depreciable, and RECPER is the allowable cost recovery period for the existing property.

Total taxes due on the sale of the relinquished property at time t are therefore expected to

be

 TDS = TcgCG + TdrRECAlP (10)

 The second acquisition option available to the taxpayer is to take advantage of

Section 1031 and exchange into the replacement property. The net present value of the

exchange strategy, assuming all-equity financing, can be represented as

 NPVEX 1 EC 2 (- oDEP2,e pt2 n-SC2 cgCG,2- p p2,e
 NPVEXt = t -(ECI -k)( +k)
 =1 (1+k)j (1+k)"

 (11)

where:

 EC = the total cost of exchanging out of the relinquished property and
 into the replacement property at time t;
 DEP"2, = depreciation on the replacement property in year i, conditional on
 an exchange strategy;
 CG2 = the expected capital gain income on the sale of the replacement
 property in year t+n, conditional on an exchange strategy; and
 RECAP2,e = depreciation recapture income on the sale of the replacement
 property in n years assuming an exchange at time t.

 All other variables are as previously defined. The capital gain and recapture

components of the total taxable gain on the sale of the replacement property at time t+n,

conditional on an exchange strategy are

 CG 2,e(P2 -SC2 )-UNDBASIS2,e (12)

and


 RECAP =iDEP2 (13)