1031 Exchange Rules Every Real Estate Investor Should Know Before Selling

Brett Davis (00:00)
Yeah, So when I when I look at the serial investor, serial real estate investor population out there, I see a lot of really creative, really smart individuals who have begun utilizing 1031 exchanges for their non-qualified properties, right? And they’re doing it well, they’re doing it smart. But no one’s gotten in front of them. It’s very rare that they have, and told them.

Look, you have you probably have a retirement plan also. It’s probably an IRA or you have rollover funds from a four former 401k. It’s probably pretty big. Did you know that you can invest in real property in an IRA account and defer those the taxation on you know the sale of that property up until the point that you take a distribution at retirement?

Scott Bursey (02:18)
Welcome back to the *Real Estate Pros* podcast powered by Investor Fuel. I’m your host, Scott Bursey. And today we’re delighted to be joined by Brett Davis, the Senior Vice President and Chief Trust Officer of Exeter Trust Company. Brett brings decades of financial services experience in managing non-traditional investments and has a stellar reputation for ensuring operational excellence in complex financial environments.

Listeners expect to gain a clear understanding of how to leverage tax-deferred 1031 exchange strategies and navigate complexities of holding alternative real estate assets within a regulated custody framework. Brett, welcome to the show.

Brett Davis (03:00)
Thank you. I’m excited to be here.

Scott Bursey (03:02)
It’s awesome having you here, my friend. And to help our listeners get up to speed, please give us the ninety-second highlight reel of how your career ignited and where you’re pouring your fuel now.

Brett Davis (03:13)
Yeah, absolutely. So you know, I’m an old guy. So I started out in the early nineties with Merrill Lynch, and then went to Fiserv, Inc., then to Schwab. I’ve also been with a couple of trust companies. Most of my time has been spent with securities clearing firms, like the the the back end of Schwab, Fiserv, Inc. and Merrill.

My my kind of tangential experience has always been not only with with listed securities, but with what we refer to as alternative investments, private stock, promissory notes, real estate in particular accounts. And I’ve always touched those with my roles in the other companies somehow or some way. So those are kind of my two claims to fame. I can I can handle both those types of asset classes and speak to you about them.

So that’s that’s my ninety second elevator speech.

Scott Bursey (04:10)
And it’s a good one. Wow. That’s a unique journey. And it really does bring a broad spectrum to the conversation. Thank you for that. And what really caught my attention about you, Brett, was the way you’ve been able to bridge the gap between complex regulated custody frameworks and practical tax-deferred 1031 exchange strategies for your clients. And really building on that, curious to know.

What do you consider the biggest strength of the Exeter Trust Company model when handling 1031 exchanges?

Brett Davis (04:41)
Yeah, so there’s actually two, and they’re tied for first, right? So the first one is that we’re regulated by the Wyoming Division of Banking through our trust company. That’s a big deal. There’s not a lot of 1031 exchange qualified intermediaries that are regulated, and regulated makes things very vigorous as far as transparency, as far as doing things correctly for clients.

And as far as just having regulators come in every couple of years and open up your books and records and make sure you’re doing everything right. The other piece that’s really important here is our executive leadership. William Exeter and Maureen Brown, who work primarily on the 1031 exchange side but oversee everything. Probably 60, 70 combined years of experience with.

1031 exchange and alternative investments in IRAs. So deep industry experience and regulation.

Scott Bursey (05:45)
Interested in hearing, Brett, where do you see the most common pitfalls or weaknesses that investors face when they aren’t properly utilizing or, you know, regulated custody framework in that capacity, if you could take us down that path?

Brett Davis (06:49)
So the the biggest pitfall on both the IRA side and the 1031 exchange side is lack of knowledge or education, right? People entering into transactions really quickly or not not utilizing tax-deferred strategies like an IRA or 1031 exchange. It costs them money. And people don’t think about that when they’re when they’re looking at

a piece of property, for instance, that’s appreciated well over time. They’re they’re worried about their the income, they’re worried about the proceeds. And they’re not thinking, well, I’m making 200 grand on this, how much more could I be making if I deferred it? Right? They’re excited about the proceeds, but they’re not thinking it through completely. So, you know, on the 1031 exchange side, if they’re prepared, if they’ve thought about this before they embarked upon the sale,

they would be in much better shape and they’d be able to roll those those taxes that they’ve been hit on into another real piece of real estate. Right. Same on the IRA side. If you start if you start young enough, if you start vigorously saving, you can build a nest egg through real estate acquisition and sale that is huge when you’re ready to retire.

Scott Bursey (08:09)
Wow, that’s a great distinction. And we’d love to get your thoughts on the biggest opportunity you see right now for investors who are looking to move into buy hold alternative real estate assets.

Brett Davis (08:21)
Yeah, So when I when I look at the serial investor, serial real estate investor population out there, I see a lot of really creative, really smart individuals who have begun utilizing 1031 exchanges for their non-qualified properties, right? And they’re doing it well, they’re doing it smart. But no one’s gotten in front of them. It’s very rare that they have, and told them.

Look, you have you probably have a retirement plan also. It’s probably an IRA or you have rollover funds from a four former 401k. It’s probably pretty big. Did you know that you can invest in real property in an IRA account and defer those the taxation on you know the sale of that property up until the point that you take a distribution at retirement?

And and when I have that conversation with

serial real estate investors who have gotten good at real estate investors, they’ll they say, huh, I’d never heard that before. Tell me about it. And it’s an aha moment for them. So that’s a huge opportunity. All of these good versed real estate investors out there who have gotten really strong expertise at it, they don’t realize they can use their IRAs also. So I think that’s the opportunity.

Scott Bursey (09:38)
Is there a specific asset class you’re seeing gain the most traction currently?

Brett Davis (10:20)
Well, people, you know, out there in the world, people are interested in AI, right? Alternative or artificial intelligence. And they’re hyper focused on that right now because of the markets. Under that, those people who are not paying attention to that, who understand that there’s a lot of hype out there, they’re looking at real estate, first of all, because real estate performs so well over time.

And then they’re thinking about private investments. How do I get away from the markets, from the volatility, from the ups and downs that take me by surprise and flatten that out a little bit? And private stock, private investments and other alternatives are kind of what they look to there.

Scott Bursey (11:06)
Brett, digging into the current market shifts, what do you see as the primary threat to the traditional 1031 exchange landscape in the coming year?

Brett Davis (11:15)
I don’t really see too many threats to the 1031 exchange landscape. I think it’s a strong tax deferral strategy, and I think that our our leadership in the in the the the world is behind it, right? It it’s a it’s a fair, good way to go. The the one difficulty I would see with 1031 exchange strategies is regional, if a region’s going down.

Or if a region is challenged and real estate prices are going down as opposed to sideways or slightly up, that’s always the challenge to the 1031 side of the business. You know, I would also think that regulation is important, right? We’ve seen some 1031 exchange qualified intermediaries go down because they they invested client funds incorrectly or in a bad way.

We’ve seen them go out of business because they can’t run their business. I think regulation is important because it it attests and contributes to the health of a qualified intermediary like us. So if there’s any threat out there, it’s those two things. And the the second one is not being regulated.

Scott Bursey (12:30)
Can you shed some light on the internal discipline required to manage non-traditional investments at the scale Exeter Trust operates?

Brett Davis (12:38)
Yeah, it it takes a lot of experience. So from a traditional security standpoint, people know mutual funds, they know annuities, they know stocks and bonds, they know Schwab, they know how to buy them. When you look at an alternative investment or a piece of real estate or a promissory note backed by a deed of trust or a private stock, it looks very different from everything else. You have physical paperwork, you have

Multiple parties involved in the transaction and multiple people you’re talking to about it. There are also multiple risks to the investor with those types of assets that they have to be abreast of. So I would say those are the main areas that you have to have developed expertise in. Where are the risks to not only client but to the firm that’s holding like us? What

Are you actually dealing with? Are you dealing with a private real estate fund? Are you actually dealing with a debt fund? Perhaps you’re really dealing with a piece of real estate. It’s it’s very difficult to know offhand from the initial conversations with the asset sponsor or the the the client as to what you’re actually dealing with. And then there’s the transaction piece itself. If you think about a real estate transaction, you have an escrow, you have a title company, you have a buyer, seller.

You don’t have these with traditional securities. You click a button and you buy shares of IBM, right? And they hopefully go up. With private transactions, alternative investments, there’s multiple parties you have to coordinate and and it’s all done manually. So that’s the other piece of it. You really have to have some experience to know where you’re sending the money, who you’re dealing with, how to confirm the investment is in good shape.

And in your name as the custodian.

Scott Bursey (14:29)
Is that discipline something a solo investor can replicate or should they outsource that trust?

Brett Davis (14:35)
If they’re doing this in an IRA, they have no choice. They have to choose a custodian. And typically custodians like us, independent trust companies. That’s that’s that’s who has the bulk of this type of business. If they’re a very, very, very large investor and already have funds at at a Schwab or an Interactive Brokers or Fidelity, chances are Schwab will help them out with it.

But it’s kind of rare that you find these type of investments with a brokerage house or a financial services company like that. It’s usually with a custodian that’s structured as an independent trust company like us.

Scott Bursey (15:13)
Understood. Thank you for highlighting that. And Brett, if you could help us understand what does your professional network look like right now?

Brett Davis (16:03)
Yeah, so Exeter Trust Company connects with realtors. Any realtor out there in the nation we will connect with, because they’re a great way to get the word out to serial real estate investors, right? A lot of them deal only with retail, but you know, you run into those realtors who have professional clients who, you know, are doing one piece of real estate after another. That’s a great

Piece of our network. The other piece of our network is registered investment advisors and financial consultants and CFPs, certified financial planners. They, you know, take a broad stance on a client’s wealth management. And if a client’s involved in alternatives or wants to be involved or is involved in real estate, they tend to know. But they typically can’t.

Custody their assets or help them open an account and transact. So that’s what they look to us for. So those three populations are great populations for our network, probably take up about 60, 70% of our professional network, and then attorneys and CPAs after that.

Scott Bursey (17:12)
It sounds like you’re surrounded by the right expertise. And Brett, if you could give one piece of money advice to an investor sitting on a significant capital gain right now, what is the most important action they should take before initiating a 1031 exchange in your view?

Brett Davis (17:32)
Know the rules and regs behind it, right? And try to get in with a qualified intermediary you’re comfortable with before transacting, right? Be prepared for when the market hits the point you want it to.

Scott Bursey (17:45)
That’s some solid advice. Thank you for dropping that golden nugget. And really, Brett, you have dropped a lot of good advice here today. But is there any additional words of wisdom or additional advice that you could leave with the listeners?

Brett Davis (17:59)
I I have a very important piece of wisdom I want to impart out there. And it it’ll it’ll take a couple of minutes, but it I think it’s important and it’s about real estate. So in 2019, the San Francisco Fed asked someone, a guy named Jordà, Òscar Jordà, to do a study. They had they said, we want you to take the four main asset classes equity, real estate, bonds, fixed income.

And we want you to figure out which has the best return, which has the best volatility over time. That’s a pretty big task. And he kind of got stressed out immediately about that. But what they found is that we have data going back to 1870, not only in the United States, but across 14 other countries around equity, real estate, fixed income, and and and bonds. And

Jordà found some really interesting things. His first finding was that over that 1870 to current timeframe to 2019, real estate was the second strongest performer, only by 1% under equity. So if you think about the markets and all of these companies that are flying high right now, real estate keeps pace with them over the long term. Okay. That’s the first piece of wisdom I want to share with anyone. And we can, I can cite this.

Study when you put up our our webinar. The second piece had to do with volatility, right? When we think about the markets, they go up, they go down. NVIDIA takes down the entire market with it for no reason sometimes. Sometimes it goes up for no reason. Real estate had a flat volatility, it was much smoother than equity over time. So investors

Investing in retirement with real estate get a couple of benefits that are equivalent to equity. First of all, they get the same growth. Gotta find the right property, but they get the same growth that an equity does. Second of all, they get lower volatility and it’s lower by a lot. It it matches treasuries. And that’s incredible. So why would you not buy an asset or seek out an asset

For your retirement that gets the same return as an equity with lower volatility. That’s my that’s my imparting of knowledge for the day.

Scott Bursey (20:16)
Brett, that was incredible. Thank you. Thank you for those wonderful, powerful words. And for those of our listeners that want to keep this conversation moving, stay in your lane or collaborate with you, what’s the best way for them to reach out to you and and contact you directly?

Brett Davis (20:32)
[email protected] E-X-E-T-E-R-C-O.com.

Scott Bursey (20:35)
Brett, thank you so much for joining us today on the *Real Estate Pros* podcast.

Brett Davis (20:39)
Absolutely. Honor and a pleasure.

Scott Bursey (20:41)
It most certainly was. And to our listeners, we appreciate you. If you receive value from today’s episode, please subscribe. We’ll be filling your tanks with the lineup of a leak guest, just like Brett Davis, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.