Your adjusted cost basis, capital gains and depreciation recapture were deferred from your old relinquished property into your new like-kind replacement property that you acquired when you completed your 1031 exchange, so you would pay taxes on the accummulated capital gains from both properties as well as the accumulated depreciation that would be recaptured from both properties. 

This can be quite confusing.  We would be happy to talk with you about this if you would like to walk through your specific scenario. 

 Ok, let me see if I understand you.  Forgetting the depreciation for right now, if I bought the new property for $200,000 (per a 1031), and after a few years of renting it and it was no longer a rental property, I sold it for $300,000, are you saying I would pay capital gains on the $300,000.  In other words, there is no way to get out of paying taxes on the $200,000?  So the 1031 is just a "deferral" to a later time?

Yes, exactly, except that the $200,000 would have some cost basis.  So, for example, let's assume that you bought the original property for $100,000 and sold it for $200,000 and then completed a 1031 exchange by acquiring the current property for $200,000.00.  The 1031 exchange is a tax-deferral tool, so that the new property will have a cost basis of $100,000 (ignoring depreciation) and will have a deferred gain of $100,000 for a total purchase price of $200,000.00.  You would pay capital gain taxes on $200,000 (the $100,000 deferred gain from the first property and an additional capital gain of $100,000 on the current property).  You would not pay any taxes on the $100,000 of deferred cost basis. 

Does that make sense?