Today’s guest is Dave Foster.
Dave is a 1031 Exchange Expert, a degreed accountant, and serial real estate investor. He is also a Qualified Intermediary and consultant who shares his tax saving strategies with investors like you who want to maximize their returns.
Show summary:
In this episode of “How to Scale Commercial Real Estate”, host Sam interviews Dave Foster, a 1031 exchange expert. Dave shares his personal experience of using 1031 exchanges to fund his lifestyle, including living on a sailboat for ten years. He explains the four D’s of 1031 investing and how they can be used to recession-proof a portfolio.
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Intro ([00:02:41])
Using 1031 Exchange to Fund Lifestyle ([00:04:40])
Nuances of Converting 1031 Property into Primary Residence ([00:06:31])
The first d: Defer ([00:11:26])
The second d: Diversify ([00:12:20])
The third d: Die ([00:15:16])
The 37 part YouTube series ([00:24:09])
Ways to contact and talk to us directly ([00:24:09])
Subscribe and leave a review ([00:24:23])
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Connect with Dave:
Twitter: https://twitter.com/DaveFoster1031
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Facebook: https://www.facebook.com/DaveFoster1031
Facebook: https://www.facebook.com/the1031investor
LinkedIn: https://www.linkedin.com/in/davefoster1031/
YouTube: https://www.youtube.com/c/The1031Investor
BiggerPockets: https://www.biggerpockets.com/users/davefoster1031
Website: https://www.the1031investor.com/
Book: https://a.co/d/f6rKKzc
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
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Want to read the full show notes of the episode? Check it out below:
Dave Foster ([00:00:00]) – But what people don’t realize is that it is perfectly fine to periodically convert a 1031 property that has a large amount of deferred tax into your primary residence. And prior to 2008, when you did that and you lived in it the requisite amount of time, you were able to take the entire amount of the primary residence exemption tax free.
Sam Wilson ([00:00:31]) – Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big. Dave Foster is a 1031 exchange expert. He’s also a qualified intermediary and consultant who shares his tax saving strategies with investors like you, who want to be in to maximize their returns. Dave, welcome to the show.
Dave Foster ([00:00:57]) – Sam, it’s great to be here again. It’s been a while since we got together, man.
Sam Wilson ([00:01:03]) – It’s been since March 16th, 2021 that you’ve been here on the show. So it’s I’m glad glad to have you back on the show today. But maybe for our listeners who haven’t gone back to March 16th two and a half years ago and listen to that first episode, there are three questions I ask every guest who comes on the show, so if you don’t mind answering them yet again in 90s or less, tell me, where did you start? Where are you now and how did you get there?
Dave Foster ([00:01:28]) – I started with a huge tax bill from the IRS because my other name is ready.
Dave Foster ([00:01:34]) – Fire firing. Dave and I bought a duplex in Denver. Fixed it up, sold it. And didn’t realize that the 1031 was even allowed. And so ended up paying a huge tax bill. You want to know how that thing still haunts me to this day? Sure. Is that the tax bill would have been about $30,000.30 years ago if I made 10% on my money. For 30 years. What would that look like in my checking account?
Sam Wilson ([00:02:05]) – I’m going to say 1.2 million. I have no idea.
Dave Foster ([00:02:08]) – What is it? I refuse to think about it because I want to. It would have been a lot. So that was where I got started, was I discovered that we were going to be able to get to our family’s goals quicker by using the tax deferred power of the 1031 exchange. And so that was how we got there. Ten years into that thing, we were able to buy a 53 foot sailboat and move our children on it and raise four boys on a sailboat with tax free dollars from 1031 exchanges.
Dave Foster ([00:02:41]) – And where I am then, now, today is continuing to reap that and helping other people learn how to do it as well.
Sam Wilson ([00:02:49]) – So you lived on a 53 foot sailboat? For how long?
Dave Foster ([00:02:55]) – Ten years.
Sam Wilson ([00:02:56]) – Wow.
Dave Foster ([00:02:57]) – Yeah. We raised our four boys on it.
Sam Wilson ([00:02:59]) – Did you sail around the world?
Dave Foster ([00:03:01]) – We did not go around the world. But there is so much to see. 50 yards offshore we went. We can find ourselves to Florida. The keys to the Gulf of Mexico and the bombs. And never got to see even a fraction of them. I’m sure there’s so much out there.
Sam Wilson ([00:03:19]) – I’m absolutely sure that that sounds amazing. So would you say that you’re a good sailor?
Dave Foster ([00:03:26]) – Huh? Okay, there is a truism here. Learning to sail is just like learning to golf. It’s easy to learn. It’s impossible to master.
Sam Wilson ([00:03:39]) – And now you know why I don’t play golf? That. That’s a difficult, difficult game. And I imagine sailing is the same. That’s not nothing I’ve ever tried my hand at, but anytime I see it, even on YouTube videos or otherwise, I go, wow, there, looks like there’s a lot to know there.
Dave Foster ([00:03:56]) – Oh, you know what? You’re only seeing the final take, right? Right. You’re not seeing the 20 takes before that, because it is so true that any docking you walk away from is a great docking. It’s a.
Sam Wilson ([00:04:09]) – Great docking.
Sam Wilson ([00:04:12]) – Note to self, if I ever decide to live on a sailboat, I’m. I’m going to come calling to you and say, Dave, show me, show me how to do it. You mentioned that while you lived on that sailboat, you use the 1031 exchange to fund that lifestyle. That doesn’t make any sense to me. Tell me why I’m wrong. Because in my mind, you take 1031 money and you just roll it over indefinitely. How were you reaping proceeds from 1031 exchanges tax free?
Dave Foster ([00:04:40]) – Yeah, a couple different ways. That’s a great question, because it’s one of the most powerful parts of the tax code that nobody knows. So the first one is you want to think about the 1031 exchange as a way to compound your investment capital, because you’re getting to reinvest not just your sales proceeds minus tax.
Dave Foster ([00:05:02]) – You’re also getting to. Reinvest for your benefit. The tax dollars you get to defer. So just like in my example, if instead of paying the government $30,000, I get to reinvest that $30,000 at 10%, it’s going to double every seven years. And that money that is used to purchase cash flow real estate. And that’s always been where my heart is, is to position myself into assets that throw off cash on a regular basis, because then they’re doing the work and I’m not. So we had taken our journey from Colorado to Connecticut to Florida, using the 1031 exchange into a fleet of vacation rental properties. And while we were on the boat, those vacation rental properties generated the income for us. Right. So that’s the that’s the first and easiest way. The reason why the boat was tax free was because we utilized this crossover between section 1031, which is deferral of the tax on investment property, and section 121, which is the sale of your primary residence. Now, when you sell your primary residence, if you’ve lived in it for two out of the five years prior to sale, you get to take as a couple the first $500,000 right? Profit tax free.
Dave Foster ([00:06:31]) – And you can do that once every two years. But what people don’t realize is that it is perfectly fine to periodically convert a 1031 property that has a large amount of deferred tax into your primary residence. And prior to 2008, when you did that and you lived in it the requisite amount of time, you were able to take the entire amount of the primary residence exemption tax free. So we did that a couple of times in Colorado before we got to Connecticut. And then in Connecticut, we converted a rental property into our primary residence. We came to Florida, did the same thing, and each time we sold, then it was tax free. And that money went to buy the boat. So that’s how we got the boat tax free. And then lived our lifestyle of my private clients and the vacation rentals.
Sam Wilson ([00:07:34]) – So let me just restate what you’ve said and see if it makes sense to. It just tell me where I’m where I’m getting this wrong. You’re rolling over these 1031 properties. You already own one of them.
Sam Wilson ([00:07:48]) – Say it’s a rental property. And you say, all right, I’m going to move into that now. And that’s going to become my primary residence. And then two years after living in that primary residence, you say, Bagot, we’re going to sell it and head south. You sell that primary residence, and now let’s say you’ve made the maximum amount good for you. You made $500,000. You put that in your pocket tax free now able to go and spend it. And that’s it’s almost it’s almost a a back door exit of a 1031.
Dave Foster ([00:08:21]) – That’s exactly right. Let me tell you the story of a client of mine down on Saint Pete Beach who used 1031 exchange to buy three identical, mean, almost literally identical beachfront condos on the same floor of the same building. And that he retired. And after a period of time he moved into the first one. Now the rules have changed since 2008. You now only get to prorate the game, but as soon as he had lived in that, so that he did for five years, he had lived in it for three years.
Dave Foster ([00:09:00]) – And then he’d rented it for two years. So we moved into it and lived here for three more years. And then when he sold it, he got to take 60%, 3/5 of the game tax free. He paid tax on the rest of the game. I said, you okay with that? You said, dude, if I was bagging groceries, I’d be paying tax this way. Just go out to my back deck and drink coffee. But where did he move? Next door.
Sam Wilson ([00:09:28]) – Next door.
Dave Foster ([00:09:31]) – And now. So the proration is what’s powerful because you have to owned the property for five years, but then it’s based on how much you’ve lived in it. So let’s say he rents it for two years and losing it for eight, he would get 8/10 80% of the gain tax rate. And then words, you get a move. Enter the next one. Now, you said the great way to do that.
Sam Wilson ([00:09:57]) – Great way to do it. I love I love the unique strategy. It takes a little bit.
Sam Wilson ([00:10:01]) – It takes a lot of patience and some planning, I think, to pull something off like that. But you had mentioned the rules have changed since 2008. What are the nuances since zero eight maybe to that and if you’ve already set them and I just missed them, forgive me.
Dave Foster ([00:10:14]) – Yeah. Well you used to be able to get the whole game tax free. Got it. Okay. You have to prorate it. That’s really the big difference.
Sam Wilson ([00:10:20]) – That’s that’s the that’s the key. So of the you have to have owned it for at least five years. And only you can prorate the number of years that you actually physically lived in that space.
Dave Foster ([00:10:32]) – Precisely. Yep. But still, what a great opportunity as you get towards the end. Right. And you’re trying to slow down, go more passive.
Sam Wilson ([00:10:41]) – That’s fantastic I love that. Okay. Hey, you went into some nuance and some detail there. I didn’t I didn’t actually expect and that’s kind of what I was hoping for because I think a lot of our investors and listeners understand high level.
Sam Wilson ([00:10:56]) – 1031 okay. Like maybe it’s maybe it’s the maybe, you know, whatever the value has to be less or you’re buying a bigger property. You, you know, use an intermediary. There’s there’s all those basic steps to it, I think that a lot of us get. But when you get into things like what you just mentioned, man, that’s really powerful. And I had no idea about stuff like that.
Dave Foster ([00:11:14]) – Right. Well, you want to take a real quick test. Let’s see how you do.
Sam Wilson ([00:11:18]) – Let’s see how I do. More than likely now I suddenly retract everything I said about high level understanding, because I think I’m about to get an F.
Dave Foster ([00:11:26]) – Oh, no, no, you’re gonna do awesome on this test. This is a test on what the four D’s of 1031 investing are. Now, I’ll give you the first one. The first. Steve. 1031 investing is defer. Right? Because anytime you defer, you’re starting to calm down your profits. Well, that by itself is the eighth wonder of the world.
Dave Foster ([00:11:49]) – But you can 1031 exchange anywhere in the country, from any type of real estate to any type of real estate. So if you’re going to sell a piece of real estate, no matter where you want to go or what you want to invest in. You do the 1031 and defer. Sure. What do you think the second deal would be?
Sam Wilson ([00:12:09]) – Defer.
Dave Foster ([00:12:10]) – Defer.
Sam Wilson ([00:12:11]) – Uh. Shoot. Defer.
Dave Foster ([00:12:15]) – I’ll give you a hint. Okay. It’s deferred.
Sam Wilson ([00:12:17]) – Oh, okay.
Dave Foster ([00:12:20]) – Because the 1031 allows you to capture wherever you’re adding a real estate cycle. And we may talk about this a little bit in just a minute, but the idea is that real estate cycles cannot be predicted, but they still always follow the same pattern. Appreciation is high and then appreciation stagnates and some other area starts to come on. Think about all those poor people in San Francisco Bay that sold those massively appreciated properties in Silicon Valley, and when invested in the cheap hill country of Texas around Austin, just because they wanted to hang out with you on, they went from an area of high appreciation to a high cash flow.
Dave Foster ([00:13:06]) – And now, of course, that appreciation has taken off. So everybody in 1031 world is always looking for where the next place is. That isn’t yet. So that’s the second deed. All right. What do you think the third D is?
Sam Wilson ([00:13:24]) – I’m going to say defer.
Dave Foster ([00:13:26]) – Yes. C you’re all over this man. And the reason why is that it doesn’t just accommodate your movement within a real estate cycle. It accommodates your movement throughout your life cycle as a real estate investor. You could do what are called diversification exchanges, where you sell one and you buy multiple properties to capture maybe your energy level and wanted to force appreciation to get better cash flow on cheaper properties as you start to mature and get tired. You can sell several and consolidate them when you want to start moving into more passive investments. Larger multifamily, triple net commercial, all those types of things where your effort is less. You could also take the opportunity, like we discussed a minute ago, to convert them periodically to your primary residence so that you’re capturing turning some of that tax free.
Dave Foster ([00:14:31]) – And what about moving your portfolio from Ohio to Sarasota, if that’s where you want to retire and you want your rentals in your backyard? So that’s the third D is it accommodates your life cycle. Okay. For the win. What’s the fourth deed.
Sam Wilson ([00:14:50]) – Dave.
Sam Wilson ([00:14:52]) – Dave Foster the 1031.
Dave Foster ([00:14:55]) – Guy answer but you like it. So I’m an experienced the injury of telling you that it’s not defer. And unfortunately it’s not Dave either. Have no idea. Which is not my favorite answer. But we’re all have that way, right?
Sam Wilson ([00:15:13]) – None of us get out of here alive, right?
Dave Foster ([00:15:16]) – But here’s what happens to your assets when you pass away. Your heirs inherit them and what is called a stepped up basis. So they inherit them as if they paid market value for them on the day you die. So throughout your life, you defer, you defer, you defer. And there’s all this deferred tax. When you die, it disappears. You don’t pay it. Your estate doesn’t pay it. Your heirs get the property tax free.
Dave Foster ([00:15:53]) – And then they get to start the process over again. It’s the greatest generational wealth building opportunity that’s out there. Unfortunately, you and I have to die to give it away.
Sam Wilson ([00:16:04]) – And die to give.
Sam Wilson ([00:16:05]) – It away. Yeah. You don’t get to take it with you. Uh, I think that’s a blessing too, though. But no, you think you’re right. That’s that is. That’s amazing. I didn’t realize that. There at the end, the stepped up basis.
Dave Foster ([00:16:20]) – Yeah, I’ve literally got one family that are now on their third generation investment from Connecticut. The grandfather started doing exchanges with us, and he passed away a few years into it, and his son inherited all of the properties. Don’t tax tax free. But then a couple of years later, guess what he was starting to do is up to 31 exchanges. Because those properties it started to appreciate. And then we passed away a couple of years ago. His properties went to his children. And now throughout this boom, they too have started to appreciate and they are now doing their own two, three, one changes.
Dave Foster ([00:17:03]) – Can you imagine how much tax that is that is come down to them? It’s in their pockets tax free.
Sam Wilson ([00:17:11]) – That’s that’s incredibly powerful. So what about properties where people borrow money, say you’re doing a fix and flip or say that whatever it is, you borrow money in order to improve the property. Let’s call it $1 million, and you put in a quarter million dollars in renovations. Then you sell it for 1.5. Let’s I mean, I’m just making up numbers. Whatever they are doesn’t matter. But how do you and then you owe that money back, obviously, to the people you borrowed money from when that property closes. You’re only paying tax, of course on the gain that 250 gain.
Dave Foster ([00:17:45]) – Yeah, that’s exactly right. So the way the IRS accounts for that is that they tell you that if you want to do for all tax, you need to do two things. You need to purchase at least as much real estate as you sold. So in our example that would be the 1.5, right.
Dave Foster ([00:18:02]) – Secondly, you need to use all of your proceeds from a sale to do that. So you know let’s say you borrowed. 750 to buy it, right? Plus the 250 to renovate it. So there’s a million, right. So you sold it for $1.52 million. It gets paid back, and you’re left with 500,000 in cash and the need to buy at least 1.5 degrees right now, if you want to grow up in size, that’s no problem at all, isn’t it? You can find a big asset. What if you want to get more when you take those proceeds and you allocate them into down payments on multiple properties? Okay, $250, a couple of different properties or whatever it is that you want to do, and that’s how powerful that can be, because the IRS doesn’t care how you allocate, as long as at the end of the day, you’ve purchased at least as much as you sold, and you’ve used all the proceeds to do it. Now, here’s an incredible hack to recession proof your portfolio using this exact principle.
Dave Foster ([00:19:14]) – Let’s say you’ve got a property for you’re selling for 500,000 and there’s 200,000 in debt. You sell the property, you’ve got $300,000 in cash. You could take 250,000, let’s say, and go buy the $250,000 property for cash. Right. Take the other 50,000 and go buy the $250,000 property. Using that as a down payment. So you sold what you bought to. But some magical things happen. First of all, you want an asset that’s free and clear so you don’t have to worry about just keeping the lights on. It’s free of mortgage risk. It’s free of being taken from you. If the market downturns or whatever, but also all of that equity is trapped in it. So that like right now when we’re in 7% interest rate world, you don’t have to worry about paying interest while you wait for your next project. Let’s say a couple of years from now, interest rates are back down to 3%. You slap a refinance on that. Pull out the bulk of that two hour 50,000. And then go use that to buy your next acquisition target.
Dave Foster ([00:20:36]) – But meanwhile, it hasn’t been costing you anything, but you were still able to defer all the tax of a gain because you use the other 50,000 and used it as leverage to go buy your second property. That’s a pretty neat way.
Sam Wilson ([00:20:52]) – Yeah. That’s awesome. That’s one thing I didn’t realize as well is that you can split those down payments on several properties. Do those. Is there any regulation around? All of those properties being owned inside the same entity or the same name, or does it not matter?
Dave Foster ([00:21:14]) – Yeah. Actually does. And that’s just one of the basic rules of 1031 is that the taxpayer for the property that’s being sold has to be the taxpayer for the properties that are purchased. Now, any taxpayer entity could do it to 31 exchange, but it’s whatever tax return reports that. Now a lot of people love to practice liability, you know, reduction of that kind of thing. So they like to own their properties at LLCs and at certain state series LLCs where there’s a parent LLC that does all its own tax return, and they had children and child LLCs that don’t.
Dave Foster ([00:21:55]) – Those are very common. As long as those children LLCs don’t bother no tax return, they’re going to be reported on the tax return of the parent LLC and the IRS world. That’s the same taxpayer because it’s that tax return. So you could sell the one. Buy a property in Dayton, Ohio, free and clear under water, and Ohio LLC and co buy an Alabama property using. Leverage using an Alabama LLC. Both of which are owned by the parent LLC. So plenty of ways to practice liability deferral as well.
Sam Wilson ([00:22:37]) – Right.
Sam Wilson ([00:22:37]) – Yeah. That makes that makes a lot of sense. Very, very cool Dave. It’s been a pleasure having you come back on the show today. You always give some insightful nuances to the 1031 exchange. I know that you’ve recently put out a book. Before we sign off here, can you tell our listeners about that book and the best way to get a copy of it?
Dave Foster ([00:22:58]) – Yeah, it’s right out there on Amazon. It’s called Lifetime Tax Free Wealth A Real Estate Investors Guide to the exchange.
Dave Foster ([00:23:06]) – And I love how you catch this. Early on in the show where you talked about the rules and the do’s and don’ts. I thought that’s what I was writing. But at the end of when looked at when, you know, this is really more of a roadmap for how to strategically reach your life goals using the government’s tax dollars. So it’s really more strategy and designed to fit your desires than it is just by the numbers one, two, three kind of thing. That kind of fun. We do a lot of case studies in it. People like I was just talking about my story, several others. Because think out there, there’s always a way to do this. There’s always a way to do it using the government’s dollars. And I guarantee you that’ll be faster.
Sam Wilson ([00:23:55]) – I love.
Sam Wilson ([00:23:55]) – It. Dave, thank you again for coming on the show today. We know how to get your book. Outside of that, what is the best way for our listeners to get in touch with you or your company and learn more about you?
Dave Foster ([00:24:05]) – Stop by the 1031 investor.com.
Dave Foster ([00:24:09]) – I’ve got a 37 part YouTube series talking about all these kinds of things. We’ve got calculators. We’ve got ways to contact and talk to us directly, and we get bored if we don’t have people visit.
Sam Wilson ([00:24:22]) – So that’s.
Sam Wilson ([00:24:23]) – Fantastic. The 1031 investor.com. Dave, thank you again for your time today. Certainly appreciate it. Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
