Reinvesting will not eliminate the income tax

There is a common misconception that a taxpayer can sell property for cash and reinvest in similar property within a given period of time, thereby eliminating the income tax.  This is not the case.

You can, however, arrange a tax-deferred exchange of properties (often referred to as a tax-free exchange or a Section 1031 exchange).  If you follow the rules, you can postpone paying tax on some or all of the gain.

A tax-deferred exchange calls for trading business or investment property for property that is of "like kind."  This tax provision does not cover inventory and certain other exchanges.

Here's an example:

Suppose you own property with a cost basis of $100,000 and a current value of $600,000.  You want to sell the property and purchase a $600,000 apartment building.  If you sell, your tax bite could run $100,000.

Instead, consider an exchange.  To perfect a tax-deferred exchange, the buyer for your property acquires the apartment house and trades it to you for your property.  If you follow the rules, you'll owe no tax on the exchange.

The rules governing tax-deferred exchanges are very specific and require proper planning.