EXAMPLE:
The "out of state" investment property is valued at $100,000 and has a basis of $50,000. If this property is exchanged for property of "like kind" (in a sales contract) and meets all the qualifications for a "Tax-Free Exchange", it could be sold to an individual and the $100,000 could be used to buy a designated investment property in South Carolina.
The designated South Carolina investment property is worth $100,000. Alternatively, the buyer could make a $25,000 down payment and secure a $75,000 mortgage on the South Carolina investment property and still not pay capital gains tax. (The $75,000 cash can be spent on additional investment property or personal expenditures.) However, simply put, the basis of the "out of state" investment property would transfer to the basis of the South Carolina investment property, which would create a large equity in the South Carolina investment property.
This is a very basic illustration. Important factors to consider are the investor's financial situation and the stringent qualifications and the timing of the transactions (which are critical), consequently, guidance from a tax attorney along with a CPA is highly recommended