The most appropriate response is to inform the client about the possibility of a 1031 tax-deferred exchange. Under Section 1031 of the U.S. Internal Revenue Code, an investor can defer paying capital gains taxes on the sale of an investment property if the proceeds are used to acquire another "like-kind" property. A fourplex is an investment property, making it potentially eligible. As a real estate licensee, you should not provide tax advice, but you should be aware of such common investment tools and recommend that the client consult with a qualified tax professional or attorney to explore this option.

A. "Capital gains do not apply to investment properties."

This is factually incorrect. The sale of an appreciated investment property is a classic example of a transaction subject to capital gains tax.

B. "Investors don't pay taxes."

This is false. Investors are subject to various taxes on their income and profits, including capital gains.

C. "Taxes are required, no matter what you do."

This statement is too absolute and unhelpful. While taxes are a reality, legal strategies like the 1031 exchange exist specifically to defer tax liability.

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1. Ling, D. C., & Archer, W. R. (2018). Real Estate Principles: A Value Approach (6th ed.). McGraw-Hill Education.

Page/Section: Chapter 15, "Taxes and Real Estate Investment," Section 15.3. The text explains that while most property sales are taxable events, Section 1031 of the Internal Revenue Code allows for "like-kind" exchanges to defer taxes on any capital gain.

2. Maryland Real Estate Commission. (2023). State-Prescribed Curriculum for Principles of Real Estate for Salespersons.

Page/Section: Module 11: Real Estate Investment. This section of the required pre-licensing curriculum outlines the tax benefits of real estate investment, specifically including tax-deferred exchanges as a key concept that licensees must understand to competently serve investor clients.

3. Goolsby, W. B., & Brueggeman, W. B. (2019). Real Estate Finance and Investments (17th ed.). McGraw-Hill Education.

Page/Section: Chapter 13, "The Tax Environment of Real Estate Investment." This chapter details the tax treatment of real estate sales, explicitly covering Section 1031 exchanges as a method for deferring capital gains by swapping one investment property for another. It clarifies that this is a deferral, not an elimination, of the tax.