From The Wall Street Journal Online

Real-estate investors worried that a new administration will raise capital-gains tax rates are starting to abandon a popular tax-deferral strategy to pay taxes now while rates are low.

The trend is more pronounced when bare land is involved, but investors with other kinds of business property may also save by paying capital-gains tax when they sell instead of deferring it, according to financial advisers.

All kinds of real-estate investors may be affected, from big firms that handle tracts of land to an individual who buys an apartment building to diversify his portfolio, and even homeowners who meet certain requirements.

The tax strategy in question is known as a 1031 exchange — for the section of the Internal Revenue Code where it is described — and can be used for real estate and other assets, but not for stocks and bonds.

“The change started in the second half of 2007, and as we get closer to the elections and it becomes more obvious who the candidates may be, that has caused the rethinking to become even more prevalent,” said Stanley L. Blend, chairman of San Antonio law firm Oppenheimer, Blend, Harrison & Tate Inc.

Gary Gorman, author of the book “Exchanging Up!,” said some people believe the current 15% tax rate on long-term capital gains could go as high as 20% to 25% if a Democrat is elected president. “Now the question is, ‘Do I want to pay 15% now, or 20% or 25% five years from now?’ ”

Also called a like-kind exchange, a 1031 transaction lets a property owner roll over the capital gains from the sale of an old investment property to a new one if certain conditions are met. The property is disposed of through a third party called a qualified intermediary, and money from the sale is used to buy similar property to replace it.

“It takes the tax you would have had to pay to the IRS, and lets you use that to lever up into a bigger property than you would have been able to afford,” said Mr. Gorman.

Don Weigandt, a wealth adviser at JPMorgan Private Bank, said that real-estate investors should analyze each case carefully to see whether it’s a better idea to pay the capital-gains tax now, at 15%, or to defer it.