Barter is perhaps the oldest form of finance known to civilization. Yet, many competent real estate investors still are unaware of certain provisions in our tax laws that allow properties to be bartered with a tremendous tax savings.

When investment property is sold, the profit realized on the investment is subject to a tax. However, under the Internal Revenue Code (Section 1031), if "property held for productive use in trade or business or for investment" is exchanged solely for property of a "like kind," no gain or loss is recognized.

The rules of this co-called tax-free exchange are extremely complex, and the real estate investor who wants to try it is cautioned to consult a tax councilor first.

Here is how it basically works:

1. The propety exchanged must be held for productive use in trade or business or for investment. Obviously, it is not applicable to the sale of property that is the principal residence of the taxpayer.

2. The property exchanged must be "like kind" property.An exchange of real property for personal property will not qualify. However, the Tax Court has made it quite clear that "like kind" does not mean identical. Thus, an exchange of improved land in the city for a ranch or farm in the country will qualify.

3. The transaction can include a three-cornered exchange, whereby A (who wants to buy B's property) actually ends up buying property from X and then swapping X's for B's.

4. It should be pointed out that if one of the exchanging parties receives something of value in addition to the property traded, this is known as "boot." Boot can be a mortgage, personal property, stocks, bonds, or anything else that is added to make the transaction an even or equitable one. However, the boot portion of the barter is generally taxable.

This concept is not to be undertaken lightly. The rules are complex, and the potential tax implications are great.

But real estate investors -- and indeed the real estate broker -- should give serious consideration to this concept, especially with the rapid rate of appreciation that real estate has had in recent years.