Indiana RECP Comprehensive Practice Test 2025 - Free Real Estate Practice Questions and Study Guide

The correct method for deferring capital gains taxes is the like-kind property exchange. This tax strategy allows real estate investors to swap one investment property for another and defer the recognition of capital gains, meaning they don't have to pay taxes on the gains realized from the sale of the first property at the time of the exchange. Instead, the tax burden is postponed until the replacement property is sold, provided certain conditions are met under IRS rules, specifically Section 1031 of the Internal Revenue Code.

This method is particularly advantageous for investors wishing to reinvest their profits into another property without the immediate hit of a tax bill, thereby preserving capital for future investments and growth.

Other methods mentioned, such as cost recovery and straight-line depreciation, relate to different aspects of tax benefits and reporting, not directly to the deferral of capital gains taxes on the exchange of properties. A REIT (Real Estate Investment Trust) involves investing in property through a trust, which has its tax implications but does not offer the same direct deferral of capital gains through property exchange as a like-kind exchange does.