Welcome to another episode of Passive Real Estate Investing. I’m your host Marco Santarelli. We have a great, great episode for you today. What is one of the fastest ways to grow your wealth with real estate? Or even as a small business owner? The answer is it’s the tax deferred 1031 exchange. If you know what I’m talking about, then you know what I’m talking about. And if you don’t know what that means, stay tuned. This episode is going to answer some great questions and we’ve got some golden nuggets of information throughout this episode, and then a great strategy that you should be thinking about or employing today or this year. If you are thinking about doing a 1031 exchange or planning to do a 1031 exchange, the challenge you’re going to have in today’s market environment may make it difficult for you. But I think we have the solution.
It’s one of the strategies that we talk about later in the episode. So stay tuned for that basically listened to the entire episode. I think there’s just a lot of good information in today’s interview with my guest, Dave Foster. So if you need help, there are a lot of people out there who can help you with a 1031 exchange. Some people are more seasoned and better than others. What I do like about my guest today, Dave, is that he is an investor himself and has been using the 1031 to create and grow his wealth for about 22 years. And I thought this episode was timely. Given what is being proposed in Congress about changes to the tax code. There’s always, you know, the initiative to tax the rich tax, the wealthy, increased taxes on those that make more money. But what people don’t realize is that the tax code is really just an incentive code.
It’s really the government’s way of telling people what to do because the government can’t do that thing very well. And then the rental housing is an example of that. That’s why there are tax incentives for real estate investors. It’s because the government doesn’t want to create government housing. It’s been tried many times and we all know how that pans out. So really the tax code is an incentive for business owners and investors and people in general in telling us what we should be doing with our money, where it would be put to work in our favor to provide the greatest returns for us and get the best in terms of tax deferrals and tax savings. So the 1031 is just one of those. And that is something that we’re going to focus on here today. The question is, is will the binding, the administration make changes to the tax code, especially with 1031 exchange.
It’s in the news every single day right now, and it’s being kicked around like a football. So anyway, with that, let us get to our interview today. And, uh, I hope you enjoy this episode. Let me know, by leaving a rating and review on iTunes or Stitcher or Google podcast or wherever you listen to this, but iTunes would be the best. And I really appreciate that. So thank you in advance. And here we go with our interview today,
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It’s my pleasure to welcome back a returning guest. Dave Foster, Dave is a degree accountant and a serial real estate investor. And Dave is also a qualified intermediary and a consultant who shares his tax-saving strategies with investors to take advantage of using the tax-deferred exchange to grow their wealth faster. Something we talk about on the show on and off, but quite often, and Dave has been using the 1031 exchange as a cornerstone of his own personal real estate investing for over 20 years now. So he is certainly seasoned and well-versed on the subject. And as some of you may recall, we’ve had Dave on last year. I think it was in March of 2020 for our episode, How to Use Equity to Snowball Your Wealth and Cash Flow. So we’re going to pick up, I guess, where we left off with that and talk about the potential changes coming with the 1031 exchange as they are being proposed by the Biden administration. So with that, Dave, welcome to the show.
Hey Marco, it’s great to be back. Yeah, I forgot that. That was our title of the last episode because perhaps you’re right. Two of my favorite topics, gaining wealth and gaining data faster. So, and a lot of that is how you shut the back door. Um, so that your silent partner, Uncle Sam has to do his own work. So that’s where I’ve lived. So yeah, I think today it’s definitely a brave new world out there. Isn’t there I, there was an attorney named Gideon Tucker who once said that no one’s person property or Liberty is safe as long as Congress is in session. And I think that’s kind of like what we’re all feeling right now. Isn’t it?
Yeah, very much so. And it’s got a lot of people concerned because there’s a lot of small business owners out there that could potentially be impacted by changes to this 1031 exchange. In addition to that, there are a lot of real estate investors who use and benefit, you know, using the 1031 exchange to help accelerate and build their wealth faster by deferring taxes on their capital gains. And so that’s really one of the topics I want to talk to you about today because I think a lot of people, well, first of all, I’m sure there’s people listening to this that are maybe not even aware that there’s this potential change in the tax code coming that will impact what they can and can’t do with their capital gains. And I’m sure most, if not all of those people do not want to be taxed on their gains, especially if they’re trying to grow their real estate portfolio. So I want to talk to you about this today, before we jump into that, let’s briefly kind of summarize what the 1031 exchange is. What is the 1031 exchange? And also let’s maybe cover why do we like it and why do we want it?
Absolutely. So the 1031 exchange has been a part of the tax code for over a hundred years. So that’s a lot of why it’s, it’s one of those sacred cows that were used to basically to take our country from the agricultural and agrarian industries, into the industrial era and into the technology and information era. It’s a hugely powerful economic generator and it’s been around for a long, long time. So the fact that it’s being talked about for elimination now he has cousins and paws. In essence, what it allows you to do is to sell investment real estate that you have a profit in, or that you have significantly deeper shade. It now a lot of people don’t even know what depreciation has. Depreciation is a fake gift that the IRS gives you. They let you pretend that your real estate loses value every year and you get that as a tax write off.
Well, that’s kind of cool. I mean, what an awesome way to mitigate rental income and other income, the problem is when you sell that property, they make you pay it back. So what kind of a gift was it really? So you’ve got depreciation where you got to pay it back. You’ve got an appreciation. You made money on your property. When you do a 1031 exchange, you sell your property, you buy new investment property, you don’t have to pay tax on the middle. So why is that such a big deal? Well, let’s say you got a hundred thousand dollars game at a lot of states between federal and state, um, capital gains, you know, a textbook, maybe $20,000. What if you were able to take that $20,000 and invested for yourself instead of paying it in tax, can you make 10% on your money as a landlord? That’s $2,000 every year, that’s going into your pocket instead of paying the $20,000 once to the government because it’s indefinitely divert. Well, that’s huge.
Well, there’s a dual benefit to that. Not only are you deferring taxes today where you’re not paying taxes today or potentially ever, if you know how to do it right, but the other benefit, this is kind of a dual benefit is that the taxes you would have paid and that you’re saving on, you’re now converting into an investment on income producing and wealth creating investment. So you really benefiting on both ends. You’re deferring your taxes potentially forever. And at the same time, what you’re saving in taxes, you’re now turning into wealth creation and potential cashflow. It’s a beautiful thing. And so this is why I think so many people are up in arms about the possibility of this changing or even, you know, God forbid going away, you know, you’ve said it well, and this has just been over a hundred years, a great way for businesses to grow and profit and do well and expand and help other people and create jobs and do all kinds of things for our economy would be a shame for it to be thin or watered down or even removed.
Well, it was originally designed Marco for cash strap, farmers, or wanting to increase their holdings, or right at that cusp of the industrial age, we were wanting to take land and go buy factories for new Ford cars or whatever. Was that the thing at the buggy whips at the time. And because if the farmer sold his land many times, by the time they paid the tax, they wouldn’t have enough money left to go buy the new property. So it was a way of stimulating the economy. And when you think about that, now it’s a huge generator because when you can take that tax, what are you going to do? You’re going to buy more real estate. So there’s more transactions that are going to happen. But what people forget is it’s not just the landlords and the buy and sell. I was sitting here and I just made some just quick off the cuff notes of what happens to give let’s take that down a hundred thousand dollars gain $20,000 tax.
As part of that one transaction, there would have been over $2,000 in loan origination fees for the replacement. There would have been commissions of 6 to $12,000 for the sale and the buy there would have been the title, company, title, insurance, and escrow charges of a several thousand dollars. There’s the rent that comes in annually. That is then taxed. That would be several thousand dollars. And those things are on both sides and they’re continuing. So I know it’s, well-intentioned, the government wants money so they can help us. (Inaudible) the most dreaded words in the language. I’m from the government, I’m here to help. Yeah. So I mean, I, I get where they’re coming from, but that’s the kind of economic generation for every dollar of deferred tax. There’s multiples of dollars that are put back into the economy and then spent and used. So they stimulate everybody’s jobs from inspectors to title companies, to realtors, to handymen, to landlords, and they helped provide people a place to live.
So it’s really not a surprise to me that every president I’ve been under since I’ve been doing this for over 20 years, has talked about getting away with doing away with them, everyone on, because it’s low hanging fruit, but every president to date has left it in place for real estate because they recognize what an economic engine. Yes. And I would say, actually, there’s another shoe that drops off his or another huge benefit. And that is that we appear to be entering a much more accelerated inflationary stage. And inflation is really in essence, it simplistically, it’s more money in circulation. 1031 is an incredible mitigator of that because instead of having to create more money, it makes each dollar work harder. So over the course of a year, that $1 may turn over twice because there’s this stimulation of making you do 1031 exchanges. So if you print $2, you’ve created inflation. If you make $1 work twice as hard, you’re combating depreciation, I mean up inflation, right? And so hopefully Culver heads will seal this. I know we’re a long ways from it being done. That’s for sure.
Well, I hope if they have intelligent economic advisors, that they understand what you just said, which you’re talking about the velocity of money and how quickly it transfers from one person to another, to another, within the economic engine. So let’s just hope it doesn’t change. And if it does, it has a minimal impact. So that’s a good segue. So, you know, president Joe Biden is really trying to ask Congress for this tax hike, which is going to impact real estate investors, primarily as well, small business owners and the pitch, if you will, is to help fund the $1.8 trillion American families plan. So maybe give us a summary of what is being proposed and what investors should know about this tax hike. I guess that’s the best way to describe it, right.
You know, it’s kind of interesting because the target is just moving every week. It seems, if you remember, during one of the campaign promises was getting rid of loopholes, like 1031, which is kind of offensive to me, it’s like, how do you call a a hundred year old tax code a loophole, but be that as it may, we was going to get rid of it all. Then he was going to get rid of it for high net worth individuals. Well, it’s kind of funny because I speculate of course, but I just kind of wonder if some of those high net worth individuals that make more than $400,000 a year happened to also be elected officials who said, wait a minute, this has been good for me, change it differently to then it change to, I promise I’m not going to hurt anybody making less than 400,000.
I’m going to cap 1031 exchanges at $500,000 per gain per year. All of that has been tossed out like some sort of spaghetti noodles to see if it sticks. And right now I’m not even hearing much noise about it at all. Obviously the industry itself is gearing up for a fight, but things are strangely quiet about that because I think the noise is starting to percolate through about what’s happening. One thing right off the bat, $500,000 in capital gains is a huge amount. What they’re going to collect in taxes is going to be a minuscule amount. The average 1031 sales price is less than $400,000. So the average gain is way less than probably $200,000, which means where are they going to generate any sort of income by blocking it, stopping it at $500,000? They’re really not. All they’re going to do is slow down transactions. And when you slow down transactions, you make the money work. Not as hard. A lot of people don’t get to do inspections or paint or put flooring in or sell properties. And that’s, it’s all going to be. So we’re not quite sure yet where it’s going to lie because they’re just now getting their arms around the fact that this might not have been such a good idea to promise.
Has the $500,000 changed. That’s the last I heard. So is that still the proposed number?
Yeah. I mean, obviously nothing has been proposed in writing as a formal proposal, but that’s still, what’s being talked about being inside the beltway. So, you know, honestly, I am, I’m not all that concerned. I say that. And I’m the guy that has a job because it’s there, but because every president has talked about it and come to their senses, I just am kind of optimistic that maybe that’ll happen here, if not I still. I think they’re having trouble figuring out where parking places are going to be allocated among Congress. They’re having a hard time getting anything done. So I think it’s such an atmosphere of necessary compromise and the votes are so close in so many ways and already everybody’s worried about 2022. So I just kind of wonder if it’s not going to slide under the carpet, you know, never say never. And your lips to God’s ear that we can always hope.
Yeah. Well, you’re talking about the size of the impact. Here’s kind of an interesting stat or two, but the national association of realtors did a study in 2020, and they looked at transactions 1031 exchange transactions from 2016 through to 2019. And I say only in air quotes here, but only about 12% of those were actually real estate sales. So even though it’s probably a large number percentage wise, it’s relatively small number and tied in with that, you know, 1031 ones are also used by small business owners, especially people who are sole proprietors and S corporations. And that realtor survey show that 84% of those 1031 exchanges were actually small investors, which should be as no surprise to anybody. Right? So who’s using the 1031. It’s primarily very small and small business owners and small real estate investors. It’ll be interesting to see where this goes.
You know, which is why it’s been for decades. My favorite tool, because we all started out as small investors. And that’s the thing that gives you that bootstrap up. Exactly, really lets you grow and leverage. So you can take advantage of the American dream.
It’s a powerful tool for the average, Joe, the person who is starting to invest in real estate or has been investing in real estate, they have a small portfolio. Well, how do you accelerate your wealth creation? You use a 1031 exchange because if you have held property for a while and you’ve got a chunk of equity, now you want to put that equity to work well, how do you do that? Well, if you pull it out or you sell the property and you have to incur gains on it while you’re washing away potentially to who knows, you know, whatever the taps capital gains taxes are. But if you can put that percentage to work for you, now you can buy more real estate in a shorter period of time and accelerate your wealth creation. So it is a powerful tool if you know how to use it and use it right.
Yeah. Marco, there’s actually another component to his plan. That worries me even more. I mean, aside from I lose my job if he gets rid of 1031, but what worries me more from an investor point of view is the elimination of his step-up in basis. Have you heard about that?
Well, I’ve heard about it, but I don’t know a lot about it. And I’m sure the people listening today are very unfamiliar with it. So why don’t we go over?
Yeah. So let’s start with what the four D’s of 1031 investigator. They stand for defer, defer, defer and die. As long as you keep the 1031 rolling forward, you’re never going to pay that tax. All of that tax has benefiting you. So if you own a property and don’t sell it, even if 1031 goes away, if you’re sitting on a property and don’t sell it, you’re never going to pay the tax. Well, guess what I’m going to be motivated to do. If 1031 goes away. I’m going to hang onto properties longer. Cause I don’t want to pay the tax. As long as any time you sell that property and do a 1031 exchange, you never pay the tax. Here’s where it gets really fun right now. If you die owning a piece of property, then your heirs inherit that and what is called a stepped up basis.
So they inherited as if they paid market value for it. On the day you died. In other words, you are giving your heirs a tax-free legacy of wealth to start with. And you know, I’m sure you’re the same way I am. I looked at where my parents took me. I’m incredibly grateful for that, but I look at my children and I say, I want them to do better. And one way that I can ensure that is by holding onto my properties, putting them into my estate and letting them inherit them tax free under current law. That’s huge. That gives my kids a massive lake up on my work. Well, part of president Biden’s plan is to eliminate that step up in basis. So what’s going to happen is when you die, all that tax comes to now, what if you’ve got a family home in one of your favorite vacation areas in Idaho, Tennessee, or wherever that has been in your family for decades, you and your children have known it, loved it and it’s massively appreciate it. It’s very conceivable that when you die, your children would have to sell that property simply to pay the taxes without the opportunity to hang on to it as a legacy to you or to maintain that family cohesion that’s there. So I think that’s probably even more insidious and hurtful provision in the plan is eliminating that step up in basis. We all like the chance to build, to grow and to create that’s the American way. We’d all love the chance to give that to our children, to let them continue.
Is that elimination of the step-up basis, part of the pitch on the 1031 exchange, or is that a separate proposal or idea?
It’s a separate proposal, but there’s definitely a cross-impact isn’t there because right now people are using 1031 to try and hang on until they die. So there’s definitely impact on both sides. That’s actually a separate part that is speaking more to his taxation on his states or Senator Warren who’s proposing that, uh, just punitive tax on assets, over X number of million dollars.
It amazes me how these people can make proposals on taxes, finance, and things that relate to the economy when they have zero or very little experience in it, have never really owned or started a business in their life. But yet they’re making decisions as if they are, you know, seasoned business owners and investors.
Yeah. Everybody’s, everybody’s an expert when they’re spending my money.
Exactly. And they don’t even know how to spend the properly crazy. Well, so you know how much, I think you touched on this, but how much of an impact do you think this restriction on the 1031 exchange will have on real estate investing? Should it change or go through?
You know, I think it’s going to change the course that an investor will use throughout their life cycle because typically the general life cycle of a real estate investor is they start out, well, actually they start out as accidental investors, right? That’s the prototype, right? Two people get married. They each have a house, they get married, they move into one boom they’re investors. They like that so much. They go buy a second and then a third and then a fourth. And then they realized that there’s economies of scale by going bigger rather than more. So they transition into multifamily, larger properties. And then they transitioned from there typically into some of the more exotic things like commercial, industrial, special purpose type properties. And then as they start to reach the end of their career, they again look to simplify. So they start to sell from active, into passive so they can just generate income.
What I think is going to happen, we’re going to see a lot of that middle step of growth not happen. And we’re going to see investors that are going to try to stay small because that’ll let them keep their sales under 500,000. This is where a company like Norada, where you guys I’m sure seeing an impact because people are out there with an asset to sell. Why would I want to buy one big asset knowing that I’m going to be taxed on it. If I sell, when I can spread this sale among two or three. And then when I sell those, I’ll still be able to 1031 because I’ll be under the $500,000 cap. So I think we’ll see people stay in smaller asset investing longer. I think they’ll buy and sell less. That’s going to be a given. And I think that they’ll probably start to transition into exotic ownership vehicles, more trusts, LLCs, family LLCs have that kind of thing so that when they die, won’t be a portion of the sale of the property. Because if they’re just taking this is taxed. So I think those are kind of the things that I’m actually seeing an uptick on right now.
Yeah. Everything you just said is very interesting because it forms a modified strategy on what people are investing in, what they continue to invest in and the path that they stay on. And I’ve always been a big believer in building a portfolio of single-family duplex, triplex, fourplex, nothing larger than a fourplex because the financing is far better for what we call residential real estate, which is anything that is smaller than a five unit complex. But you make an argument or a case to stay that path, stay that course because changes to the 1031 exchange allow for you to take advantage of, you know, the changes to the limitations, whether they be $500,000 in gains or maybe less who knows, right.
Oh my gosh. He has said, I actually love those smaller multi’s myself because they’ve got an added benefit to two added benefits. Actually the first one is that as long as your standard five, both with conventional and FHA financing, you can get into those now for three and a half percent down at a very, very favorable rate. That’s fixed. And remember I’m thinking inflation is creeping. So anything that I can place into long-term fixed interest debt I’m grabbing right now. So that’s number one, but number two, and this is huge when you couple it with the 1031 is when you use either conventional or FHA to buy a four unit or fewer, you’re actually buying. You can be, if you want buying two properties, one is your primary residence. One fourth of that quad, the other three are invest is an investment property. And the rules for your primary residence are different.
And there’s nobody talking about tinkering with them. If you live in a property you own for two out of the five years prior to sale, then you get the first, if you’re married $500,000 in profit. Tax-free so think about this as a path and I’m sure this is exactly where you were going. You buy a quad live in one unit of it for two years. And when you’re ready to sell that one fourth at that property is tax free. The other three, you’re going to do a 1031 exchange on and go buy another quad or two cloths or whatever, move into one of the units. And in two years you’ve got another tax-free you’ve got another opportunity to 1031 or a 1031 goes away. You’re still living in one and turn it in to tax-free. So periodically you’re taking a bite out of a tax smith. Yup. And you still have that model.
Yeah. That’s a great model. They refer to that as house hacking. That’s kind of a, what they loosely referred to that strategy as exactly. Yeah. And it’s a great way to start. I mean, not everybody’s going to do that because they already have a home and they’ve already been purchasing rental properties. But if you’re just getting started, what, you know, what better way than to buy your own principal residence as a duplex triplex or fourplex live in part of it, rent out the others, you can live effectively rent free while creating wealth at the same time. Beautiful. Right.
Well, let’s take that a step further. Let’s say you’re not a candidate. Um, your family’s grown too much. You’re not a candidate for taking on for living in one fourth of a quad. There’s so much attraction now to the tiny own movement and the ATU movement. And there’s a ton of big lots across America. Go buy a beautiful Victorian house on a quarter acre lot and put an ADU in the back that just became your house act. And in many cases, there’s municipalities that are letting you start to separate those as two different lots. So again, when you sell, you’re selling part investment and you’re selling part primary residence, I love it. There is a ton of ways to skin that cat and the bright lawyers and folks will figure it out.
Yep. So let’s throw the question out there. What should investors do? If anything, at all, to prepare for the possible change in this 1031 tax code, we don’t know if it’s going to pass, but should it pass or change, you know, is there something we should be doing right now to prepare for it?
Wow. Trying to think of a funny quip related to Congress, not getting anything done. Credit clock is our friend. And, uh, you know, I literally, I was a lot more worried when I saw all of the both houses and the executive aligning that with the same political party, because I’ve always been a firm believer that if one XY of the, if one of the houses is going to be Republican, the other needs to be Democrat. And I really wish the president was just the libertarian because then they’d never get anything done and they can just argue in Washington and leave us alone. So you never want to take action based on something you think Congress is going to do, right. That’s probably a bad bet, but you do want to take advantage of everything that you can do right now. And the things that loom on the horizon for me, um, that are immediate.
I think the uptick in inflation is telling me that I want to sell and repossession my reposition, my assets into longterm fixed step using 1031 exchanges. So that that’s going to mitigate inflation because it’s here, it’s not maybe get a cup it’s here. And then along with that would be the idea of also looking at one of the things we know Congress wants to do. And so does America is we’ve become a nation of renters ad. That’s not good for the economy because almost her ship lets you keep pace with inflation somewhat. Right? So we know that there’s going to be incentives of some sort or another for single family home ownership. Well, so I’m saying get a jump on that game. We’re seeing the huge hedge funds, private equity firms are buying single family homes in blocks of thousands. I think smaller investors need to jump right in there too, because that’s always the most stable in a correction anyways, single family homes.
And if you’re positioning those, your prepared for just about whatever happens, if 1031 gets limited, you’re spread out. So you’re okay. If there’s a correction, you’ve got smaller assets to worry about bread and butter. Single family homes are always going to be the easiest to rent. And what’s interesting is the greater the incentives, the government gifts for people to buy single family homes. Do you know what happens to those homes? Their price goes up. Trust me, the very seldom to the people who have the incentives are meant for get the benefit. It’s the people who own the asset and sell that to them. So all reasons why I’m starting to look back at single families. I know everybody feels they’re overpriced. Yeah. But if I was going to sell something, I got to admit it would be overpriced when I sell it. So that’s the poison pill you got to swallow.
Well, and it may be, it, it definitely is a topic for another day. And it’s something I’ve been thinking about doing an episode on inflation specifically in today’s environment. So it’s out of the scope of this particular conversation. But the thing is, is as much as real estate has gone up pretty much across the country, over the last 12 plus months, incredibly like double digit rates of appreciation in so many markets. The thing is, is it’s not that the value of those properties have gone up. It’s the purchasing power of the dollar. The currency has gone down so much so fast because of all this excess money printing the trillions of dollars that have been injected into the economy through these recovery acts that what’s really happening is the purchasing power of the dollar is going down, which is pushing up the nominal price of the asset.
But in real terms, it hasn’t changed. It’s just that the dollar is worth less. So, you know, we say, oh, real estate is appreciating so much. We’ll know it’s not, it’s the same in value price has gone up in nominal terms. The problem is this is that wages aren’t going up at the same rate as the price of real estate. So if it did, if they went up, you know, in lock step with each other, it’d be no a non-issue because you’re able to afford the same amount of house today as you did 12 months or 18 months ago. But that’s not the case. Wages are lagging far behind and that’s why affordability is going down. So I know that was a mouthful, but that’s the truth.
Well, it’s the same two by four. Isn’t it. But tell me how your builders feel about it now. I bet they’re posting armed guards at their sites.
Yes, that’s probably true. Oh man, that’s funny. Um, all right, well let’s uh, let’s start to land this plane. I have one or two other questions here just to kind of tie a bow on the whole thing. Well, first of all, let me ask you how likely do you think it is that these changes are coming?
You’re telling me to put my prognostication ad on.
Yes. Yeah, nobody knows, but, and this is going to be kicked around like a football. Oh, heck yeah.
It’s gonna be fun. I can’t wait to see the email. Um, I don’t think it’s likely at all that it goes away. I don’t think it’s going away. Hi. Are you talking about the 1031, 1031? Yeah. Okay. I think that it is possible. The worst that will happen in my, the worst possible case is going to be that it’s limited to the $500,000 per year, but I think it’s still less than 50% on that. So step up in basis, I think that’s got a pretty high likelihood in being limited or eliminated.
Well, that was my other question is the step up basis what’s happening there. So that was my second question.
Yeah. Cause I mean, you know, if you want to give out 3.5 trillion, there’s gotta be a way to pay it. I get it. And once they vote that, then they have to find a way to pay it. And there is a lot of the dollars that are being passed down generationally. That seemed to be an easy target.
Okay. Well we could go on about this, but I think we’ve covered all the main points. Is there, um, any tips, suggestions, or advice that you want to give people about the 1031 before we, uh, tell people how they can find you and get more information?
Yeah, I mean, I would just say, obviously investors are getting the idea now’s the time. And even if it wasn’t the administration doing this, we’re in a very mature market. And when you’re in a mature market, you start to think about make evils that you can sustain in the ownership of a property while the correction goes through. When I was a, I happened to be a QI and an investor during, uh, those what were referred to as the dark days of 2007, 2008, 2009. Interestingly enough, a lot of my clients never lost a penny because they positioned themselves with debt. And with that sense that they never had to sell on paper. They went from being worth millions of dollars to negative many times, but because they never had to sell today, they still own those properties have they’re worth billions again. So the idea is to position yourself now where you can sustain the debt in a correction position in where you’ve got properties that perhaps are going to be much less capital expense intensive. He had rented the older home where there’s a roof coming by newer construction, and you’re going to make the same amount of money, but guess what? You’re going to spend less repairing the one. And it’s those surprises that will catch you in a correction. And the 1031 is perfect to do that because you can do that without missing a beat without paying tax, sell the old property code, buy a couple of new properties with low debt and then be ready to hang on for a few years.
I just remembered something we were talking about before we started recording that I asked you to remind me to, I was supposed to beat you. Wasn’t I answered that you were supposed to kick me in the side of the head to remind me this is a great strategy. So I guess we saved the best for the last almost, but talk about how to do a 1031 today, given the current environment that we’re in with strong demand, lack of supply and problems, finding good inventory quickly enough to get the 1031 done. You made a great comment or suggestion from a strategic perspective. And I think this is a major golden nugget for this episode.
Oh yeah. And it actually stems from the statutory order of what the 1031 exchanges. You have to close the sale of your old property before you close the purchase of your new property. But the order of contract does it matter. So right now the easiest thing in the world to do is to sell a piece of property. The hardest thing to do is to buy one. So we have a lot of clients that are not even putting their properties on the market. They’re out there finding the properties they want to buy. They’re maybe they’re very cash, heavy investors. So they’re able to offer substantial earnest money, sometimes even releasable earnest money to entice the seller, to sell to them. And then once they get a contract for their purchase, then they put their own property on the market and it sells in two days. And boom, you’ve got a perfect 1031 exchange because you’re going to close the sale before you close the purchase, you just went about doing the art part first and that protected you now where this actually extends part was just really cool is in the world of new construction.
Every builder in America thinks that each month has 45 days. And I don’t know where they got that idea, but they tell you it can be done in six months. That really means an eight or 10, just to how it is. It’s not their fault. It’s just how they do math. But that’s the problem with the 1031, right? It’s from the date of the closing of your sale, you only have 180 days to take title. How can you do that with new construction, by going into contract on a new construction property before you close your sale. So your couple of things happen that this is so awesome. So you’re under contract. Guess what? You locked in your purchase price. It doesn’t matter what happens to the cost of two by fours. You’ve got your price up, but you haven’t listed your old property. So every month you wait, you’re making another what? 5% it seems sometimes, right? So you’re double dipping on both ends. You control your purchase, but you’re allowed your sale to gain in value. When you’re certain that that new construction is three or four months out from bill from be done, put your old property on the market and close the sale. Hey, it says that’s a cure, right? It’s a very, very powerful strategy.
Yeah. I love that. That is huge, huge, huge. I hope people need to rewind that last two minutes and listen to it again because it’s super powerful and really it links the problem that we have today with the supply and demand in balance. So that was great. Dave, that’s brilliant. Dave share with our audience, our listeners, how they can find you and get more information. Cause you’re a very sharp investor and someone who really understands the 1031 exchange and how to implement it properly. So where can people find you?
Yeah, go right to our education portal, the1031investor.com, how we’ve got all YouTube series of about 32 videos, calculators, blog, articles, everything you need to give yourself the ammunition to take your portfolio and your investing career forward. And you’ll find me there.
Awesome. Dave, I really appreciate you coming back on. I think we’re going to have to have you on a regular basis, like once a year.
It’s always fun.
It is fun. Well, good stuff. We’ll get this, uh, outline soon and um, I appreciate you coming on, Dave. Thank you so much. My pleasure. Well, I hope you got a lot out of today’s interview. I think this was a great episode. If you have questions about what we covered today, by all means, get in touch with my team here. Our investment counselors can help you implement a 1031 exchange. We would bring someone like Dave in to help the accommodator for that and facilitate that for you. But we can certainly help you line up the acquisitions of your new properties to build your portfolio using the 1031 exchange.
So other than that, if you have any questions about this, hit up my team or just contact me through the passive real estate investing.com website. Remember to subscribe to the show, if you haven’t done so already help us spread the word, share this with your friends and family, share the education, let them learn about wealth creation, investing, finance taxes, whatever it may be through the show. If you have a guest recommendation by all means, let me know. I’m hitting up a couple different people right now that I think would make great guests for the show. And I hope to get them on soon. That’s it for today. Thank you for listening. And I will see you on our next episode.
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