Q: We have held a condominium unit for investment for several year, and would like to sell and buy another investment property. Our tax accountant has suggested that we may be able to enter into a sale and exchange transaction, thereby saving us considerable dollars on the profit we have made on the appreciation. We don't understand how this sale and exchange works, and would appreciate your advice.

A: Barter is perhaps the oldest form of finance known to civilization. Yet, many competent real estate investors are still 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.

This does not mean that the transaction is tax free; rather you defer the tax until you sell the next property.

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

Here, basically, is how it works:

1. The property 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 buying property from X and then swapping X's for B's.

In your case, find a buyer for your condominium unit. Then you designate a third property (the like-kind exchange) and your buyer will purchase that third property. You will then "swap" your condominium for that third property, and the net result will be that your buyer will end up with your condominium, and you will end up with the third property. However, the sale and exchange rules will apply, and you will not have to pay tax on this sale, at this time.

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 implications are great.

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