How 1031 Exchanges Build Generational Wealth in Real Estate

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In this episode, real estate investor Dave Foster shares his 30+ years of experience, focusing on tax strategies, 1031 exchanges, and building generational wealth through real estate. Learn how to leverage these tools to maximize your investments and create a lasting legacy.

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Dave Foster (00:00)
We used the 1031 exchange for ourselves to build our portfolio in Colorado, to move it to Stanford, Connecticut, which we thought was going to be the sale off point, till we realized that Connecticut’s always cold and there’s no warm water and no sunshine. So forget that. We came down to Florida and we moved our portfolio all the way to Florida. And at the end of 10 years, we were able combining 1031 exchanges and a couple other tools in real estate.

to buy a 53 foot sailboat for cash, tax, free cash, and raise our children for 10 years on a sailboat living off our real estate portfolio, never paying a penny in capital gains tax. That’s my story.

Micah Johnson (00:44)
Man,

Hello everyone. Welcome to the Real Estate Pros Podcast. I’m your host, Micah Johnson. And today I’m speaking with Dave, who’s been a serial investor now for more than 30 years. Dave, welcome in, man. I’m glad to have you.

Dave Foster (02:31)
Yeah, it’s awesome to be here.

Micah Johnson (02:33)
I’m excited for our talk today. You have quite a story. You’ve seen some cycles. There’s a lot of wisdom that you bring and you’ve literally in your own words, learn how to lock the back door. And I’m excited to dig into what that means for the folks that are listening and viewing in today. So let’s dive in, man. For those that aren’t familiar with you yet, tell us a more about yourself and what your main focus is right now.

Dave Foster (02:57)
Yeah, thank you. Well, that is such a polite way. So let me thank you in advance. Such a polite way of calling me old. Cause I’ve been around the block a few times. I gotcha. That’s awesome.

Micah Johnson (03:06)
You are welcome, You’re welcome. I appreciate that. You know,

I tried it. I really try to flower it up.

Dave Foster (03:13)
Yeah.

Well, the back door, my wife tells me I’ve got this crazy obsessive compulsion with not paying taxes. I just hate it. I’ve always hated it. I always will hate it. And as a real estate, you know, as someone once said, there’s nothing sure except death and taxes. I really don’t care about the first one, but I’m not willing to accept the second one. And so

That’s the personality that you’re dealing with right here. There was a mentor of mine once who, as I was starting my real estate investing career, who cautioned me and he said, Dave, don’t ever forget that the true measure of your wealth that you build does not lie in how much you make, it’s in how much you keep. Cause at the end of the day, if you don’t keep it, you haven’t made it.

And that’s the back door. So my focus has always kind of been in that. And as part of that, I discovered some keys to help people, myself included, avoid entirely or mitigate significantly the taxes that they pay in real estate investing. So for now, for 25 years, I’ve been in what’s called a qualified intermediary for section 1031 exchanges.

and attack strategies for real estate investors. And it lets me help people beat the government. So I just love my job.

Micah Johnson (04:48)
Yeah, dude, talk about showing up to everything you want to do each day. I love that, man. Well, what led you here? How’d you get to where you are today?

Dave Foster (04:57)
A very, very sad story. The worst real estate deal I ever made was my first one. My wife and I were in Denver, Colorado. Now you got to picture this because I’m a Kansas farm boy. She’s a Minneapolis city girl. We’re living in Denver, Colorado. So far, there’s nothing about water in there, is there?

But we had our first child and we were in different careers. And all of a sudden, we threw away the TV. We wanted to do nothing except just watch this little bundle of joy. And my gosh, it just changed our lives. And so we realized almost instantly that the greatest commodity we’ve got in our lives is not money, prestige, power, it’s time.

Micah Johnson (06:25)
Mm.

Dave Foster (06:39)
Time is limited, we can’t buy it, but we can certainly try to maximize it. And that wasn’t gonna happen with two pressure cooker jobs. So we said, well, how can we get off the corporate train? And someone said, let’s become real estate investors. It’ll be easy. You know, famous last words, right?

But along with that, someone else said, yeah, we could buy a sailboat and sail around the world, said the non-ocean people. So what the heck? Why not try it all? So we decided that we would set a goal of sailing off raising our children on a sailboat and doing that through real estate investing. And so that’s where we got our start back in the 90s in Denver, Colorado. I, because my other nickname might get,

is ready fire aim Dave. I’m yeah bought a duplex in Denver fixed it up put renters in it kept it for a while sold it man how is the fattest cat on the block nobody could touch me till I went to my account and he said you ready to write a $30,000 check and I said wait a minute that was not part of the plan that no no and he said yeah.

Micah Johnson (07:35)
Gotcha, gotcha.

Hahaha

Dave Foster (08:02)
because we made money, the government wanted their share. Well, that threw the whole 10 year goal out of whack, didn’t it? Cause all of a sudden I realized I had a silent partner named Uncle Sam. Right at that moment, it was in 1996, there was a huge court case that was settled. By the way, I’m a TREAT accountant, so I’m kind of a nerd in that stuff, right? So there was a lawsuit. Yeah.

Micah Johnson (08:12)
Right?

No, love it man. Dive deep for me. Come on.

Dave Foster (08:30)
that had been settled from a guy named Starker who actually beat the IRS. And now investors like you and me, we’re going to be able to do this thing called a 1031 exchange, which allows you to sell investment real estate and using the process, purchase new investment real estate and not have to pay tax on the profits.

or the depreciation recapture in the middle. So all of a sudden that $30,000 could have stayed in my pocket. Now, if you take the rule of 72, where you divide the interest rate by the number of years you have a, and that will tell you how long it takes your investment to double. If I had real estate for, if I had that 30,000 for

10 years or I’m sorry, at 10%, it would take 7.2 years to double. So can you imagine how much sleep I lost over the next three decades? Counting $30,000 lost every seven years. So that was my motivation. It was a really bad, bad thing. But since that moment,

Micah Johnson (09:51)
Right? Right?

Dave Foster (09:57)
We used the 1031 exchange for ourselves to build our portfolio in Colorado, to move it to Stanford, Connecticut, which we thought was going to be the sale off point, till we realized that Connecticut’s always cold and there’s no warm water and no sunshine. So forget that. We came down to Florida and we moved our portfolio all the way to Florida. And at the end of 10 years, we were able combining 1031 exchanges and a couple other tools in real estate.

to buy a 53 foot sailboat for cash, tax, free cash, and raise our children for 10 years on a sailboat living off our real estate portfolio, never paying a penny in capital gains tax. That’s my story.

Micah Johnson (10:43)
Man,

man, that’s one first. Congrats, man. You pulled it off. I love talking with people that set a goal, pulled it off. And ⁓ it’s beautiful because you actually use the tool. And you said something early on in our prerecorded call where you played the long game is what you’ve done. You used real estate as the best get rich, slow scheme ever.

Cause it is, that’s what it does for you for someone that, you know, wants to dive on that journey. Like what are some things that they’re thinking about upfront? are some questions upfront? You would say, you know, think about this, you know, make sure you check this.

Dave Foster (12:05)
Yeah. You know, first and foremost, I think this will probably be the most relevant for people watching this podcast today because so few investors are left since the first decade of the 2000s. 2008 crushed everybody. Two thirds of the realtors went out of business. 90 % of investors went out of business. There’s nobody left.

with this kind of campfire knowledge. So it’s had to rebuild. And so for just about everybody who’s been investing for the last 15 years, it’s like just tripping over gold nuggets. You almost couldn’t fail, right? But the 1031 exchange, like you said, is the long game. It takes planning. There are so many people that start out ready fire aim.

I’m going to go buy a piece of property, I’m going to sell it and make some money. When you do that, number one, you’re going to pay ordinary income tax. So you’re going to give up, depending on the state, 20 to 40 % of the profit right out of the gate. Secondly, you don’t have that money to then buy your new property. So everybody that likes to do, you know, the common term is fix and flip. And those are so easy to do.

early on. You find a property, fix it, sell it, and that’s cool. Let’s do it again. All you’ve done is buy yourself another job and you’re working to make money in real estate instead of letting your real estate work for you. How does your real estate work for you? Over time, because over time you get to depreciate it. That’s a tax benefit. Over time, your real estate appreciates.

That’s an increase in value. That’s profit for free. Over time, your loan, if you’ve got one on your real estate, amortizes, which means it’s being paid off. Who’s paying it off? Not you. Your tenants are. So, and if you buy real estate, intending to hold it for productive use, meaning in effect more than a year,

Then you get to do the 1031 exchange. And in my case, keep that $30,000 and use it for your own benefit to invest in more real estate. See, that’s the power. So it’s all got to start with a long runway and you’ve got to be patient. That’s probably the single biggest thing that people have to adapt to if they want to take advantage of this tool.

Micah Johnson (14:47)
Gotcha.

Gotcha. Gotcha. Well, you also mentioned in that one thing that your work that you’re noticing right now is a little bit of timing difficulty, right? There’s a lot more levers that you’re having to pull. And at the same time, though, we’ve never been more able to buy nationwide. We’ve never been more able to invest in places we used to not be able to like.

It actually invests and not gamble, right? Like have enough information and do the things we know. How are you tying those two together?

Dave Foster (16:10)
Yeah, well, the 1031 exchange just by default involves a sale of real estate followed by a purchase of investment real estate. It can be any type of real estate and it can be anywhere in the country. So you’ve got the absolute flexibility to look at the market cycle and see where it’s at because it doesn’t change.

exactly the same every place. For instance, Southern California or actually San Francisco, let’s deal with that. My gosh, by the mid to 2015-ish, was yet skyrocketed, but it was starting to slow down because people could no longer afford increases in rent. So all of my clients in San Francisco sold these massively appreciated San Francisco investment properties.

Micah Johnson (16:42)
Mm-hmm.

Dave Foster (17:09)
And you know what they did? They went to a sleepy little town called Austin, Texas, and followed their friend Elon down there and started buying up Texas desert. And they’ve done pretty darn well now. So they found a different sector in a different location that was ready to pop, but hadn’t yet. So that’s where a lot of the research has to take place. And it has to take place ahead of time because to do a 1031 exchange,

Micah Johnson (17:14)
Mmm.

Dave Foster (17:39)
You’ve got a limited window. It starts with the closing of your sale. You only have 45 more days to identify your potential replacements. And you only have a total of 180 days to complete your purchase. So you’ve got to be laser focused on what you want. The exchanges I see fail are the people who will call me like on day 30 and say, I’ll give my 45 day list into you, but I’m still trying to decide.

Micah Johnson (17:47)
Mmm.

Dave Foster (18:10)
because San Diego is great for small multifamilies, but I really love the commercial market in New York. And man, the Smoky Bounds is still great for vacation rentals. Well, tell me that person is really gonna be able to lock in their decision. It’s not. They’re gonna fail because they got too much to analyze to make it work. So the 1031 exchange is a curse because you’ve got the limited compressed time.

Micah Johnson (18:26)
Right?

Right? Right.

Dave Foster (18:40)
but it’s also a blessing because it forces you to stay on task. And that’s how we people deal with the timeframes. We say, it as a benefit. Get started now, because you can invest anywhere you want, in any type of investment real estate you want. Look at the cycle and start searching right now before you even put your property on the

Micah Johnson (19:05)
makes complete sense too, because it the preparation, you’re right, the person you described, you’re you’re not making a decision. You’re not you’re not going to be able to nail that down. Because you know, you’re making a fast choice and you’re you’re like violating your own principles trying to do it. So the reality is a 1031 exchange is not an afterthought. It’s very much a forethought. It is something that you’re going to sit down and start thinking about and

Cause like you’re saying was super interesting. mentioned fixing flips, but that’s mainly single family. What you’re talking about is learning how to drift to a different asset class at the same time. And that’s not something you take lightly. That is like they’re different businesses is what you’re basically running into as you drift from asset to asset. It’s the same kind of machine. It’s a machine that trades in real estate, but it’s, it’s like, you’re talking about an F three 50 and a freaking backhoe. it’s.

They both are machines, but they’re not the same machines. Okay. They are capable of way different stuff. And you have to process that because that’s, if you’re not, you’re gambling. That’s not investing. You’re like leaving the world behind of what we say we try to do, which is make those informed choices on where you’re trying to go. And if I’ve learned anything, preparation is what gives me confidence. That is what lets you look at whatever you’re looking at, knowing, all right, this is what we’re doing. We’re making a good choice here. And.

Dave Foster (20:03)
All right.

Micah Johnson (20:30)
You know, good choices can turn out with bad results. We all know that, but knowing you’ve made that good choice, that’s 99 % of it. You put in the work to understand this ain’t random. This is an intentional action that I’m taking here.

Dave Foster (20:46)
And let me throw a little bit of gasoline on this fire because the 1031 exchange is the bridge between those machines to stay with the metaphor. Because when you start out investing, it’s very typical to start with single families. But very quickly you can learn that either, you know, it’s not your gear, Ash, you really don’t like that. You want bigger things, you want more passive things, or simply as you go through life.

your needs change. We all start out generally where we got, no, we don’t have much money, but we also don’t have much brains, but we got plenty of energy. So what are you going to do? Go buy a house, pick up a hammer, buy a bigger hammer in case it’s an electrical problem and start going. Right. And so that’s what we do. Well, we put a wrench in that house and yeah, I’m all that.

Micah Johnson (21:26)
Hahaha!

Right?

Dave Foster (21:44)
So I’m to do it again. Well, what you can do though, is you sell that one. And because the 10 31 allows you to buy any number of properties, you buy two single family rentals and you fix them up, you rent them out, and then you sell those two and you buy four. And at some point in time, you look at yourself and you’re there and you say, why am I so tired? Why do I hate tenants so much?

Micah Johnson (21:56)
Right.

Dave Foster (22:12)
⁓ it’s because I got all these little single families that are spread me thin. So you sell five hundred thousand dollar single little titles and you could buy one five hundred thousand dollar duplex. Or you sell a bunch and then you consolidate. Now that’s what I call the ebb and the flow of 1031 investing because you can increase or you can decrease again.

Micah Johnson (22:29)
Right?

Dave Foster (22:41)
depending on what your energy level and what the market is telling you to do. Yeah, remember everybody thought you were crazy to go into multifamily about eight years ago. It’s been about that, I think, right? What happened? It was the right time. Well, there’s a bunch of them out there hurting now, right? So we’ve seen the end, we’re seeing the flow. It may be time.

Micah Johnson (23:05)
Right?

Dave Foster (23:09)
And the 1031 can accommodate that. But even more, Micah, the 1031 is going to accommodate where you are in your personal life cycle. Got more energy? Go buy those single families. Start to get tired? Consolidate into larger passive properties. Retire? Maybe before that, you start to buy vacation rentals.

where you can build family memories and get some personal use of your investment properties. When you retire, convert one of those into your first retirement property. You can do all that without paying tax. At the end of the day, the greatest thing in the world is, okay, this can sound really strange.

Micah Johnson (23:59)
Mmm.

Dave Foster (24:07)
The greatest thing in the world is you’re going to die. Okay, maybe not, but it’s going to happen. But when you die, what makes it great is that your property is going to go to your heirs and what is called a step up in basis, which means that they inherited as if they paid market value for it on the day you died. So you never pay the tax. You’re a state.

Micah Johnson (24:33)
Mm.

Dave Foster (24:38)
never pays the tax. Your children never pay the tax. You’re able, quite literally, and we’re doing it ourselves. Although one of my children decided to go to med school. And I’m a little worried that it might be because he can decide when to pull the plug on dad. So I’m keeping an eye on him. I got my eye on him. But we’re going throughout our lives.

Micah Johnson (24:59)
Gotcha. Yeah, yeah. You’re getting that secret knowledge.

Dave Foster (25:05)
without paying any tax. It’s going to go into our state and our real estate is going to go to our children tax free as an incredible legacy of wealth that they can start with. And I’ve literally got one family that’s now on their third generation.

Micah Johnson (25:23)
Wow.

Dave Foster (25:24)
Grandpa was doing 1031 exchanges with me when he started. He passed away. All his property went to his son. Now, we didn’t hear from his son for a few years, because he got the property tax free. But pretty soon, he was making money over and above what he inherited. So he started doing his 1031 exchanges. He died a few years ago. And now, his children knock on my door a few times a year.

Micah Johnson (25:37)
Right?

Dave Foster (25:53)
Three generations never paid tax. They live in Greenwich, Connecticut. Believe me, those people have cracked the code, but it’s available for everybody.

Micah Johnson (26:00)
Mm. Yeah.

yeah?

Yeah, love that. My wife’s from Connecticut, Greenwich. Woo, that’s a nice place. It’s good to in Greenwich. ⁓

Dave Foster (26:13)
It’s cold

and the sun never shines. Don’t kid me.

Micah Johnson (26:16)
Right, no, that’s where I’m from Florida. I don’t deal with it well. I’ve been up there. I’ve made it 10 days in a row is my longest so far. And then I had to run for the sun and I need it. Well, Dave, man, I appreciate all the knowledge you dropped on us, man, cause you nailed it for the real estate is a big umbrella. Rarely do you do, you keep doing what you got in doing. It always, you kind of adjust, you grow into it. And for those that are

looking to build exactly what you built, man, you laid it out. You’re laying out exactly that map to do it. And the fact that it’s three generations, that is powerful. It shows you what’s really possible when you leverage real estate as the tool it is. Learning how to switch those asset classes like you’re talking about when you get tired, just overall making sure you understand it. And that’s what I appreciate about someone like yourself. You’ve been there, you’ve done it. I like to learn from people who are using.

Right. You can learn a process and not be doing it yourself, but you’ve been on the side that signs the paperwork. You understand what it’s like. You know what it’s like for them to be sitting there looking at it too. And I think that’s the most powerful position for someone to come from when you’re working with them. Cause it’s just next level of trust that you can build. So for those out there that are listening in that, you know, want to find out more about you, the company, what you have going on, possibly touching base. What’s the best way for them to find you?

Dave Foster (27:33)
Start now because planning is key, but reach out to us at the1031investor.com. We’ve got education resources, YouTube videos on these types of things. We really want to make this the place where you educate so then you can execute.

Micah Johnson (27:50)
So there’s really no time too soon to reach out to you then. Love that. Excellent. So if you’re listening or watching and check the show notes, we’ll have all Dave’s links there. You heard him. Reach out. this is what we’ve talked about today lines up with what you’re trying to do, apply it, take that action, do it, got you where you were today, right? Nothing gets done without taking the action. We don’t bring professionals on here for no reason. We want you to learn from people.

Dave Foster (27:53)
ever.

Micah Johnson (28:16)
who are actively building businesses and doing these things in the industry. Cause this is a team sport. We all win together. No one knows how to do everything. So put people on your team, just like Dave. So Dave, I appreciate you being here, man. Had a great time. Love these kinds of conversations. Thanks everybody for joining us out there. If you got value from today’s episode, please like this episode, share it with someone else you think get value out of it. And if you’re not a subscriber yet, click that button.

We appreciate every single one of you that follow along out there with us. We’ve got more conversations coming up with operators, just like Dave, folks out there building a real business in the industry. Thanks for being with us. We’ll see you on the next episode.

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How 1031 Exchanges Build Generational Wealth in Real Estate | Dave Foster

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