Maximizing Profit through Tax-Free Real Estate: Insights from Dave Foster of 1031 Investor

Ever dreamt of transforming your financial landscape through real estate investing without the taxman taking a hefty chunk of your profits? Well, Dave Foster, CEO of 1031 Investor, is on the show today to reveal the secrets of the 1031 exchange - a mechanism that can help you defer taxes on profits from highly appreciated properties by reinvesting them into new real estate. Not only will Dave share his personal journey, but he'll also reveal how this method could have saved him from a costly error in his first real estate transaction.

We also delve into the nitty-gritty of property management and the transition to working with the next generation to purchase small multi-family properties. We’ll share our trials and tribulations, and, of course, discuss the importance of not giving tenants an equitable interest in the property. Our conversation will also touch on the delicate art of giving up control and the necessity of delegation to family members. If you've ever felt the tug between maintaining control and trusting the management process to others, this episode is for you.

Lastly, we’ll pull back the curtain on tax-free real estate investing strategies. Drawing from our pool of experience, we’ll talk about utilizing primary residence financing, and making the most of tax-free money. We’ll also share insights on the benefits of buying down interest rates and potential for saving money during the slow season. Whether you’re a seasoned investor looking to up your strategy game, or a beginner looking to enter the market with a bang, this episode is packed full of valuable insights.

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Transcript

Speaker 1: 0:20

Ryan Diment from Chasing Financial Freedom podcast. Hope you're having a great day today. On the podcast we have Dave Foster. It's got a little bit of a scratchy voice, but I think we can manage through it. Then we've got a little bit of a delay in audio, but we'll work out. The King's guys. Dave is the CEO of 1031 Investor and we're going to talk real estate. We're going to talk taxes, we're going to talk all these fun things that we want to do in business. Dave, welcome into the show and thank you for coming on.

Speaker 2: 0:49

Absolutely, Ryan. I'm celebrating winter in Florida. It just hit 50.

Speaker 1: 0:55

That's great, I'm here in Arizona and this morning we were 42 or 43.

Speaker 2: 1:06

So why don't people go to Arizona for the warm?

Speaker 1: 1:09

That's what I'm saying. But guess what? Tomorrow we're going to be 75 and 58, 57. Sign me up.

Speaker 2: 1:16

Obviously, we're not taping this in July, are we? No, we are not.

Speaker 1: 1:22

So do you live in Florida year round? We do, we live in St Petersburg Florida.

Speaker 2: 1:30

And that is actually part of our story of how we chased financial freedom using the 1031 exchange, nice. So let's get right into it.

Speaker 1: 1:39

Who's Dave Foster? And then we'll go down some rabbit holes with you.

Speaker 2: 1:42

Dave Foster is an addictive real estate junkie who just can't resist a deal. I've been investing in real estate and acting as a qualified intermediary for 1031 exchanges for about 24 years now. So if it's real estate, I love it. If it's 1031, I love it because of what 1031 allows you to do, and I'm also a decree to count it. So I've got just enough of a nerd in me that I like to search out those opportunities to maximize my ROI's.

Speaker 1: 2:17

So all that great put together, all that greatness put together. Can we just get in, start talking about let's for and I say this, it's for me mostly let's dumb down the 1031 and what that is and then walk through that process?

Speaker 2: 2:32

Yeah, absolutely, and along the way I'll tell you about the worst mistake I ever made in real estate investing. But the 1031 exchange is an opportunity that the IRS gives you. It's been around for a hundred years but nobody knew about it or how to put it together until about 30 years ago. And all it does is simply use cell investment property that you either is highly appreciated or that has been highly depreciated, which is this tax benefit? That's really a pretend benefit the IRS gives you because when you sell they want it back.

Speaker 2: 3:06

So either way, either you've taken a tax write offs and you'll have a tax if you sell, or your property's appreciated and you'll have a tax if you sell. You sell that real estate and, following a strict price, you'll have a tax if you sell or you sell that real estate. So you sell that real estate and, following a strict process, purchase new investment real estate that's at least as much in value as you sold and you get to indefinitely defer paying that tax. Now here's where it comes into the greatest choice I ever made and my greatest mistake. I found the Tim 31 exchange about 30 years ago, 28 years ago, when my wife and I were in pretty high profile just regular careers and we had our first child, and we realized that the one commodity that is irreplaceable is time.

Speaker 2: 4:08

Yes, and time is a subset of freedom, right and we wanted to maximize our time with our feet. So how can we do that? Oh, let's get into real estate, he said it'll be easy. That sure will make a lot of money.

Speaker 1: 4:23

She said there'll be no problem.

Speaker 2: 4:27

No, that's what we decided to do, because we decided we wanted to co-live on a sailboat and raise our family and maximize our time that way. So I'm ready firing Dave. I bought a duplex in Denver. I fixed it up by sold it and I thought I did awesome, until my accountant that January told me that I was going to have to write a check for $30,000.

Speaker 2: 4:56

I didn't know I had a silent partner whose name was Uncle Sam. But here's where it gets crazy for you and your listeners and me, for you and your listeners and me to contemplate, and that is that if I would have been able to take that $30,000 and invested in more real estate, then that would have compounded over 30 years at a 10% rate of return. That means that I gave up $3,000 of real money every year for 30 years. Now compound that and I would probably have today free to $400,000 more in my bank account, for my first real estate transaction Pains me to this day. That's what the power of the 1031 is. It lets you take that $30,000 and invested in more real estate so you can make the profit of the tax. And then you get to make the profit off of the profit off of the tax and the next thing you know freedoms in your grasp much sooner than you would think.

Speaker 1: 6:16

So let me ask the question. This works for any type of real estate.

Speaker 2: 6:22

Yes, that's the beautiful thing, because there's changes in real estate market right and, as we are going through, different types of real estate are better values, more appealing, and so the 1031 allows you to sell any type of investment real estate and purchase any other type of investment real estate anywhere in the country.

Speaker 1: 6:50

For example, I have six rental properties, single family residents. I sell they're in a 1031, take the profit. I move it over here. I can actually go buy a commercial building with those profits.

Speaker 2: 7:04

That's exactly right. Yeah, you, probably, in your bad instance, you would have started out a few years ago as what we call the accidental investor. And that's where two people get married but they each happen to have their own house. They moved one of them. They became an investor, didn't they? Yes, they rent that out for a few years and then they decide that was pretty cool, let's do that again. But instead of selling, say, that $400,000 property and going to buy another $400,000 property, they sell it for $400,000, they go buy two for $200,000 because they get more rent per square foot for a smaller property. And then they do that again and now they've got, like you said, six. And now they say you know what get entired and multifamily is really becoming. Let's do that. So they sell all six and they take the $2.4 million and they go buy Multifamily property. Yep, so you can do what I call the ebb and flow of 1031 investing, expand, contract and move into whatever type of real estate the market is telling you about.

Speaker 1: 8:23

Interesting. So can we go through an example for the listeners? I guess a good example would be, since I'm in the space. I understand it. I have a let's just start at the beginning. I have a single family residence. It's rented out. I've owned it. Is there any ownership length? Does you have to own it for a period of time for it to be in a 1031?

Speaker 2: 8:43

There's no statutory holding period. However, there is the benchmark called intent. Property that qualifies for 1031 is not property that you bought intending to resell immediately like a fixed limit. It is property that you buy intending to hold for productive use. Now, just about everybody feels comfortable with a hold of more than a year and a day used to be a mantra in our industry. There's no magic to it other than that it does provide a length of time and it puts the property on two consecutive tax returns. So some magic that makes it look longer, but it's really all about what your intent was. So it's property that you intend to hold for investment.

Speaker 2: 9:34

That's any type of real estate anywhere. As long as you're purchasing at least as much as you sold, you defer all tax and that's really the qualifier that's there.

Speaker 1: 9:49

So it needs to be dollar for dollar. So let's say this single family residence was sold for $200,000. I need to go buy a equal amount of real estate for $200,000 on this other side of the transaction.

Speaker 2: 10:02

Correct. But here's a cool little trick you can allocate your proceeds any way you want. So part of freedom is the ability to go to sleep at night without fear, right. It's knowing that you've got a secure foundation for your wealth and where you want to be. So let's say you were selling a property for $500,000 that had $200,000 in debt. You would need to purchase a $500,000 property using all $300,000 of cash. For most people that means, oh, I'm going to have to take out another Correct. But how about this for?

Speaker 2: 10:44

a way of mitigating potential recessionary issues. What if you took $250,000 and bought a house, free and clear? That's going to fill the tonal out of people. No debt means less risk, and yet my equity is concentrated, isn't it?

Speaker 1: 11:06

Yes, then I take the other $50,000 and I use that as a down payment on a $50,000 property?

Speaker 2: 11:14

on a $250,000 property, did I buy 500,000? Was it a real estate? Sure did. Yes, did I use all my cash? Sure did. But here I have a property that I got arbitrage of debt. So my tenant is making the mortgage payments and I'm getting the amortization alone from them.

Speaker 2: 11:37

But I also have a free and clear property that all I've got to do is keep the lights on and it cannot be taken away from me. And anytime I choose I could do a refinance on it to go buy more property when the time is right, but in the meanwhile it doesn't cost me. So that's a very creative way that the 1031 can be used to accommodate where you are in your particular situation.

Speaker 1: 12:04

Interesting. I just I think we talked way back on our pre-call that I'm just not into tenants, toilets and 2AM phone calls and that's just me. But I like the 1031. I've kicked it around numerous times. It's just we don't have any rentals and you said earlier in tension, we buy property to fix and flip, but now we build to flip and some of the properties we've owned for longer than a year they're empty lots. So would it qualify for that if we've owned it for more than a year?

Speaker 2: 12:39

What I tell people in situations like that is to change your intent Modified for the fix and flipper person. I get it, I'm totally right there because I'm going to turn it on junkie I. If I don't have a project that's got time constraints and needs to get out of the market, I can't do it. But here's what I do. I am a long-term investor, so every property that I buy I'm intended to hold.

Speaker 2: 13:09

So instead of fixing it and then renting it, I will fix it and then I will rent it. And then, while it's been rented for a year because that's my intent I'm going to refinance it so that I can get the money to start my next project. So I'm not slowing myself down other than the very first time. And then, when that first property is at a year, then I'm going to reevaluate it and say, is it time to sell or should I continue holding it? And at times I've chosen one or the other because if, like when rent, when rates started to climb dramatically, it became much more attractive to hold on to my low interest properties than I've refinanced my low interest rates If appreciation is just going through the roof.

Speaker 2: 14:06

I look at it and I say my gosh, I intended to hold it, but it will make so much money that I could go and buy two more properties. So I'm a long-term investor. I hold the property more than a year and then I change my intent.

Speaker 1: 14:28

Okay, I got a question. It's in my what in the space that we're in Whoops. The thing that I look at is the intention piece, because that seems to be the struggle. We're also in the lending space. We're also a we're a mortgage broker, licensed mortgage broker. My intention is to always find an in-buyer for our properties. There's times where we cannot and we will actually put somebody on a private mortgage. It's underwritten, just like you and I would go to a traditional lender other than it's going to be funded by a private entity or someone self-directed IRA, something to that effect With that being on the asset. Does that affect anything in the 1031 whatsoever?

Speaker 2: 15:11

So are they actually getting the loaded and taking title to the property?

Speaker 1: 15:15

The title is depending on where they're at in this process. The title could still be in our name or it could be conveyed into theirs. It just depends on the state and where we're at. So, like some of these, I'll give you an example. Some of these individuals have to come up with down payment and they have to go through some programs. We'll let them come in, go through the process They'll rent initially, so it's a little different and then we'll put them on that private mortgage. Some people will come in through the private mortgage, have the down payment but still need additional funds to be able to wrap the transaction up. So it will still be conveyed in our name. The title Got it.

Speaker 2: 15:53

That's going to create a potential issue.

Speaker 2: 15:57

Like you identified correctly with the intent, because it could be argued. Your intent was to sell it immediately because you did everything but take title out of their name. Yes, now you can couple that and counter that somewhat by saying but we in fact the title for more than a year and that satisfies a couple of different court rulings that are out there where they attempted to say what an appropriate old period was. And one court said two years, one court said two calendar years and one court case said two tax years.

Speaker 2: 16:37

So there's been a lot of weight that's given to situations where you had a justification and, even though it was less than a year, it went across a tax year, because that becomes very invisible and puts the property under two different tax returns.

Speaker 1: 16:56

Now I know that seems somewhat artificial.

Speaker 2: 16:59

So there is probably some risk, but it's one of those things where it's just fuzzy enough that people need to get with their tax advisor and say I'm comfortable, are we? Now? Here's something that you may want to think about doing right, and that is that this will actually benefit you if things go south, and that is that instead of selling them on a pay as you go, rent to own kind of thing that creates a situation where that tenant is deemed to have an equitable interest in the real estate. Okay, because they're down payment is counter towards the price. Yep, part of their payments are those kind of things that does want.

Speaker 2: 17:41

Potentially, that can really throw a loop, throw you for a loop. And that is that it creates a situation where if, with pain, now you no longer can just evict, they have a beneficial interest in the property and now you have to foreclose Correct, and foreclosure is a much longer process. So what we've done several times in the past is I have gone into it with. I used to have a corporate model where I had people coming in to using corporate transfers to come to Denver and then I would work with them and I would say go pick your house, and they would house out and then I would buy it, and then I would lease that house to them for, say, a two or three year period, with an option to purchase it.

Speaker 1: 18:30

Okay.

Speaker 2: 18:31

Yeah, now the option itself because they're paying for that, doesn't create an interest in the real estate, correct. And then they would make their lease payments and then there'd be an escalation clause where if they bought it at the end of year one it was plus 10%, at the end of year two was plus 5%, and that kind of thing. Yep, that solves a bunch of those problems right there. And because all you're doing is leasing it with an option for them to purchase it, you don't know that they're going to, so it's much easier to satisfy a debt with them.

Speaker 1: 19:04

So the key here is not to have them to have an equitable portion of the asset. So here's the other example that we've looked at and we have not done this because I'm not a big fan of it is let's say we have somebody leasing and a part of their monthly lease payment goes towards a down payment, which I'm guessing that's going to hurt the intent portion.

Speaker 2: 19:25

Yeah, that's the. It hurts that, but also that gives them that equitable interest. Okay, because then when you go to a victim, they can say, but wait a minute, I don't heard of that. Yep, okay, that's going to my down payment.

Speaker 1: 19:36

Okay, and thinking of all sorts of kids' worms.

Speaker 1: 19:39

So let me ask you when you first started and you're getting through all this is not just 1031, I'm going to go back to, because my mindset is 10-nits toilets and 2AM phone calls how do you effectively manage the assets? I know you have property management, but I have to be honest, the property management teams that I've come across in my years in this business suck and all they do is take my money and I get stuck with most of the headaches when I did have rentals. So maybe I was connected with the wrong people, I don't know, but that's one obstacle that I see in this process. Yeah, no, you're absolutely right.

Speaker 2: 20:15

I mean, there are good property management firms and some that are not so good, and you got to really do a lot of that and talk to a lot of people. For me, I'm much like you. When I started investing, there was a guy and I don't know if this will resonate with you or not the guy that followed and patterned my start after was a guy named Carlton Sheets.

Speaker 1: 20:36

Oh yeah, Of course, Mr Infomercial, late nights 2am.

Speaker 2: 20:41

Exactly Now. The key to what Carlton did was he stressed do not invest more than 15 minutes from your house, because it lets you be the manager. Correct, I didn't like that, but I also don't like long distance. But with the model that we're just now talking about with the corporate tenant, they already have a sense of ownership. Yeah, because they know they're gonna buy it, so they're responsible for everything, and you can write that into the lease, and the option that they paid really becomes a massive security deposit. Yeah, see how accomplished a couple things is that?

Speaker 1: 21:27

is that the model that you're on today? Still?

Speaker 2: 21:30

No, we quit doing that. Actually, that's not true I am, so we have transitioned and Maybe this will be a good time in a minute, to tell our story.

Speaker 2: 21:38

Yeah, I like this with a K31, but we've transitioned through all sorts of different iterations and now what we're doing is we're working with the next gen, okay, and I work with my children, my younger just starting relatives, and we are working with them to buy their first property. And what we're buying are small multi-families Because we can put them in one unit to live in it and we can get 5% down payments and we can rent the other units. You're up.

Speaker 1: 22:09

You're up on land. I like that.

Speaker 2: 22:11

Yep, yeah, then guess who my property manager is? You're a relative, bingo, my son who lives in it, and actually I've got one attempt of my son just pledged a frat and we just guaranteed tenants For the aging out front brothers for decades or set. But yeah, that's exactly what you can do and I totally feel your pain Because it's tough giving up that control. Yes but you're desperate to give up that control.

Speaker 1: 22:41

I am and, like we've talked about and I don't know how people can argue this time is our most valuable asset. You cannot get it back. Money you can lose and earn again and you can file bankruptcy, do whatever, but time you never get back, and that's one of the things that I just don't get. Where people don't understand is Time is that critical asset? Think about it, and this is something. Where did I hear this from?

Speaker 1: 23:05

I can't remember, but the quote was this how many Paid subscriptions do you have online? Or how many times do you do door dash a day or a week or whatever the case is Because you don't want to go to the store? It's time, it's the valuable asset that you don't take into consideration and we seem to lose sight in that. But when it comes to our businesses, we want to be in every aspect, and that's not what I want to do. I don't want to be in the business. I want to be working on the business from the 30,000 foot view to where I can be the face, 24, 7, being out there getting the deals.

Speaker 2: 23:42

Exactly now. What we have done to accomplish that, which is a little different than what we're doing with our kids, is I sent on a path of doing that recessionary proofing, purchase, refinance, hold, and, and what I do is I will take the refinance money and then I will invest that into passive real estate opportunities.

Speaker 1: 24:10

When you say okay, go ahead. Sorry, you're gonna answer sorry.

Speaker 2: 24:14

Yeah, I was just gonna be such like syndications Okay, or REITs or Delaware's tax-tribe. Trust the refinance money you can spend anywhere.

Speaker 1: 24:23

So there's no limitations from the 1031 on the refinance money.

Speaker 2: 24:28

Correct, so you can even put that into equities, doesn't matter, okay. Okay. When it's then time to sell that property, hit to a 1031 Rather than go back into active management again, I will then 1031 into Delaware Statutory Trusts okay, Because those are a passive syndication that are specifically blessed for 1031. So it takes me about a year or two but then I turn a house purchase Into an equities investment, the Delaware Statutory Trust investment. Never been in opinion tax and every that tax deferred as long as I owed.

Speaker 1: 25:12

Okay, my head's spinning now. I got questions, but I think where we need to go for listeners is can we back up and talk a little bit about your story? And then how we can wrap up is how can someone really start? Because I know real estate investing is daunting, like you said earlier Carlton Sheets, zero down, no out of money out of pocket. It's not truly that way, but it is what it is your story. And then let's figure out how we can get people started and then get in contact with you.

Speaker 2: 25:44

Yeah, keeping it simple is always better, and although I was a disciple of Carlton Sheets, I've never bought a property without putting money down. Yes, so I was thrown out there. That's more work than working to make the down payment is, so there's my disclaimer there. But we wanted that freedom. So what we started to do was we bought Plattebeast, dearest and Denver and we started renting them. Now here's a twist that is another opportunity for folks out there, and that is that the other part of real estate besides investment, real estate is your primary residence. So we bought a property, we moved in and lived in it. That's our primary residence. Once we've lived in it for two out of the previous five years, we can sell that and take $500,000 of profit tax free. Yep, do you have a thing? You can do that.

Speaker 1: 26:41

What's that?

Speaker 2: 26:43

Do you know how often you can do that? No, once every two years.

Speaker 1: 26:49

Wait a minute. So you literally can live in it for two. So two consecutive years, correct Out of the five, is that right?

Speaker 2: 26:56

Now two consecutive, just two out of the five years prior to selling it.

Speaker 1: 27:02

Oh Lord, I didn't know that. Thank you.

Speaker 2: 27:04

Thank you.

Speaker 1: 27:05

That's an interesting one. Let's go, keep going.

Speaker 2: 27:09

Now. So if you want to jump into the end, how can someone start? Go buy a house and live in it and in a couple years sell it? All of that profit is tax free.

Speaker 1: 27:23

Where else are you going?

Speaker 2: 27:24

to get that? You're not. There's no job, there's no business, there's no investment in the world that will do that, no way. What are they going to have to pay for that money that they have to borrow right?

Speaker 1: 27:37

Eight, seven, eight percent right now.

Speaker 2: 27:39

And they're only going to have to put five percent Correct. Gosh, what a hack right. So that was one part of what we did. The other part was we would buy the rental properties and then here's how we put them together. Is that occasionally we would sell the house we were living in. That tax free money went into the buy the boat bank account. We would move into one of our investment properties and convert it to our primary residence. Now, when we were doing this, we would then get 100 percent of the gain tax free. Now the IRS makes you prorate it, but it's still an opportunity to turn some of the deferred tax into tax free. So we would convert that.

Speaker 2: 28:38

We knew we needed to get to water because there's just not a lot of ocean in Denver. So ahead of that, we moved our entire portfolio to Stanford, Connecticut. Ahead of us, when we moved to Connecticut, we sold the house we were in Denver, tax free. We moved into one of our rental properties, turned it into our primary residence. Each time we do that, the money goes into the buy the boat bank account and then we continue to defer the tax by buying rentals and did 311 we sold. We then figured out that Long Island Sound never got sunny or warm, so we moved our portfolio to Florida and it was finally in Florida where we took all tax free money and bought a 53 foot sailboat for cash and moved on to it with our four children and lived on it while we financed our adventures from our fleet of short term vacation rental properties.

Speaker 2: 29:44

All purchased with 1031 money.

Speaker 1: 29:50

Man, we could talk about this for hours. I love this stuff in these hacks, but geez. So let's say someone doesn't own a property. Let's say they're renting and they don't have great credit. What could be a starting point for them?

Speaker 2: 30:07

You're always going to get better lending when you're doing it for your primary residence.

Speaker 1: 30:14

The.

Speaker 2: 30:14

FHA and conventional lending will let you buy up to a four unit property using primary residence financing. So what I tell everybody in the world with an earring of my voice is that's your first purchase. And remember, in order to qualify for the primary residence exemption, you have to have lived it for two out of the previous five years, which means that you literally could live it for two years and then rent it for three more. Yes, and still sell it and make that money tax for free. It just doesn't get any better than that. And what are you going to do? Go buy another one.

Speaker 1: 31:09

The FHA and Fannie and Freddie underwriting changing on that, I see it as a little bit of a game changer. But for me, when I look at it from a lender side but then an investor lends also two lenses One is you're only putting 5% down, which means you're increasing your payment with interest rates where they're at today. So you've got to be able to build that in. And a lot of people thought this was going to be a game changer and when I was talking to some other investors I said but you got to think about it, the amount of money that you're putting down 5% could be better used if you actually had a seller that did a buy down on your interest rate.

Speaker 1: 31:47

Forget the down payment, down payments or price reductions. When you get a $10,000 price reduction, you're talking about $100 max on your payment on a monthly basis. Get a quarter to 50 basis points in your interest rate knockdown You're talking $200 a month, sometimes more, depending on the dollar amount. So that's something I talk to other investors about is when you're going into a deal and let's say we're in the slow season which we are, sellers are motivated right now Don't look for a price reduction, look for that buy down. So if you go find a property I was literally talking to an investor that's looking at a property that's a pocket listing that they've already price reduced and I'm like, dude, go in with a full asking price I think it was $250,000. Going at $250,000, they'd already I think they lowered it by $15,000 or $16,000 and then ask them for $16,000 in concessions and then go apply that to your buy down. Go try to run that rate. He could actually on that property, dave, he could buy down his rate to $4.99 if he used all the cash.

Speaker 2: 32:55

Yeah, exactly, we just bought our last property using what's called the 321. Yeah, I'm talking about that one, right?

Speaker 1: 33:02

I'm talking 30 year fixed. I don't want to method a 321 or a 2-1. Let's go all in and get yourself a rate right now that you can handle, and it's not a problem. 1.9 is nice.

Speaker 2: 33:16

It sure is. Yeah, but that's where I would start, because everybody understands where they have to live. Everybody's going to manage where they live anyways. Start that way and then let the market talk to you. Now might be the time for you to be saving money rather than stretching to buy. Give me everybody that had cash in 2010, or just pick a lollipops up the trees 50% man, everything was 50% off.

Speaker 2: 33:48

Yeah, but that's, I think, the best way to start it in. The second key to starting is start now. Yeah, don't wait, even if you can't. I can't tell you how many date nights we had where we would just go to look at properties and talk about them and play it and learn out. Of them and after right then Became a game yeah.

Speaker 1: 34:13

So that way.

Speaker 2: 34:14

When you're ready, you're really ready.

Speaker 1: 34:16

One last question will wrap this up. What about if you're using other people's money to buy investment properties? When I say that self-directed IRA because we have, I work with self-directed IRA investors how does that play into the 1031?

Speaker 2: 34:33

It really doesn't have any impact at all, because the IRS does not care where you're borrowing your money from. They care about the use of the property. So you can borrow the money from anywhere you want, as long as you're purchasing it, at least as much as you sell and using all your cash. Where you get the rest of the money doesn't matter Interesting, so any source of lending is fine.

Speaker 1: 34:57

I'm just trying to think of the exit strategy for the investor, because you can't take that money out and if you do, it's taxable. At that point I have to think that one through.

Speaker 2: 35:06

For the investor. Are you talking about the lender?

Speaker 1: 35:09

The investor would be the lender. So the 1030, sorry, the self-directed IRA investor would be the lender. They would put up the funds to purchase the property. We would do all the renovations, we'd rent it out and then go through that exit. But I don't know how they would be paid out unless on the next property there was a refinance out for the dollar amount. I don't know, maybe I'm missing. Yeah, two different ways you could do that.

Speaker 2: 35:35

Number one. Just like you said, you could have a planned refinance that repays that. So then, the borrower who owns the property still has a loan that's just now with a different company, correct? Or that investor goes in just like a private lender. It lands on holding the note until that property is sold, at which time they're paid off, and then the owner, though, is responsible for finding their own loan.

Speaker 1: 36:05

I didn't think of it that simple. Just look at them as a lender then, basically, so they would get satisfied with the lien against the property when the transaction goes through.

Speaker 2: 36:16

Yeah, exactly.

Speaker 1: 36:17

Okay, interesting, I love it.

Speaker 2: 36:20

Now we would be remiss if we did not talk about the very last off-ramp.

Speaker 1: 36:25

Okay, let's get it in.

Speaker 2: 36:27

And that is that if you want to completely, never ever pay the tax, all you've got to do is die. That is definitely the last time and when you die.

Speaker 2: 36:40

That's the last time I know. But when you die, here's a magical thing that happens your properties all get treated with a step-up in basis, so all of the tax that had been deferred disappears for your errors. So it truly is possible to live and be a real estate investor without ever paying a penny of tax all of your life, and then have that tax disappear and your errors get the property tax-free.

Speaker 1: 37:12

I love it, I love it, I love it, I love it. Sir, I thank you very much for coming on. We might we'll talk off air, but I think we might have another round where we can come on and go a little more in depth. Best place, I don't know. Are you able to take clients on that could work with you with a 1031, or what do you have going on there?

Speaker 2: 37:31

Absolutely. We create an education brand because we want to do 1031 exchanges for people. The artist requires that a third-party called the Qualified Intermediary act as your functionary for that. So that's what we do as that part of our business. So to do that, though, we've created, we've done a couple of things. First of all, I wrote a book and you've either come to company or it's coming to you and it's called Lifetime Tax-Free Wealth a real estate investor's guide to the 1031 exchange, and that's Dave Foster. You can pick that up on Amazon or you can also simply go to the1031investorcom. And we've got a 47-part YouTube series and accumulators and opportunities to talk to us all kinds of things.

Speaker 1: 38:23

Awesome. I will also put your website in the show notes so people can get ahold of you. Sir, thank you very much for coming on. I know you were a little bit under the weather, but thank you for sharing. It has just opened my eyes with a bunch of stuff and I've got a ton of questions that I've got to put out there. But thank you for coming on and sharing your wealth of knowledge.

Speaker 2: 38:42

Hey, it's been fun.

Speaker 1: 38:43

Thanks so much for having me, Ryan.

Speaker 2: 38:44

You're more than welcome.