You may avoid tax on the gain by using the proceeds to buy replacement property within a set time limit. You can, for example, buy similar rental property and instead of reporting the gain, you adjust the tax basis of the new rental property. (The tax law requires that the replacement property be similar or related in service or use to the property that has been involuntarily converted.) The basis adjustment will ensure that the gain is ultimately taxed when you sell the new rental property. However, you must act no later than 2 years after the close of the year in which you have the tax gain.