Deferred Exchange and Deferred Action
Among the many of the ideas surrounding 1031 tax-deferred exchanges stands the idea that the benefits of a like-kind exchange can only be enjoyed by far and few, but that is not the case. Still, the reality of tax-deferred exchanges is that any US tax-paying person or entity can use section 1031 to exchange like-kind property, regardless of US citizenship.
Deferred Action for Childhood Arrivals
Deferred Action for Childhood Arrivals (DACA) is a United States immigration policy created in 2012 through an executive order by President Barack Obama. The policy was created as a stopgap measure to stop the deportation of people brought into the United States as children and did not have citizenship or legal residency status. Participation in the program comes with a range of benefits. For example, along with permission to remain in the country, recipients can also get work permits.
DACA recipients are often referred to as Dreamers, are not eligible for any federal benefits, like Social Security, college financial aid, or food stamps. Still, Dreamers are required to pay federal income tax. The IRS does NOT share taxpayer information with other government agencies. Therefore, DACA recipients should not be afraid to file their taxes. It may help them in any future immigration cases in which they are required to prove tax compliance, proof of income, or proof of residence.
Tax Deferred Exchanges
A 1031 exchange, also called a like-kind exchange, LKE,
The landmark legal decision of T.J. Starker v. U.S., 602 F. 2d 1341 (9th Cir. 1979) was significant in the development of the 1031 tax exchange rules. In this case the Ninth Circuit Court held that non-simultaneous 1031 exchanges were permissible and set the precedent for the current 180 day non-simultaneous, delayed tax-deferred like-kind exchange transactions. Also referred to as a Starker Exchange.
, or tax-deferred exchange, was first authorized in 1921 when Congress recognized the importance of encouraging reinvestment in business assets. Today, taxpayers use 1031 exchanges to increase cash flow by deferring taxes on gains realized through the sale of real estate, as long as they reinvest those gains in the replacement property. 1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment.” By structuring the sale and purchasing property as an exchange, the owner can potentially reduce the recognized tax gain to zero. By reducing the taxes owed to the government, more cash is available to purchase new property.
There are many questions asked in regards to 1031 exchanges, a DACA recipient may wonder if their legal status permits the use of section 1031, and the answer is yes. As long as a Dreamer pays their federal taxes as required, they may exchange like-kind property using a 1031 exchange. The benefits to a like-kind exchange are open to various individuals and organizations, and properties both in the United States and internationally. Keep in mind that for two properties to remain “like-kind,” they both must be domestic, or both be outside of the United States. This creates several new opportunities for Dreamers to begin growing their wealth and their businesses.