How to Avoid Capital Gains Tax with The 1031 Exchange Expert, Dave Foster – EP 208

The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE! 

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Today, I’m speaking with Dave Foster. Dave is the Founder of The 1031 Investor — an online resource that’s helped thousands of investors buy more real estate and avoid paying taxes on the profits, by leveraging the tax deferral strategy known as the 1031 exchange. 

Rolling your gains into another real estate investment can be intimidating at first, but when you understand the rules and regulations, this under-utilized tax provision creates ultimate buying power and keeps your money working for YOU, instead of landing in Uncle Sam’s pocket! 

In our conversation, you’ll learn all about this unique investing technique and how you can use it to build generational wealth, without ever having to pay a dime in capital gains tax. 

Not only does Dave share a ton of wisdom to help you navigate and understand the rules and regulations, but you’ll hear a step-by-step walkthrough outlining how the 1031 exchange strategy would apply to my $20 million real estate deal. 

If you’re interested in maximizing your reinvestment capacity by leveraging this tax deferral strategy, don’t miss today’s episode with Dave Foster!

Key Takeaways

  • What is a 1031 exchange and how can you use it to sell investment property, without paying capital gains tax? 
  • Dave reviews my $20 million deal and explains exactly how I could leverage the 1031 exchange.
  • Is it possible to do a partial exchange?
  • The power of refinancing as a real estate investor.
  • How to transition from active to passive operator, while still being able to shelter your tax! 
  • How to create generational wealth using The 4 D’s of 1031 Investing – Defer, Defer, Defer…. Die! 
  • How does a 1031 exchange work when it comes to real estate syndications?
  • Understanding both the risks and rewards of 1031 exchange investing. 
  • Why Dave doesn’t believe the Biden administration will eliminate or limit this highly effective tax planning technique.
  • Dave shares his secret to finding real estate investing hot spots!

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Josh Cantwell: So, hey, guys, welcome back to Accelerated Real Estate Investor. Hey, it’s Josh. And today I have an awesome, awesome interview for you, a special treat. My guest’s name is Dave Foster. Dave can be found at The1031Investor.com. Dave is a real estate investor but he’s also what’s known as a qualified intermediary. And Dave believes that real estate is the investment of the future. Dave has over 20 years of experience working in multiple phases of real estate investing including large-scale development, single-family homes, and vacation rentals, which has given him a keen eye for opportunity and a clear vision on reducing the impact of taxes. He is a degreed accountant with a master’s in management and he is a regional director for the Exchange Resource Group, which has its own educational website, again, at The1031Investor.com. Dave has worked with hundreds and hundreds and hundreds of clients to execute 1031 exchanges and reduce and defer taxes. 

 

In this interview, David and I spend a lot of time actually specifically talking through my $20 million case study and how we would handle a 1031 exchange on a $20 million deal that I personally own. Number two, Dave talks about his recent experience of raising his four boys on his 53-foot sailboat and why, if you have an opportunity, should do it now. And also, number three, we’re going to talk about Dave’s strategy of defer, defer, defer, and die. It’s an amazing interview. I think you’re really going to love it on Accelerated Real Estate Investor with Dave Foster. Here we go. 

 

[INTERVIEW]

 

Josh Cantwell: So, hey, guys, welcome back. And I’m really excited to have my newest guest on Accelerated Real Estate Investor. His name is Dave Foster. Dave, thanks so much for carving out some time, and thanks for joining the show. 

 

Dave Foster: Awesome. It’s great to be here. I’m glad you said newest and not oldest. 

 

Josh Cantwell: Yeah, new. It’s good to be young. It’s good to be new. Fantastic stuff, Dave. So, listen, let’s jump in and talk about some current events like help my audience understand something that you’re working on right now that you’re excited about. Like, what are you literally doing like tomorrow or next week, a deal that you’re working on, or something that’s going to get you going? 

 

Dave Foster: Like I was going to say, when you talk about adrenaline rushes, what gets me up? It’s trying to get two high schoolers through school. 

 

Josh Cantwell: Oh, yeah?

 

Dave Foster: And stay alive. That’s number one. 

 

Josh Cantwell: My oldest daughter is in seventh grade, so it’s coming up for me very soon. 

 

Dave Foster: Oh, my gosh. They’ll become insane until they’re about 19 so get ready. It’s coming. Yeah. You know, one thing that I’m doing right now that’s a lot of fun is I’m right in the heat, about two-thirds of the way done with a 200-home subdivision on the investment side that we’ve done from ground to construction. And we’ve got about 100 homes out of the way and 80 more to go. So, that’s keeping me out of some trouble. And then just working on finalizing my book on 1031 exchanges, which I think we’re going to talk a little bit about here today and helping investors. It’s a crazy time. 

 

Josh Cantwell: It is a crazy time.

 

Dave Foster: But great time to be an investor. 

 

Josh Cantwell: It is a wild time to be an investor. I mean, I think it’s fun. I think now’s great. I think capital is abundant. There’s a lot of trades happening, a lot of transactions happening. Some uncertainty in the market for sure with the new administration and some tax laws that could be changing, obviously around the 1031 exchange, which we’ll talk about today but, yeah, I think it’s a great time to be an entrepreneur, right? It’s a great time. The world is very pro-entrepreneur, a lot of commercials, a lot of courses, seminars, all different kinds of things. A lot of people taking kind of the bull by the horns and doing their own thing. Even a lot of my own team, my own staff, Ramie, my podcast producer, some of my marketing team, they’ve got a lot of their own side hustles going on and everybody seems to have the entrepreneurial bug. So, I know you’ve been working with entrepreneurs for years. You’ve done a lot of development. You’ve done a lot of single-family investments and I know you’re working on a lot of 1031 exchange. So, tell me about the book that’s coming out. When do we expect the book to come out? And it’s all around the 1031 exchange concept. So, tell us about the book. And for people that don’t know what a 1031 is, why don’t you just jump into the basics of 1031 exchanges? Go ahead. 

 

Dave Foster: Got it. Yeah. So, the 1031 exchange is basically just a process that allows you to sell investment property and replace that with new investment property of any type in any location and in so doing, not pay tax that would be due on a capital gain or the depreciation recapture. And instead, you use that indefinitely deferred tax to purchase then in real estate. So, in essence, what you’re doing is compounding your profits because you invest the tax, you make money on the tax, then you make more money, you do another 1031, and you just keep it rolling forward. And at the end of the day, a significant chunk of your net worth has been built up with deferred tax that was owed to the government. Now, that’s what the 1031 exchange does. It’s been around forever and a day. It’s been user-friendly for about the last 25 years. And what I like to do, because I live in the world of strategy, this is a process that I discovered for myself and started to use it over 20 years ago. And through that time, I am most happy when I’m working with investors helping them to strategically use this process. So, the book is a little bit about the rules, which everybody knows and can learn and follow on YouTube, but it’s more about how can you strategically and creatively develop your portfolio through different actions throughout the life cycle of you as a real estate investor. And that’s what we’re going to focus including case studies from actual clients and, well, you know how it goes. It’s like a builder that says there’s 14 days in every month. I think we’re expecting this out of any month. It’s what I’m fighting with right now.

 

Josh Cantwell: Got it. Love it. Yeah. We’ll make sure we talk about at the end here. It was a little bit of a threat to the 1031 exchange, some of the tax laws with the new administration and maybe get your insight on what that might look like down the road if there’s any change. But let’s not go there because that’s all speculation. Let’s not go there right now. Let’s talk maybe at the end. So, Dave, let’s use some of my portfolio as an example. So, I just bought this 220-unit. Purchase price is 11.65 million. We did it through an entity drop through a MIPA, a Membership Interest Purchase Agreement. We bought the LLC, which included the real estate, talked to our accountants and CPAs before we bought it, and they assured us that we’d be able to restart the depreciation schedule and kind of start from ground zero so we’re going to do that. And purchase price, 11.65, we’re going to put about 1.4 into it with soft costs, etcetera. We’re going to be in for about 13.5. We’re going to force the appreciation. Going to be worth about 18 million, 18.5 million about three years from now when we’re done with all of our capital improvements, putting on new roofs, turning the units, adding a dog park, adding some amenities, adding a playground, striping the driveway, et cetera, et cetera. 

 

Then we anticipate there’s going to be additional growth, of course. So, we’re going to refinance roughly three years from now, return all the investors’ equity, pay off the bank loan and move into permanent financing. Or we can refi. The financing that we got allows us to convert the loan into a permanent loan with a 25-year am schedule. So, let’s assume under that scenario, let’s say it’s 10 years from now. Right now, I’m in my mid-40s, that I’m in my mid-50s. Let’s say I want to sell the building. And I’ve got this decision to make, right? I can either sell the building, take the cash, go spend it on whatever I want, pay a lot of tax, or I can 1031 it. So, walk the audience through and walk me through some of the questions that you would ask me, some of the strategy that you would be walking me through let’s say 10 years from now, assuming the tax laws stay the same. What are some of the things that you’d be asking your clients if I was a client or some of our audience was your client, how do we think through this process to make the best decision? 

 

Dave Foster: Sure. Well, first of all, one of the things I’ll know when you’re going to sell it because I’ll be one of your tenants. As soon as you said dog park, I’m there. 

 

Josh Cantwell: All right. 

 

Dave Foster: I live in St. Petersburg, which is the home of brewpubs and border collies, and we foster rescue dogs. 

 

Josh Cantwell: Oh, great. Nice.

 

Dave Foster: Near and dear to my heart. 

 

Josh Cantwell: Fantastic. 

 

Dave Foster: Yeah. So, what’s happening right now, and my gosh, Josh, you may be tired just listening to you the first five minutes we were talking. You got it burning at both ends. You’re obviously right in the middle of an incredibly active phase in your real estate investing. It’s acquisition time. Like you said, capital is cheap, projects are out there. You’ve got energy. It’s time to go. Now, in this property and, wow, there are some really interesting components in here that we can look at because ten years from now, are you going to have the same energy? So, that’s going to be one of the questions. Is it time to look at a different type of investment? Right now, you’re doing a lot with forced depreciation and that takes a toll and building up the energy you’ve got to expend monitoring those kinds of things. Maybe it’s time to start in 10 years moving into a more passive type of role. But this property, you’ve depreciated out what you want. It’s time to sell. The neighborhood demographics are changing. For whatever reason, it’s time. So, do you want to go back into more multifamily? I think we all sense that right now multifamily has been on a huge run. And I got to think you’re starting to find it a little more difficult to pull these projects out of the weeds, right? 

 

Josh Cantwell: Sure. 

 

Dave Foster: So, at some point in time, you’re going to be able to sell multifamily at its peak and maybe there’s a different sector like commercial, land development, old single-family portfolios. It doesn’t matter what it is. 

 

Josh Cantwell: Self-storage, mobile home parks, you name it.

 

Dave Foster: Exactly. Yes. Yeah, I saw that you had Paul Moore on not too long ago, speaking of that. So, the 1031 allows you to go from any type of investment real estate to any other type. So, it’s all about finding what I call holes in the market. Where are the places where there’s an inefficiency where I can sell my product high and go buy this other product low that meets my needs, whether it’s income, whether it’s a certain load of management, or that kind of thing? So, that’s one of the questions that I would really start with on these people. About your situation, let’s say that ten years from now was the 18 million. Well, refinance is a beautiful tool because the refinance is not taxable yet. Now, it doesn’t affect the requirements for your reinvestment of a 1031. If you sell your property for 18 million, then you must replace that if you want to defer all tax with at least 18 million of new real estate. But it doesn’t have to be just one. So, maybe there’s a couple of value-adds out there and you sell the one to go buy two cheaper ones. And then what are you going to do? Rinse and repeat and keep doing that and diversify it out until you wake up one day and retire. You go, “What the heck?” because you got so many of these things. 

 

So, then you start to sell two or three of them and combine them into one much larger asset, maybe an office tower or a large, big-box strip center or mall of some sort. Sky’s the limit, but you can increase the number through diversification. You can decrease the number and you could move into any other sector. And for you, the refinance gives you the cash to accelerate that process. So, you could take the refinance cash and like you said, repay your investor’s principal or take it and go buy the next project. When you sell, I don’t know, you probably end up with, you sell for 18, you may have 13 million in debt, so you come out of that with 5 million in cash. You’ve got 5 million in cash to go buy 18 million in real estate. Stuff you can find everywhere for that. 

 

Josh Cantwell: Yeah. No doubt. So, the mechanics of the numbers, so I’m sort of a numbers geek, right? Like my math was my favorite subject in school and math just flies off the top of my head. So, if I’m in for 13.5, a little bit of principal paydown, let’s say with the debt reduction I’m all-in for 12, but my basis with all my expenses is 13.5 and I’ve done some accelerated depreciation over this 10-year period. So, maybe my loan value, let’s say 10 years from now, let’s say my loan amount from my loan is now 7 million. I sell the real estate for 20 million so I have 13 million in proceeds and my depreciation schedule through my accelerated depreciation, regular depreciation schedule has reduced my basis down also to let’s say 7 million. Okay. So, easy number, 7 million of basis, 7 million in a loan, value of the real estate is 20, sell it, a million of closing costs. So, I’m at 19 of proceeds minus the 7 million. So, I’m walking away with 12 million in cash and my sale number was 20 million. 

 

What are my requirements? How much of that do I have to put into the next deal? Because the last deal I just bought an 80-unit about six months ago, and I remember seeing that the seller of that deal, his name is Ron, well, Ron did a 1031 exchange and his proceeds, that was a smaller deal so I think Ron’s dollars when he walked away was like $600,000, all went into a 1031 exchange account for him to reinvest in the next deal. So, help me understand the mechanics of that like selling for 20, my basis is only 7, and I would have a taxable event of $13 million. That 13 million of now proceeds or 12 million of proceeds after my closing costs, all of that has to go into the next deal. I have to roll it all into the next deal. 

 

Dave Foster: Right. So, if you didn’t do the 1031 exchange, you’re looking at that 13 million in gain, which part of it is capital gain, part of it is depreciation, recapture. In ballpark, I think at 1.62 million in tax. 

 

Josh Cantwell: In tax. Got it. 

 

Dave Foster: Okay, right? Alarm bells start going off. I got to give up 2 million. When you do a 1031 exchange, the keyword there in the IRS’s eyes is exchange. They are expecting you to carry forward your equity and your basis, and the forms that you fill out, I’ll speak to that at the end of the tax year. So, the IRS doesn’t care how much your gain is, only that you’re carrying it all forward. So, what they say that makes the requirements pretty easy to understand is that you must do two things if you want to defer all tax. The first one is purchase at least as much as your net sale. Now, that’s not the 20 million. That’s going to be the 19 or whatever, so it’s 19. So, you’ve got to purchase 19 million. Second part, you must use all of the cash proceeds in the next purchase or purchases. So, you generated 12 million in cash selling for 19 million. So, if you want to defer all tax, you must purchase 19 using all 12 to do that. Now, what the IRS says that you can purchase less, you can purchase 18. You can take cash out to go pay off investors or do whatever. But when you do that, they choose to interpret that you’re taking out profit first. So, you want to say, “This million dollars is a return to my original basis.” Now, they say, “Nah, it’s a profit,” and we all know who wins that argument, right? 

 

Josh Cantwell: Yeah. Right. 

 

Dave Foster: The guys with the nuclear weapon. So, it is what it is. But that’s what we would call a partial exchange. 

 

Josh Cantwell: Got it. 

 

Dave Foster: And this actually leads us into an interesting discussion from a syndication point of view because you mentioned investors. Now, those investors are all with you as members of your LLC. Is that correct? 

 

Josh Cantwell: Correct. So, let me add one stop to the storyline. So, the real numbers here of this real deal is – you got 11.65 purchase price. We recruited 3.5 million of limited partner cash. We syndicated the deal. We gave up 18% of the equity. We kept 82% of the equity for us. So, me, Glenn Lytle, my partners, we own 82% of the deal. We gave up 18. And so, step number one is buy, stabilize. Three years from now we’d see the first recapitalization of that, the first refi. At that event, it would pay off the bank loan and return all the investors’ equity because if the valuation is 18 million or 19 million, we had a new loan at let’s say 75%, that new loan is going to go out 14 million to 15 million and that’s going to allow us to pay back, pay off the bank loan, and all of the limited partner equity and some refi proceeds to us and to our investors. So, we got a new loan on it now, let’s say for 14.5. We’ve taken some cash-out refi, which is tax-free, which is awesome. We returned all the investors’ equity, the 3.6 million, and we paid off the original bank loan. Now, we just have one bank. Let’s say it’s Fannie Mae nonrecourse at 14.5. That starts at year 3 month 36. But then over the next seven years, we pay that loan down and we have the depreciation schedule also that’s happening to have our basis minus the depreciation schedule. 

 

So, question becomes now for you is, if we pulled some cash out, what if at let’s say year eight we had another recapitalization event and we refi’d a second time and we pulled out more cash tax-free that we go spend, and now the proceeds instead of being 12 million, maybe is only 4 million or 5 million. Okay. How are those refi events impacting the 1031? 

 

Dave Foster: They don’t change your reinvestment requirement at all. That’s still the 19 million. What changes is the amount of cash that you have to buy that with. So, it’s a simple matter then of taking the lesser amount of cash and taking out more leverage on your replacement. 

 

Josh Cantwell: Okay. So, let’s say I got them all in for 14.5, myself for 20, we net 19, so we got 4.5 million of proceeds. I’ve got to invest all those proceeds, 4.5 million, and I’ve got to buy at least $19 million worth of real estate. And the dollars that I pulled out in the tax-free refi event, the recapitalization number one at year 3, recapitalization number two let’s say at year eight, I don’t have to like bring those dollars to closing to buy a new real estate. 

 

Dave Foster: No. Not at all. You simply use that property as security to borrow money. So, it’s paid off as part of the sale and you go for it. That’s why refis are so powerful because they don’t slow down your investing at all. They give you access to the capital for further down payments. 

 

Josh Cantwell: Yeah. I love it. So, let’s say I do a 1031 exchange. I buy another $19 million worth of real estate, which would be my intention, and let’s say I buy another and I want to own or operate it for another ten years. So, that takes me from my mid-50s to my mid-60s. Let’s say I’ve got plenty of energy and I’m still actively investing. Maybe, maybe not. But let’s just say I am. But now at 65, another similar event happens, but now just use round numbers, I’ve got assets again bought for 19. Now they’re worth 30 million and I’ve got 10 million of equity. And now I’m 65 years old and now I’m slowing down. I just want to hang out and I don’t want to be an active operator anymore. What are my options now to continue to shelter that tax but to maybe get into some sort of investment where I’m not so active and I roll that into a limited partner arrangement where I’m a limited partner, do I have to still be a general partner? But maybe I just have a property manager that does the management of the building. How would that work when you really want to go from an active operator role forcing appreciation? Now, I want to be a limited partner. I really don’t want to do anything but sip Mai Tais on the beach and go for beach walks with my wife or whatever. How does that work? And is there ever a time where all of this tax deferral catches up to me and there’s just been a big balloon payment where I’m going to owe a ton of tax down the road? 

 

Dave Foster: Yeah. The tax doesn’t go away, that’s important to know, but there are what we call the four Ds of 1031 investing. You ready? 

 

Josh Cantwell: Yes. 

 

Dave Foster: Defer. Defer. Defer. Die. 

 

Josh Cantwell: Okay. All right. Explain. What do you mean? Defer, defer, defer. 

 

Dave Foster: So, as long as you don’t sell the property ever, you never pay the tax. As long as any time you sell that property and do a 1031 exchange, you’ll never pay the tax. 

 

Josh Cantwell: So, the idea is to die, pass away, give it to my kids, have a step-up in basis when I die, and now let’s say the property’s worth 50 million. Now, I’m 85 years old and then my kids inherit a $50 million group of buildings and complexes and whatever.

 

Dave Foster: Tax-free.

 

Josh Cantwell: Tax-free. They’re going to step up in basis. The new basis now is the value when they inherit it at 50 million and now all of a sudden the clock turns all the way back to midnight. And there’s no tax at all that. 

 

Dave Foster: And depreciation restarts. Yeah, the whole nine yards. 

 

Josh Cantwell: All of that gain, all the1031. Is that what you’re saying? 

 

Dave Foster: That’s exactly right. I have a family in Greenwich, Connecticut, who’s on their third generation. Grandpa started it, willed it to his son. His son then started over and built it up and he passed away not too long ago. And he has children and they have in three generations not paid a penny in capital gains tax. 

 

Josh Cantwell: Wow. 

 

Dave Foster: On real estate. But, Josh, be careful. Do not let your children go into any kind of medical field because when they figure out the benefit of your death, they may find some ways to accelerate it. I don’t know. 

 

Josh Cantwell: Yeah. Well, if they were to knock me off, then they’ve got to pay tax so hopefully, they keep the old man around just to avoid paying. 

 

Dave Foster: You know, what’s really interesting is, look, I wanted to kind of go back to your structure of the first deal, because this is a very key 1031 component and it affects syndication greatly. In order to do a 1031 exchange, the taxpayer for the old property has to be the taxpayer for the new property. So, because your property… 

 

Josh Cantwell: Give me an example.

 

Dave Foster: Go ahead. I’m sorry?

 

Josh Cantwell: I was saying give an example. So, the taxpayer like so…

 

Dave Foster: So, the taxpayer for your current property is your limited partnership. The limited partnership itself is filing the tax returns that report the activity of the property. So, the IRS decides because the properties of the LP tax return, the LP is the taxpayer, not the members of the LP. 

 

Josh Cantwell: Not me or my LLC. Yeah. Got it. 

 

Dave Foster: So, when you sell that property, it has to be the LP that does the 1031, not the individual members. They have to either go along or you have to buy them out somehow. 

 

Josh Cantwell: Got it. So, when people ask me and they say, “Well, I have a gain on my other property of half a million, a million, whatever, can I 1031 that into your deal?” The answer is probably going to be no because their LLC is whatever, XYZ, LLC, and they’re now 1031-ing into this new LLC, which we typically set up a special purpose LLC like this deal we bought. It was 220 units on Chevrolet Boulevard so we called it 220 Chevy. So, 220 Chevy’s a new entity that bought those buildings actually through the membership purchase agreement but if somebody is looking to 1031 a million dollars into there and become a partner, they really can’t do it because it’s a different taxpayer. Is that what you’re saying? 

 

Dave Foster: That’s exactly right because what they’d be buying is a membership interest in an entity that owns real estate and they wouldn’t be buying actual real estate. So, it’s changing taxpayers and they’re not buying real estate. Now, the answer, Josh, if you can make it work and at certain times you can if the financing is right, is that if that investor, if you are able to sell to them a tentative common interest to the property so that 220 Chevy actually ends up owning, let’s say, 90% of that property and XYZ, LLC owns 10% then they could 1031 into that tenant in common interest. And when it was sold then, of course, 220 Chevy could do an exchange on their portion. XYZ, LLC can do a 1031 on its portion. So, you’ve got to be very careful that what you actually own is real estate itself. 

 

Josh Cantwell: Right. Got it. So, then if we were to sell that building, let’s say again, 10 years from now, now I’m in my mid-50s and I had this 10% partner come in from their 1031 into my deal in a tenant in common arrangement, now we go sell the real estate and we go buy the next group of buildings, can they then exit the partnership as long as they roll their 10% into another deal of equal or larger size roll in all their proceeds, you said those are the two requirements, but they can now go do a deal without me, right? They could go to a different deal so long as the taxpayer remains the same. True?

 

Dave Foster: That’s exactly right. What you guys own at that moment in time is actually two pieces of real estate that happens to be a percentage of a larger piece of real estate. You own 90% of it. They own 10% of it. So, you do a 1031 in your direction. They do a 1031 wherever they want to go. 

 

Josh Cantwell: Love it. Okay, but the key being buy real estate that’s the same price or more rolling all your proceeds, and make sure the taxpayer remains the same. 

 

Dave Foster: Exactly. That’s correct. 

 

Josh Cantwell: Got it. Love it. Fantastic. So, they’ve helped me understand who is your best client. So, with our listeners, we’ve got thousands and thousands and thousands of listeners every week. People that are on the show, who is somebody that should be reaching out to you? Describe your sort of ideal client, and then give us your contact information. Where can they get a hold of you? 

 

Dave Foster: Got it. Well, that’s kind of the beautiful thing about this is that the 1031 works for anybody who has a piece of property that is either highly appreciated or that has been highly depreciated and they’re ready to sell it and go buy something else for whatever reason. Whether they want to change locations, whether they want to change sectors in real estate, whether they want to go from active management to passive management, whether it’s time to retire and look at something more passive or whether it’s time to get a vacation rental or maybe a potential retirement home, the 1031 can work in every one of those examples, and that’s the beauty of it. 

 

Josh Cantwell: So, it could be somebody who’s making the residential investment. They’ve got a property that appreciated and depreciated at the same time. And also, the market’s been good for the last 10 years. So, you’ve got people to help rentals for the last 10 years. Now, they’re highly appreciated and highly depreciated but it might be somebody who’s in their mid-40s or early 50s who just had a good run the last 10 years. It doesn’t have to be somebody who’s ultra-wealthy and maybe they’re walking away with a $700,000 profit when you, well, could be profit plus depreciation adds up to $700,000, and they’re like, “Wow. I don’t want to have to pay tax on all that. I don’t want to have to pay, let’s say, $150,000 or $200,000 in taxes. I just want to roll it.” So, you don’t have to be one of the ultra-wealthy to use this tool. 

 

Dave Foster: Absolutely. As a matter of fact, the average exchange, the size of an average exchange in America last year was a little over $300,000. That’s mom and pop. 

 

Josh Cantwell: Yeah. All-day. 

 

Dave Foster: That’s regular America. And if they’re deferring tax on, say, $50,000 or $60,000 in profit, that’s a $10,000 or $15,000 gain tax that they would pay. And if all they do is the 1031 process to put it into real estate, then that $10,000 of tax goes forward with them to go buy more real estate. And if you make a 10% return on your money, that means that every year, courtesy of the United States government and your silent partner, Uncle Sam, you’re making $1,000 a year. That’s real money. Now, multiply that times ten, $100,000 and you see it’s applicable to whatever size. My favorite client of all time was a little lady in Cape Coral, Florida, who sold a dry lot for like $11,000. It was nothing. And I said, “You realize by the time you do a 1031 exchange, you’re going to pay me more than they’re saving. They’re going to save $300 or $400.” And I swear to God she looked at me and goes, “Yeah. But, Dave, that’s my $400.” That’s the attitude of a 1031 investor. 

 

Josh Cantwell: That’s fantastic stuff. So, I guess the mindset of the 1031 investor also has to be once I start this process, I really can’t ever go back like it’s defer, defer, defer, die. And eventually, if you decide to sell without a 1031 down the road, Uncle Sam is going to come back and take a big, big, big chunk of whatever that is. And it could be even more than the proceeds if you’re doing long enough deferrals. 

 

Dave Foster: Because of the refinance. 

 

Josh Cantwell: Yeah. It could be more. The tax owed could be more than the proceeds of that final sale and you could be completely upside down. So, that’s the downside risk, right? 

 

Dave Foster: Well, that’s exactly right. The one thing that I would counter with that is to always remember, though, that, well, first of all, keep your leverage low enough that you can sustain that if that’s going to be your plan. But always remember that compound interest and tax deferral go hand-in-hand and it doesn’t matter if it’s forever. Every year benefits you. So, what’s the rule of 72 tell us? That if I make 10% on my investments, they will double in 7.2 years, right? So, what if you held a property using $100,000 of deferred tax for 7.2 years and then sold it without a 1031 and you made 10% on your estimate? Guess what, you made enough money to pay the tax with the money you made on the tax. 

 

Josh Cantwell: Right 

 

Dave Foster: So, even if you only do it for seven years, it’s still worthwhile because of what you’re going to gain. 

 

Josh Cantwell: That’s fantastic. Dave, so as we kind of round third and head for home here, what are your thoughts about possible changes to the administration, what they’re talking about with 1031s? What are some of the things you’re hearing in the background about potential tax change? 

 

Dave Foster: Yeah. I love that question because I’m old enough to have been through like five or six administrations. And let me tell you, Josh, every single president since 1996 has talked about getting away with getting away from the 1031 exchange, every one of them. Only one president has actually done something about it. That’s the one you would never think of. Who owned the most real estate of all? Trump took away the personal property exception that lets you do 1031s on personal property. We used to do a lot of 1031s on Shatz, heavy equipment, mining equipment, and that kind of thing. Trump took that away. So, I don’t see this as so much a red and blue issue. It’s just low-hanging fruit for every one of them. They see a way they think will work, “Let’s take that away. It will generate money,” because… 

 

Josh Cantwell: Well, it’s also probably a lot of pandering. It’s probably a lot of talk. It’s a lot of vote me in and I’m going to take this away from the rich. But again, you’re talking about mom and pop. $300,000 is your average. These are regular Americans, mom and pop types. These are not the ultra-wealthy. Of course, the ultra-wealthy use the strategy too but, look, everybody in Congress is getting rich off of our country. It doesn’t matter if you’re red or blue and they all own real estate. So, do we really think that they’re going to vote for a law that’s going to force them to pay a ton of tax and vote for a law where your average American $300,000 gain is using this strategy to buy more real estate? It’s going to disincentivize the reason to own property, and there’s lots of other reasons to own property but the 1031 is one of the many reasons. And if you disincentivize the market, it’s going to destabilize prices. Prices will go down. It’s going to impact the overall economy. So, it’s a massive, massive decision that negatively impacts lots of people and, of course, the lawmakers who probably own tons of real estate in their portfolio. So, probably, from my opinion, again, probably not something is going to happen on a grand scale. Maybe there’s a couple of tweaks. Is that your thought, too? Maybe there’s a tweak to the program but not large-scale overall.

 

Dave Foster: Yeah. I’m not overly concerned with it right now at all. They’re having trouble assigning parking places in Congress without a fight. So, I think it’s a little on the radar screen but like you said, it is a huge economic generator and it increases the velocity of money. There’s over, I’d say, around 600,000 to 700,000 exchanges that are happening every year. That is increasing the velocity of money and velocity of money is what keeps inflation at bay. Rather than print more, you make the money that’s in circulation work hard. So, as Gideon Tucker said, “Nobody’s person, property, or liberty are safe as long as Congress is in session,” but right now I’m not too awful worried about it. 

 

Josh Cantwell: Got it. Fantastic. Dave, let’s do this. Let me ask you a couple kind of quick-fire questions and just your kind of journey more of some of the things you’ve learned along your way as an entrepreneur, as a business owner. First question, and you could take a little bit longer to maybe answer this one, but if you were to be able to reach back into time and talk to a younger former Dave Foster, what are some advice that you give your younger former self? What’s some advice you pass back to our audience that they can incorporate into their entrepreneurial journey with real estate or even outside of real estate? What are some things you’ve learned along the way that you wish you would have done differently or just some tips, hacks, things that you think that you wish you had done or our audience should be doing along their process, their journey? 

 

Dave Foster: Yeah. Well, as the markets have changed, we’ve gone so much from a local real estate economy to where now the nation and world are really available to us. So, I don’t want to beat myself up too bad but I would tell myself being in Denver in the early 90s, “Hey, Dave, don’t forget there’s all kinds of places in the United States where you can take advantage of inefficiencies of the market,” and I wouldn’t have just invested there and kept my portfolio around me. That’s probably one. But far and away, the biggest thing is it would be a reminder and I would say, “Hey, Dave, remember where the opportunity is there, don’t wait for tomorrow. Do it now.” We positioned our real estate to sail away into early retirement, raising our four boys on a 53-foot sailboat. And we took advantage of the opportunity to do it. It’s never going to come again because we took it when it came. It was there. So, whether it’s a piece of real estate, whether it’s a lifestyle or career decision, if you can do it, do it now. You’ll never regret what you do now. You’ll always regret what you didn’t do. 

 

Josh Cantwell: Yeah, love that. Dave, let’s finish with the final five, five quick questions. Take 10 to 30 seconds to answer these questions. Question number one, what is your favorite way to find real estate deals? 

 

Dave Foster: Oh, I love to find what are called codes of investment. I look for where the federal government is putting money, whether it’s a military reservation or whether it’s universities or whether it’s special pork belly products. Where the government invests, the economy will grow. 

 

Josh Cantwell: Fantastic. Number two, what’s your favorite place or way to find capital from limited partners or joint venture partners to partner with on your deals and bring capital to your projects? 

 

Dave Foster: You know, I’m kind of a little bit of a dinosaur. This is going to be a totally unsatisfactory answer but I don’t like to use other people’s money. I have. I didn’t like it. I didn’t like how it made me feel and the risk I was taking with their money. So, I always just looked at my own bank accounts and if it’s not there, we don’t do it. 

 

Josh Cantwell: Okay. Like it. Question number three, what’s the favorite book that you’ve read recently and why? 

 

Dave Foster: Oh, man, can I give you three real quick?

 

Josh Cantwell: Sure. 

 

Dave Foster: I always like the Proverbs in the Bible, the absolute ultimate business and personal relationship guide you’ll ever read. My two favorite business books, though, by the same author. Whatever Happened to Penny Candy and the Clipper Ship Strategy, both by Richard Maybury. The Whatever Happened to Penny Candy, best primer on inflation you’ll ever read. 

 

Josh Cantwell: Oh, nice. 

 

Dave Foster: The Clipper Ship Strategy, best primer on how to find those codes of investment by the federal government. 

 

Josh Cantwell: Love it. Those are two books I have not heard of. 

 

Dave Foster: They’re written with a sense of humor, so I could understand them. 

 

Josh Cantwell: Love it. Dave, favorite place for you to vacation, decompress, and think? 

 

Dave Foster: Out of my sailboat. 

 

Josh Cantwell: On the sailboat, of course. That’s fantastic. Last question, Dave, who’s the favorite mentor that you ever had or the person that had the biggest impact on your life? 

 

Dave Foster: You know, he probably doesn’t even know what to this day, a guy named Mike Sumpter who was my direct superior. He was an Air Force colonel at the Air Force Academy and he told me two things that have resonated to this day, “David, you’ve got people under you. Day one on your job, pick a body and shoot him. Doesn’t matter who. Get rid of one. Leave the body on the floor. The rest will get the message.” And secondly, he said, “When you encounter difficulties, shoot until you’re out of bullets and then throw the gun at him.” 

 

Josh Cantwell: Fantastic advice. I’ve never heard those before. Dave Foster, it’s been an absolute privilege having you on the show. I’m sure a lot of our audience will want to reach out to learn more about you and your strategy, this 1031 exchange, and how they can use you to defer, eliminate, defer, defer, defer taxes. If people want to reach out, where can they get a hold of you? 

 

Dave Foster: Absolutely. We have developed an entire portal that is specifically geared towards education. YouTube videos, calculators, articles, and the books are going to be there as well. And it’s at The1031Investor.com. 

 

Josh Cantwell: Got it. The1031Investor.com. Guys, check it out. Thank you so much for joining us today on Accelerated Real Estate Investor. 

 

Dave Foster: My pleasure. 

 

[CLOSING]

 

Josh Cantwell: Well, hey, I hope you really enjoyed that interview on Accelerated Real Estate Investor with Dave Foster. I had a great time with him walking through our case study, our $20 million case study on how that would work. And I love the very simple mindset of deferred taxes, deferred taxes, deferred taxes, and then die and then eventually get what’s called a step-up in basis, which means your kids, your grandkids, whoever inherits your portfolio, whoever inherits your assets, gets a step-up in basis and its new value, which means they pay no tax and then they can do the same thing. It’s a fantastic opportunity. I was also blown away in this interview to hear that the average 1031 exchange was only $300,000. So, it’s a lot of regular people, average Americans using this strategy. You don’t have to be ultra-wealthy. So, make sure you use this in your own portfolio. And of course, check out Dave’s website at The1031Investor.com. If you enjoyed this interview, as always, leave us a five-star rating and review on any of the podcasting platforms and YouTube. And don’t forget to hit the subscribe button so you never miss another episode of the Accelerated Real Estate Investor. 

 

Thank you so much for being here. Thank you so much for sharing this. I’m always so just honored, privileged, and excited to be building this community, working with you. Don’t forget to join our private Facebook group for all of our Accelerated Real Estate Investor members. Just go to Facebook, go to the groups, and search Accelerated Real Estate Investor. You can join for free. If you want help building your portfolio, go visit JoshCantwellCoaching.com. You can apply for coaching there to work directly with me to help build the lifestyle that you’ve always wanted. Thanks again for being here today on Accelerated Real Estate Investor and we’ll talk to you on the next episode. See you soon. Take care. 


[END]

2 comments on How to Avoid Capital Gains Tax with The 1031 Exchange Expert, Dave Foster – EP 208

  1. Fazalur Rahman says:

    Deferred, Deferred, Deferred and died. I liked it even loved it. Dave Foster is very interesting, funnyman and fantastic real estate investor too. Mr.josh I 💘 your podcasts and every time I enjoy a lot of fun, education and real estate coaching. Pls keep it up. God bless you guys and taking cares.
    Fazalur Rahman, New York

  2. John Glynn says:

    great podcast

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