DEAR BENNY: My mother recently passed and her wish was that her estate be divided equally among her four children. My three siblings and I inherited three properties from her. Two of those were rental properties, of which one has been sold. We will soon be closing on the second. I just recently became aware of the 1031 tax exchange. Would it apply to one or more of us if we decided to use that money from the sale to invest in another rental property or only if all the money went to said property? --Pat

DEAR PAT: You cannot do a 1031 (Starker) exchange -- also called a "like-kind" exchange -- after you have sold a piece of property. The law specifically states that a person who wants to exchange one investment property for another cannot have access or control of the sales proceeds; the money must be given to an escrow agent (called a qualified intermediary) who then turns the money over to buy the replacement property.

On the remaining property, it is still possible to do a 1031 exchange. But you have to determine what profit you will make when you sell it. If you will not make a lot of profit (gain), it may make sense just to pay the capital gains tax and keep the rest of the sales proceeds.

When your mother died, you most likely are eligible for what is known as the "stepped-up basis." (Note that the laws are different in community property states, and you have to discuss your situation with your financial advisers). Oversimplified, the "stepped-up basis" means that the value of the property on the date of death is your new tax basis.

Let's take this example: Although your mother bought the property for $100,000, on her death it was appraised at $500,000. If you sell the property for that amount, you will have made no gain, and thus will not have to pay any capital gains tax. On the other hand, should you be able to sell for $600,000, the tax will only be on the $100,000 difference. The current federal capital gains tax rate is 15 percent, so you will have to send the IRS a check in the amount of $15,000. You may also have to pay any applicable state or local tax.

So, do your homework and talk with a financial adviser before you decide whether to do a 1031 exchange.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.