"WHAT ADVISORS TEND to overlook is that 1031 exchanges can be applied to persona property as well as real estate," says Julianna A. Clementi, vice president of Cole Taylor Deferred Exchange Corp. a subsidiary of Chicago's Cole Taylor Bank.

Clementi has facilitated exchanges of aircraft, railcars, racehorses, artwork, and even violins. The tax code states that as long as the property is being used in a trade or business or held or investment, it may be exchanged to property of like kind.

But whereas "like kind" has a very broad definition when applied to real estate, the term takes a literal interpretation when it's applied to personal property. So, although you can exchange a duplex for a strip mall, or raw land for a collection of small rental homes, "if you are selling a heavy-duty truck and buying a light-duty truck, that's not considered like-kind," says Clementi.

To further illustrate the strictness of "like kind" she cites a private-letter ruling (PR8127089) in which the Internal Revenue Service disallowed the replacement of a lithograph for a watercolor because the artistic medium was different.

Clementi urges the use of common sense in this area. A lack of test cases has prompted one tax payer to get aggressive, taking their chances with the probability of facing an audit-by exchanging a marble sculpture for a bronze, for example.

But she thinks there are ample opportunities to make qualified exchanges without trying to push the like-kind envelope."There are a lot of nuances to personal-property exchanges, which advisers need to be aware of before advising clients to consider them," says Clementi. But she urges advisors not be to dissuaded and to simply spend a little time with the Treasure regulations pertaining to SECTION 1031." "The goal of a financial advisor is to flag those opportunities for clients," says Clementi. "That will help them keep the most money possible in their pockets."

To make the bust use of 1031s, you need to remember to look beyond stocks and bonds and even real estate holdings when reviewing a client's portfolio. You need to look at the artwork on the walls, think to ask about stamp or coin collections, or the antique cars in the garage. Let the client know that if the time comes when their assets needed to be sold, you have a plan for doing so with minimal to no taxation-whether this means helping them accumulate bigger collections or exchanging something into smaller pieces to facilitate a conversion to cash over the course of several tax years.

Knowing how to minimize or control the realization of gains makes an advisor's services all the more valuable, observes Clementi. Which is, after all, the whole point.

—GR

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