What the Heck is a 1031 Exchange with Dave Foster

Josh (00:00:02) - Good day, everybody. Welcome to the deal, Scout. On today's show, we're going to talk about the 1031. Now, if you don't know what that is, this is going to be a good episode for you to listen in because we're going to go over the high level details in. And of course, if you're hearing things and it interests you, reach out to our guest and say, I'd like more information and maybe to do a deal with you. That's the mission and purpose of the deal. Scout put deals together, right? So Mr. Dave, is it looks like you're from Saint Petersburg, Florida, is that right?

Dave (00:00:32) - I'm somewhat of a vagabond, which is actually part of the story. Yeah. We spent about 20 years in Denver and then the beach back. So, you know, I mean, you got to do summers in the mountains. Winters on the coast. Mean, you know is what it is.

Josh (00:00:47) - It is what it is, man. Well, we're glad you're here in Florida, even if it's just for the beautiful weather.

Josh (00:00:54) - But Dave, why don't you tell us a little bit about who you are and what the heck is a 1031?

Dave (00:00:59) - What the heck is a great way to phrase it? What I am or what I was was simply a person looking to get off the hamster wheel. If you go back 25 years, my wife and I both had pretty high profile careers and we realized when we had our first child that the greatest commodity you've got, that is your replaceable that you need to maximize is time. It's not money, it's not power, it's position. And so our whole goal was how can we maximize time to be with our family and to grow our family? And so real quickly, like a whole lot of people over the last 10 or 15 years, real estate, right? Just why not? It's easy, right? You just buy property. Is it to make money? Well, because I'm already firing kind of guy. That's exactly what I did. I went and bought a duplex in Denver. Wish I would have capped it, but fixed it up.

Dave (00:02:03) - We sold it and I was feeling all fat and sassy until I went to my accountant that winter and he gave me the news. Boy. What I did not realize was that every real estate investor has a silent partner. And their name is Uncle Sam. Yeah. And Uncle Sam is going to slow down your progress towards independence. Very, very much so. We quickly our goal was to buy a sailboat, raise our family on a sailboat. And so that was the goal. And we realized after that first transaction like, this is going to take us forever. You know, I'll be ready for a nurse, you know, not a sailboat. So what we right at that moment in time, there had been a huge court case that was settled where the IRS lost. Now, first of all, when does the IRS lose cases? That's a big deal. Yeah, but it was over. This thing called the 1031 exchange. Which 1 in 1031 exchanges. After the lawsuit, it was going to allow regular investors like you and I.

Dave (00:03:16) - To sell investment, real estate and reinvest all of the proceeds, including the tax that you normally would have had to have paid so you could buy more real estate because you're using the government's dollars. The tax was indefinitely deferred. And when I saw that, I went, wow, So if I defer. $40,000 of tax. By buying more real estate. Then that's if I'm making 10% a year. That's $4,000 a year that goes into my pocket every year indefinitely. As long as I keep it deferred. That was the answer. So from that moment, instead of selling and making money to make our goal, we started to do 1031 exchanges of our portfolio and moved it from Colorado to Connecticut, which was on the coast. But we forgot to remember that there's no warm weather. So we walked out of Connecticut and moved the entire portfolio to Florida, all without paying any tax and doing 1031 exchanges. And along the way, we also took advantage of another part of the code, Section 1.1, which allows you to sell your primary residence.

Dave (00:04:38) - And Jake is a married couple. The first $500,000 tax free. So as we went from location to location. We would convert a rental property here and there into our primary residence. Living it long enough to sell it. That money, which was tax free, went into the buy the boat key. The rest of the money went into buying a fleet of vacation rentals over time. And we were able, in ten years to buy a 53 foot sailboat with our family on to it and live off of the income from our vacation rentals in my private three clients. Yeah, and that's what the 1031 exchange did for me. And so early on I realized nobody knows about this. This is awesome for me. I want to share. I want to do it. So for the last 24 years, we've been doing temporary ones for others as well.

Josh (00:05:30) - Yeah. Yeah, that's. That's such a great story. If I wasn't if I didn't get seasick, man, I would come visit you on the sailboat.

Josh (00:05:38) - But I'm a I'm a landlubber. Even though we're my wife and I pretend to be pirates.

Dave (00:05:43) - Well, you know what the closest thing is for you guys are these.

Josh (00:05:48) - We've got it. We love our being. Yeah.

Dave (00:05:50) - And there's such a movement right now, isn't there? Yeah. With a mobile lifestyle. Yeah. With Wi-Fi the way it is. And so that's exactly. There was one really bad trip, Josh, where we were going to the Dry Tortugas, which is about half a million.

Josh (00:06:05) - Yeah, yeah, yeah.

Dave (00:06:07) - And it was so bad. For two days. We didn't speak to each other. And then after two days we looked at each other and said, that wasn't very fun. Let's get an RV. And then after one more day, the sun is shining. It's 85 fish. You're jumping in your boat. We said, Nah, sailing's okay. Yeah, but yeah, the RV lifestyle can be an exact same way. Whatever it is, that's your dream? Yeah.

Dave (00:06:34) - The idea of deferring tax is just a form of compounding interest, and that's going to maximize your time and bring your dreams to you to fruition earlier than if you barnacles jam and keep plodding along.

Josh (00:06:51) - Yeah. Man. So, so good. We're working on a a luxury RV resort right now. We're working on doing some of the funding there. And it's such a cool project, man. RVs and sailboats. And but what's cool about it is, is people who've taken their real estate investing or their their their businesses and they've built it around their lifestyle. I want to I want to live on a boat. I like to travel with my family. We have a house in Ocala, but we love taking, you know, going on trips with our friends and family and doing RV and real estate is the key or is a key that can unlock these kind of things. And like all investors, like, making money is great, right? You know, everybody in their brain. How do I make more? How do I make more? How do I make more? But there comes to a point when you have to stroke a big check to Uncle Sam, and that's painful.

Josh (00:07:45) - And then you go, Whoa, I did all this work. How do I preserve some of the income that I made? Right? So we look for these things and that's where you come in because we start talking about 1031 exchanges and you talk about compound interest, the power of compound interest, the eighth wonder of the world. Right.

Dave (00:08:03) - So exactly who said that?

Josh (00:08:06) - Einstein.

Dave (00:08:07) - Yes. Isn't that amazing that I knew what he was doing? What I love is the second statement after that. Okay. Those who understand it will benefit from it. Those who don't will get hurt by it.

Josh (00:08:21) - Well, we'll be. We'll be paying for it, right? Yeah. That's it, man.

Dave (00:08:25) - Yeah, it's. It's you. We actually have an analysis that we do with folks where we can show a very real example where two investors doing four transactions over 20 years. Now, that's not many transactions. Yeah. Four transactions over 20 years. One investor does the 1031 exchange and gets to use the tax for their own growth.

Dave (00:08:51) - The other investor pays the taxes, they go and everything else is constant. They start out with $100,000, which would be a $20,000 tax. So one investor has $100,000 to use as a 20% down payment on a $500,000 property. Right. The other investor has $80,000 because they're paying the tax. So they can only buy a $400,000 property. Yeah, that's the first transaction. You go forward five years and they sell that exact same property. And because mathematics is so cool, the growth of a larger amount becomes exponential. So the investor that's deferring that tax then sells at a much higher rate amount. And again, they defer the tax and at the end of four transactions over 20 years, with everything constant, the investor that does the 1031 exchanges ends up owning about $12.5 billion of real estate. Now with that and everything, the other investor who paid the tax as they went so they weren't able to use it has about 4.5 million. I'm not going to cry for either one. Would you rather be?

Josh (00:10:13) - I'd rather be the beneficiary of the the first one.

Josh (00:10:16) - Right.

Dave (00:10:17) - Exactly.

Josh (00:10:18) - But the the the the beauty of that story is, is it could be done over time. What I love about the 1031 exchange is that it does take time, right. Because you have to put time behind it. You just can't be, you know, flipping things left and right here and there. Right. Am I is my assumption correct?

Dave (00:10:35) - There's right there. Not for like fixing flippers. Yeah. So if you're an adrenaline junkie at 1031 odds, you probably want to do a couple of fixing flips just to keep yourself safe. But the 1031 is for buying old investors, people who like to buy property and hold it for productive use. And what that does for you is it's not really going to allow you to avail yourself of the 1031, but it's going to allow you to slow down so you can get the benefits of real estate ownership. Yeah, You know, people think it's all about the sell, right? There's actually the old the old proverb was, you make money in real estate when you buy it.

Dave (00:11:14) - Yeah, right. Yeah. What the 1031 exchange teaches us is that you determine how much you keep that money when you sell it. Yeah. How do you sell it? And along the way, there's some crazy things that people don't even realize that they're getting the benefit of. So cash flow from owning real estate good enough, right? But while you're doing that, you're also getting this little thing called appreciation, where your property is gaining value here, who gets the benefit when you sell, you do. There's also this thing called amortization because a little bit of your loan is paid off every month, not just the interest, but a little bit of the principal. And who's paying that? Your tenant's not you. Yeah. So theoretically, if you've got a 30 year loan on a property and you hold it for 30 years, your tenants will have paid off all of that money and you get the benefit of it. The fourth factor of the internal rate of return calculation is depreciation. And 31 is awesome because of the tax benefit.

Dave (00:12:29) - Depreciation does the exact same thing. It's a pretend game from the IRS that lets you pretend that your property lost value every year. If it's residential property, it's 127. So basically you lose 1/27 of the value of your real estate. Every year you get to write that off on your taxes. So it becomes a loss of you pay less tax. But you really didn't lose the money, did you? Because appreciation is making it up on the back. But here's the nasty grant from the IRS. Josh, When you sell real estate, they make you do what is called recapture. The appreciation. They give you a gift and then they make you pay it back. I'm sorry, that's just not cool. But the 1031 exchange allows you to defer not only the gain, but it allows you to avoid having to pay back the depreciation. So you can continue to get the tax benefit of depreciation throughout your life as long as you're using 30 exchange.

Josh (00:13:41) - So let me let me just let's play scenario So you know, I'm not I don't run as fast as you my brain you know the the gears don't turn as fast as you.

Josh (00:13:52) - So we have a situation where, you know, we had a commercial property, we did depreciation, we sold it. And there, you know, the government's like, all right, it's time to do the recapture, the depreciation, you know, write us a check, fill in the book. Right. And then we meet a guy named Dave and he goes, okay, let's have this conversation about the 1031 exchange in the vehicle here. Right? So instead of me paying the taxes on, you know, my property appreciated and I'm, you know, there's some money there to to be had you say let's take a look at that scenario through a 1031 exchange. Here are some of the benefits. One, the recapture of the depreciation can be, you know, explain what that.

Dave (00:14:32) - Was as well.

Josh (00:14:33) - Can be deferred. The capital gains can be deferred out. Right. So essentially, I roll that money, including the taxes, the depreciation into the next project. And now I've just forced multiplied my ability to accelerate wealth on project number two.

Dave (00:14:49) - And actually that phrase forced multiplier. Yeah, that's exactly right. Yeah. That's huge isn't it.

Josh (00:14:55) - Yeah. You know. Yes. What if the market doesn't appreciate, you know, like we're, we're coming in a time, you know, like we're recording this as of August 2023, right? Especially in Florida. Everything's been blowing up and going up and everything. Real estate's been going off the roof. What if things start going down like we saw in maybe zero eight?

Dave (00:15:17) - Okay. Got a great answer for that. You know what we're going to do? We're going to go through an exercise called the 40s of 1031 exchange, and we're going to see how you do on this quiz. Okay. But the first answer to your question right there is that the first day of 1031 investing is to defer. Okay? Because the 1031 exchange will allow you to move your real estate from anywhere you sell it to anywhere else. So let's back up to about 2012 with the San Francisco Bay Area was going.

Dave (00:15:51) - Walker's right. Yeah, but what happened? Elon moved to Austin. And everybody in the bay started selling these hugely appreciated properties in the San Francisco Bay and they were buying cheap dirt in Austin, Texas. So they sold in a highly appreciated environment and then bought where appreciation was just getting going. What a great way to position yourself. I don't know what the equivalent is because you're right, Florida is just kind of crazy. And I saw I was sitting at the bridge coming onto our island and was behind a 2023 Bentley convertible. Oh, cool. With Montana license plates. Get out.

Josh (00:16:41) - Of here.

Dave (00:16:42) - What are they doing here? Californians are here. Actually, that is kind of funny, isn't it? California has now got hurricanes, and we've got Californians, so. Yeah, don't know. Don't know where the next one is. Yeah, but wherever that next place is. Yeah, that's going to appreciate the temporary one. Exchange can take you there. Yeah. How do you deal with a lot of commercial real estate? Same thing is true.

Dave (00:17:06) - You can use the 1031 exchange to change classes of real estate. Yeah. So early on in the market, it's cheaper to buy existing construction. Yeah. And then later, as the market gets long in the tooth, new construction. So you can use the 1031 to sell for old and buy new. And the other thing that that kitchen or.

Josh (00:17:27) - From multifamily to self-storage or mobile home parks.

Dave (00:17:30) - Exactly. And you can also use it to escape looming capital expenses. You own a house that's going to need a $40,000 roof. Well, you know, that's going to take a chunk out of your profit. Sell it now before you have to and go buy new construction or you're not going to have to put any money in it.

Josh (00:17:51) - Yeah.

Dave (00:17:52) - So anywhere in the country, any type of real estate, the typical exchange can accommodate that.

Josh (00:17:58) - All right. Before we go there, any type, we're going to talk about how how could this play in the residential space? Because you said that there's a Code 121 or Section 121 that allows primary residence.

Josh (00:18:10) - But before we go there, you said four DS of of the 1031. Let me see if I could guess one Right. You got the defer four was.

Dave (00:18:18) - The first.

Josh (00:18:19) - Depreciation.

Dave (00:18:21) - That's a good deed. But the second is actually defer.

Josh (00:18:27) - Defer and defer.

Dave (00:18:28) - Yeah.

Josh (00:18:29) - Are the other two deferred deferred before?

Dave (00:18:33) - Oh eight with me. Okay. So the second day of the first because as we go through our life cycle, we're always looking for where we're going to end up, right? Life is a series of events, hopefully. And so you can use the temporary one exchange to go from active investing. To passive investing. The move from having ten single family homes with a lot of effort to one multifamily property that maybe has on site management or into triple net commercial properties. Yeah, into anything where you're going to be saving time because time is that commodity and as well you can start looking towards as you start going from active capacity, you're going to start to look at where you want to retire.

Dave (00:19:26) - So the idea is to position your portfolio where you want to retire, if you like to manage it, so you sell your properties in Cincinnati over time. You go move them all to Sarasota. So they're ready and waiting for you when you get to Sarasota. So you ready for what the third D is?

Josh (00:19:47) - Of course I am. I'm sitting here with a pen. Well, not a real pen. An apple pen, but I'm ready for it.

Dave (00:19:53) - Okay, so I'll let you guess. What do you think the third D is?

Josh (00:19:56) - Defer? Yes. Oh, you're all brilliant.

Dave (00:20:00) - Because part of what you're going to be doing over time as you 1031 exchange and this is exactly what you want to talk about with the 121 you can convert those properties into your primary residence. Really. And when you do that, after owning it a certain amount of time, you will start to turn some of the deferred tax. It's a tax free. So not only are you going to get the compounding of the tax for cash flow.

Dave (00:20:35) - But you're going to take properties and move into them. Maybe eliminate some of the text. Here's a real example. I've got a Keller Williams realtor down on Sleepy Beach who sold out of an office building and bought three identical oceanfront condos. Mm. Identical. Side by side. Almost. After he used them for investment per year or so to satisfy the 1031 exchange. He broke into the first. Converted it. Now, once he has owned it for five years. Once he had lived in it for two out of the previous five years before selling it. Then he got to prorate the game between the years he lived in it and the years it was rented. So because he lived in it for three years, rented for two, he lived in it for three, he got to take 3/5 of the game. 60%. Tax free. When he sold it. So, yes, he converted tax owed to the government to tax free money in his pocket.

Josh (00:21:49) - Yeah.

Dave (00:21:50) - And as he said, you know, because I said you have to pay a little bit of tax, Right.

Dave (00:21:55) - You said, Well, yeah, but if I was delivering pizzas, I'd have to pay taxes back.

Josh (00:21:59) - Yeah.

Dave (00:22:00) - He said. Instead, my retirement job is coffee on my back deck. Now, where do you think he moved?

Josh (00:22:07) - Next door to the next condo? Yes. I like this guy. I want to go.

Dave (00:22:13) - There for eight years out of ten.

Josh (00:22:15) - Yeah.

Dave (00:22:15) - He gets 80% of the game. Yeah. Tax free. It's crazy how powerful that is.

Josh (00:22:22) - So the only thing is moving sucks. So you're going to have to own a moving company or something like that to move you every state years or whatever.

Dave (00:22:32) - If they're all next door, you've probably got neighbors.

Josh (00:22:34) - Yeah. Hey, Bob, we're moving again, Wyatt said.

Dave (00:22:37) - How do you know what? It's time to move? Because usually, you know, the wife likes to mess up. So how do you know what? It's time to move. She goes when it's time to redecorate. We're just moving.

Josh (00:22:49) - Or when it needs a new roof or when there's no.

Dave (00:22:51) - Yeah, yeah, exactly. So think you can start to see how the three days for the first three take you all the way through from being a novice investor with your first property. To being a retired real estate investor. Living off your assets tax free. Your whole life. What do you think the fourth is? Be careful.

Josh (00:23:18) - Don't die. I don't want it to be die.

Dave (00:23:20) - But it.

Josh (00:23:21) - Is.

Dave (00:23:22) - No, don't like it either. It's not my first choice.

Josh (00:23:26) - That was right.

Dave (00:23:27) - You are the first person that has ever gotten one, by the way. Congratulations. So the reason why that's so powerful. Although we don't like to think of it, is that when you die, your real estate assets get revalued as of the day you die and your heirs inherited as if they paid market value for them. So you're basically all of that tax deferred over your lifetime. Disappears. You don't have to pay it. Your estate doesn't have to pay it. Your errors don't have to pay it.

Josh (00:24:04) - Yeah, and this might be generational wealth. Yeah, it sure is, man. I went from figuring out, you know, when our mindset shifts from how do I take care of today's issues to I want to take care of my great grandkids. We make better decisions, right? But and this might be a tax question or it might be an attorney question. You could always say, hey, I defer, which is one of the three four D's. I defer to them. But when it comes to these properties, are we owning them in an LLC? Are we owning them in a trust?

Dave (00:24:40) - Well, that's kind of the beautiful thing, is the 1031 exchange is incredibly flexible. Okay. Any tax paid entity can do it. 1031 exchange. So whether you're Apple selling one of your microprocessor units or whether you're a married couple that each happened to own your own house. Yeah. Before you got married. Yeah. Doesn't matter. You can do the 1031 exchange.

Josh (00:25:06) - All right. So here's the real question.

Josh (00:25:07) - How do we do this? Like, I wanted to be a part of my ten year plan, right? Debt free right now, 41 years old. But by 50, I want to be able, you know, where my passive far exceeds my my expenses. Right. That's when we get off the rat race, the treadmill. Right. So within ten years. And then I want to buy a big ass camper, right? One of those big drivable ones and, you know, tour around with my beautiful bride and my kids and have some fun. How do I tie in the RV to it or is there a way to make that happen? Because you.

Dave (00:25:40) - Do. Yeah, that's exactly. So just in the same way we get the sale, Yeah, we would convert a property. So we started in Denver and then my wife is a saint. I don't I can even tell you how many times we moved. Finally. There was one time when she did this and said, I'm not moving.

Dave (00:25:56) - If you want to move us, you got to do it. So, yeah, I'm not that guy. Yeah, but as we would buy houses, we would live in it for two years. Yeah, we would sell them the profit tax free. Yeah. And then occasionally we would convert one of those 1031 properties into our primary residence. Now, prior to 2008, we got to take all of the game tax free. That was nice. And then the IRS put my picture up in their lunch room and decided to do this.

Josh (00:26:31) - Let's go after this guy named Dave. It was.

Dave (00:26:33) - Yeah, but we would do that. So when we got ready to move to Connecticut. Whichever you want. All of our property. They're out of time. So that when we moved there, we picked out one of the properties and we moved into it, converted it into our primary residence. And then when we moved our portfolio to Florida, we did the same thing. So those 5 or 6 transactions provided all the tax free money we needed to buy our boat.

Josh (00:27:03) - Yeah, man. Good. I'm taking notes on pads of paper and my my iPad. So, you know, you're making my brain work and you're making me sound smart, so I really appreciate that as well. Um, so here we are. I work with a ton of different types of investors and, you know, people through our brokerage and people through our, you know, seeking commercial finance and stuff like that, when they, you know, what's a when should a person contact you to start saying, how do I do this? I want to I want this to be a part of my strategy. Right. Moving forward, how and when should people contact you?

Dave (00:27:38) - I think that's an absolutely great way to say it. To phrase it, Josh, is to say, I want this to be part of my strategy. So many people will decide to sell a property and then all of a sudden they'll go, Oh, I to do whatever they want to change. But to really take advantage of everything it has to offer you.

Dave (00:27:59) - Strategies, what's needed. And that happens long before you're ready to sell. For instance, we were talking for just about what About fixing flip people, the adrenaline junkies that want to fix houses. I got to admit, there is something that is very soul satisfying to me about taking a hammer to watch drywall. I love those projects. Yeah, they're awesome. The problem is that they don't work with you through an exchange because your intent is not to hold the property. It's to say, Yeah, but what if the fix and flipper it got to work with me through the calendar on this? What if instead of fixing flipping, I bought the property, I fixed it, I put a record. And then I refinanced. So get by my next flip. I really didn't slow myself down at all. I got access to the money from a refinance to buy my next property. And I've also got a renter giving me cash flow and all those other benefits and that property now after I've worked there for a year, is going to be eligible for a 1031.

Dave (00:29:11) - So look at what I can do in 18 months. I buy one, put a renter in it on my property. Next project. What am I going to do with that one? Fix it. Put a renter in it and refinancing to get my third one. Yeah, all of this is going to happen. By 18 months, I'm going to have 4 or 5 properties that are fixed and flip properties. But every one of them I've held long enough that I could detect one changes. And could I have a couple clients that'll do 20 or 30 exchanges a year? And they fix and flip all the time. But every property they're flipping, they've rented for more than a year.

Josh (00:29:53) - Yeah.

Dave (00:29:54) - That takes time.

Josh (00:29:56) - But it compounds and it compounds. So you could leverage this through the, the single family, you know, stuff, but you could also leverage it through bigger asset classes like mobile home parks. Can you do it with land? Large tracts of land?

Dave (00:30:09) - Absolutely.

Josh (00:30:10) - Okay. Does it have to be zoned a specific thing? Can it be a one or or have as.

Dave (00:30:16) - Long as you're holding it for investment? So it could be agricultural land farm. It could be land that you buy to put an RV campground on it? Yeah, it could be land that is an interstate exchange up to 75 where you're buying it to hold while progress catches up.

Josh (00:30:35) - Cool.

Dave (00:30:35) - Yeah. Remember how slow things used to be around Brooksville? Look at what's growing up there now, right? Yeah. Yeah. So those are. This is what I call kind of a flow of different investing. Yeah. Is because you could sell one property and buy multiple properties so you could get bigger in terms of more assets. Or you could sell several assets. 1031 exchange to buy one larger asset. Okay. Whatever the market is telling you, you could use the 1031 to get there. So the answer went. Hardly. Or rather than later. Strategically speaking, the last moment that someone could get it to everyone knowing we have to be you have to use the services of an unrelated third party. That's what we do.

Dave (00:31:22) - We have no other relationship other than we're doing this every month and we have to be involved prior to the closing of the sale. Yeah.

Josh (00:31:31) - Yeah.

Dave (00:31:32) - So mean. Our world record is 22 minutes, but as long as it's before the sale, that's where all this gray hair came from. As long as it's before the sale, you could do the 1031. I still get calls every month. Dave I just sold a property last week. The buddies at the tattoo company. I'm ready to do my 1031.

Josh (00:31:52) - Yeah.

Dave (00:31:53) - Yeah. Sorry, you're not that ship sale. So sooner rather than later to take full advantage of the strategy, but definitely before closing the sale.

Josh (00:32:04) - All right. So we got to talk about the pressure of the 1031. Right. Hey, Dave. 22 minutes. I got a closing. I need you to come in here. We're going to get some more gray hairs. You might even lose some. I got this big deal That's closing. I forgot your number. I bring you in, we get the 1031 setup.

Josh (00:32:22) - We close. All right. 10 million bucks in my pocket. Ready to rock and roll. There's a pressure that's associated with the 1031. Tell me about it.

Dave (00:32:30) - Yeah, Don't relax. Don't relax yet, because you've only got 45 more days to identify your potential replacement properties. So if you're trying to eat up $10 million, you've got some shopping to do.

Josh (00:32:46) - And is it.

Dave (00:32:47) - 45.

Josh (00:32:47) - Business days? Is it 45 business days or 45 days period?

Dave (00:32:51) - 45 calendar days. Okay.

Josh (00:32:53) - Got it. Yeah.

Dave (00:32:54) - Midnight on day 45 is the witching hour. Yeah. And my operations plant is in Denver, so that's like 2:00 Eastern time. Yeah. I don't know. You guys, whatever your email timestamp is, that's what's going to be what matters. 45 days to identify total of 180 to close. Now that can become really problematic. With a market slot. So what I like to tell people is do the hard thing first. If fine. If you're in a market that's overheated and you can't find inventory.

Dave (00:33:32) - Go find your replacement property and get it under contract before you sell your old property. Yeah. So you already know what you're going to buy. We've done this successfully with thousands of California clients who would put their property on the market. It would have 50 offers day one. Yeah. And so we would just say, stop. Don't put it on the market. Let's go get your new property under contract first. Now you can use your own earnest money. You can lock it up however you want. You can give earnest money that goes hard and is not refundable. Whatever it takes. And then as soon as you get a contract for that, list your property for sale. Yeah, because you can go into contract any order you want. We just have to close the sale before you close the purchase.

Josh (00:34:23) - 45 days, calendar days from midnight to identify the property. All right, so I've identified the property. I got it under contract. I have 180 days from the closing to close the next one.

Josh (00:34:35) - Right. So 45 is a part of that, right? Yep. Okay. Day number 170. The deal falls apart. What the heck do I do now? I've got ten days.

Dave (00:34:49) - I'll buy you a cup of coffee or a beer. And we are going to commiserate because there's no extensions at all in less. It's been something like a wildfire or a hurricane.

Josh (00:35:01) - An act of God taxpayers. Okay. So it has to be a force majeure like a class act, you know, an act of God or whatever the term is to give you an extension.

Dave (00:35:12) - Now, if you're still within your 45 day period, you just identify your properties. Yeah, but if you're past 845, we'll leave the properties on a list will count. So and even if you named several. Yeah, by the time you're a day 170, none of those other properties are gonna be available. Yeah, I literally have a client right now who was buying a bunch of Northport, Florida land. Yeah. And he got sassy and tried to negotiate a little too cleverly with them.

Dave (00:35:41) - Yeah, and he lost out on all of them. And then he called me up because I wanted a more properties. Said you can't. Those are the properties on your list. Yeah. He went back and redo it with the new buyer of every one of those to give them more money than they outbid him for just so he could purchase them to defer his tax. That was a sad day.

Josh (00:36:10) - Yeah. So, okay, so day number 181. You and I are getting coffee and say we missed it because I tried to, you know, I tried to negotiate too hard and I lost the deal. And you're like, Josh, I told you, don't do that. And I'm like, I know I'm a deal guy, right? So day 181, I write a check for the Or. I prepare to write a check. Is that how it works?

Dave (00:36:32) - Well, right, because you're not going to pay. You're to pay the same amount of tax. Yeah. At the same time you normally would have.

Dave (00:36:37) - Yeah, that's the beauty. There's no penalty for starting at 1031 exchange. But you know what? Even as squirrely as this market is right now, we're still seeing 90% of our clients completing exchanges. Over 90%. Actually, it's like 91 with properties they like. So think about it this way. If a garden variety 1031 cost you a thousand bucks. I'm selling you lottery tickets for $1,000 each. That's a lot. But you have a 90% chance of winning $50,000. How are you going to buy? Why take that chance every time, right? Yeah. So it's worth starting up just to look around?

Josh (00:37:27) - Yeah. So there's no penalty for. Not now. There might be a cost associated to getting started with you. Right. Or to get some consultant or someone to help you through the process. But the the upside is phenomenal. The upside potential is phenomenal. And the downside risk is you might lose out on some consulting fees and, you know, maybe running around like a chicken with your head cut off for 180 days, right?

Dave (00:37:54) - Well, yeah, that's exactly right.

Dave (00:37:56) - I mean, for us and we're pretty market in the middle of the market for us. If your sales a million bucks or less, your exchange is going to cost you about $950.

Josh (00:38:06) - Oh, gosh, yeah.

Dave (00:38:07) - It's not much at all. And that's a tax deductible as well. So the real cost to you is like 500 bucks. But you're looking to save if your tax is $50,000. Well, that really represents $5,000 of income. Yeah. Here's the here's the here's the analogy. That's stupid house that I sold it Denver 30 years ago. If I would have kept it and not made the tax on and kept deferring it. My tax was about $30,000. If I would have kept that by doing it 1031, I would have made $3,000 a year for 30 years.

Josh (00:38:51) - Yeah.

Dave (00:38:54) - Which really dumb.

Josh (00:38:55) - Which would barely keep up with the cost of eggs. Right. But like that's that the compound interest of doing 20 or 30 different projects like that, that's when we get exponential wealth.

Dave (00:39:06) - Exactly.

Josh (00:39:06) - Yeah.

Josh (00:39:08) - So, Dave, what's a good place for, you know, the people in my audience are like, okay, Josh, we got it. We're about to sell the project and we need Dave. We want his brain. We're just a good place for people to connect with you and ask your opinion.

Dave (00:39:20) - We've created an entire website based on education. Okay, but it's at the 1031 investor.com. Okay. And the reason for that is you won't believe this, but the 1031 exchange has been in statute since 1920. Wow. But still, people don't understand it. Yeah. And as it was starting to grow in the last ramp up. In 2008 happened, right? The dark days? Yeah. Two thirds of the realtors in America would be in realtors. We lost that knowledge base. Yeah, most of my investors went bankrupt or got Alzheimer's. They were out of it in the interim, so there was nothing going there. And the greatest buying group in this new Rampa was 12 years old when temporary ones were popular.

Dave (00:40:09) - The last time, nobody got a clue. So the 1031 investor. We've got calculators for you. We have a YouTube video series. You got access to my book, which just came out in press last month and access to us for consultation as well.

Josh (00:40:28) - Cool. What's your book called?

Dave (00:40:30) - Lifetime Tax Free Wealth. That's it. 31 of Us Real Estate Investors Guide to the 1031 exchange. You can pick it up at Amazon. Just like normal.

Josh (00:40:41) - Awesome. All right. Ten the 1031 and that's 1031 Investor Exactly. Awesome. Dave, during this interview, there's probably a question that I left out that I probably should have asked you. What question is that? And if you don't, if you can't come up with one, I got one for you.

Dave (00:41:03) - Well, I'm going to let you go for it because I think we covered a lot of ground.

Josh (00:41:06) - What's the name of your boat and why did you name it Odyssey?

Dave (00:41:12) - But it was SCA and it was based on. Well, the sea thing was just kind of kitschy, right? Yeah, But it was based on this cool childhood series called Adventures in Odyssey.

Josh (00:41:25) - I know that. I used to watch that as a kid.

Dave (00:41:28) - And we asked our boys at that time they were eight, nine years old. He said, What should we what should we call the boat? Because we're going to have adventures on it. And my oldest said, Let's call it an Odyssey.

Josh (00:41:38) - Yeah. Beautiful, beautiful, beautiful. Hats off to you.

Dave (00:41:42) - There's the boat right there.

Josh (00:41:44) - Hey, it's in the picture. He sold the.

Dave (00:41:45) - Crew.

Josh (00:41:47) - Super cool, Dave. Well, Dave, thanks for coming on the show. Fellow investors and dealmakers out there. I appreciate you listening in to the deal. Scout, as always, reach out to our guests. Say thanks for being on the show. If you're looking at closing out on a project, it might be worth just a quick call or a quick conversation with with Dave and his team to see if this could benefit you. So reach out to them. Their contact information will be in the show notes. If you are working on a deal, especially right now in commercial real estate.

Josh (00:42:14) - We're running a series right now on commercial real estate, and you'd like to talk about it here on the show. Head over to the deal, Scout. Fill out a quick form and maybe we'll get you on the show next. Till then, we will talk to you all on the next episode. Bye, guys.