Tax-deferred exchanges of real estate, governed by Section 1031 of the Internal Revenue Code, allow investors to defer capital gains taxes, depreciation recapture taxes, and in some states – like Illinois – state income taxes, as well as other taxes ordinarily due upon the sale of investment property. To do so, the investor must closely follow the IRS exchange rules which allow reinvestment of the entire sale proceeds in like-kind property by deferring the obligation to pay taxes. This strategy fosters portfolio growth by providing investors with more capital for reinvestment. To qualify for this tax deferral the investor must strictly adhere to technical and tax rules. R. Kymn Harp has comprehensive experience in this area. His in-depth knowledge of Section 1031 tax-deferred exchange transactions can translate into extraordinary results for real estate investors looking to maximize their portfolios.
Kymn Harp represents investors and educates lawyers in respect to Section 1031 exchanges. He starts the process by evaluating his client’s investment goals and real estate portfolio, determining his clients’ potential tax exposure upon sale of selected properties, and by working with his clients to identify suitable replacement properties for potential reinvestment. Ensuring at the outset that the exchange fits within the investor’s larger financial plan and satisfies the IRS exchange requirements enables Kymn to help his clients efficiently execute their exchange strategy.
Kymn explains to his clients and to seminar attendees that IRC Section 1031 requires all replacement properties to be identified within 45 days after sale of the property being exchanged. Once the 45-day identification period has run it is not possible to change the identified properties. Consistent with IRS regulations, Kymn helps his clients evaluate whether to identify up to three potential exchange targets of any value or to use an alternate identification rule that allows an exchanging taxpayer to identify any number of potential replacement properties so long as the aggregate value of all identified properties does not exceed 200% of the value of the property being sold for exchange. If for any reason all identified properties become unavailable, the exchange will fail and taxes will be owed. For this reason, careful section and timely identification of replacement properties are among of the most important steps of a 1031 exchange.
The requirement that property must be exchanged for “like-kind” property has many investors confused. Kymn advises that they needn’t be. All real estate located in the USA is considered like-kind to all other real estate located in the USA. The key is that each property must be held for investment or used in the taxpayer’s trade or business. This means, for example, an apartment building, warehouse, parking garage, shopping center, or other investment property, may be exchanged for any other investment property. The property to be acquired does not need to be similar in use to the property being sold. It can be almost any type of USA real estate except the investor’s personal residence or real estate held “in inventory” for sale.
There are tight deadlines and strict regulations for Section 1031 exchanges. Not only must potential replacement properties be identified within 45 days after closing, all replacement property must be acquired within 180 days after closing. With his knowledge and experience in handling these issues, investors are assured he will guide them through the compliance process to closing.
The sale of the relinquished property and acquisition of the replacement property in a Section 1031 exchange each require attention to all of the usual real estate transfer and due diligence issues common to commercial real estate transactions generally. In practice, it will essentially be two or more commercial real estate transactions piggybacked on the other with the added requirement of complying with the technical rules of IRC Section 1031. Kymn has over 40 years of experience handling Section 1031 exchanges as well as complex commercial real estate transactions, generally. He is well equipped to handle all aspects of the transaction and to see it through to successful completion.
Kymn Harp regularly provides comprehensive wraparound services and tactical guidance to his clients to provide continuity in all aspects of the transaction, before, during, and after closing. This includes due diligence and project planning, entity structuring, financing, drafting private placements memoranda to raise capital, preparing development agreements which may include municipal tax increment financing and other development entitlements, leasing, working with the client and its land planners, engineers, and architects to plan for future development including drafting of forward looking reciprocal easement agreements, arranging for successive exchanges, and other legal issues that may arise. In a Section 1031 exchange, the time period for completing these necessary tasks can become compressed. Kymn Harp coordinates and delivers the whole package of legal services required by commercial investors.
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When disagreements arise, or litigation becomes necessary, Kymn has a unique perspective compared to most transactional lawyers because of his background in litigation during his early years of practice. His experience enables Kymn to provide seamless litigation support if necessary but more importantly enables him to recognize the early warning signs that may lead to litigation. A lawsuit in the middle of a Section 1031 exchange can prove disastrous. It will not only be expensive, it will likely delay the closing and risk blowing the rigid timeline of a Section 1031 exchange. Kymn’s remarkable capacity to identify the issues and explain complicated legal and financial matters in readily understandable terms can help his clients avoid this expensive roadblock.
Kymn’s knowledge, skill, and all-inclusive approach to representing real estate investors assures the best opportunity for successful completion of each 1031 exchange. His robust experience and transactional insights will prove invaluable to helping investors achieve their desired financial outcomes.
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