiating a Section 1031 exchange, the selling taxpayer

may be willing or required to "share" a portion of the expected tax deferral benefits with

the buyer of the relinquished property. Since Section 1031 exchanges are a tax-deferral

technique, sellers will not enter in exchanges, unless their property has appreciated in

value and (or) has significantly depreciated. If avoiding capital gains tax is the main

motivation for participating in an exchange then all else equal relinquished properties will