Final answer:
In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of rental real estate located in different states.
Step-by-step explanation:
In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of Rental real estate located in different states. This is known as a 1031 exchange or a like-kind exchange under the Internal Revenue Code.
For example, if someone exchanges a rental property in California for a rental property in Florida, they can defer paying taxes on any capital gains from the exchange.
The purpose of this tax provision is to encourage investment by allowing individuals to reallocate their investment holdings without triggering a tax liability.