How 1031 Exchanges Let Real Estate Investors Defer Taxes for Life | Dave Foster

Dave Foster (00:00)

I don’t want to stop now and start paying tax. And I don’t have to, but I can start to position my portfolio towards retirement and ultimately…

I don’t know if you know this, but the final tax hack of all is to die. I don’t recommend it, but we’re all gonna do it. When you die, your heirs get your real estate at a step-up in basis, which means they never pay any tax on it.

Meghan Escobar (00:57)

Hello, everyone. Welcome back to Real Estate Pros Podcast, hosted by Investor Fuel. I am your host today, Meghan Escobar, and I have the pleasure of sitting down with a return guest. And I’m so happy to have him here because a lot has changed in his world, a lot has changed in our world. And so we’re gonna bring some new ideas, some new insights to the show today. Dave Foster, owner and founder of The 1031 Investor. Dave, welcome back to the show.

Dave Foster (01:25)

Hey, it is awesome to be back. Good to see you, Meghan.

Meghan Escobar (01:28)

Absolutely. And I’m looking forward to having you back on to talk a little bit about some of the new things that you have going on. But first, I would love to just open up with who you are as a company with 1031 Investor. There are a lot of companies out there that are doing this kind of work, but one thing that really stuck out to me about you when I asked you, “What separates you from your competitors?” You said something that I think is really, really important, and you live in a world of education and strategic planning. And that is something I think is important because you’re not only there to create the transaction, you’re there from what I understand is to really get to know who’s on the other side of that table.

Dave Foster (02:10)

Yeah, it’s very true. And the reason why that is my laser focus and always has been for over twenty years now, is because that’s what we lived. I kind of buried the lead on you a little bit, but we used 1031 exchanges myself personally for a Minneapolis city girl and a Kansas farm boy who got married in Denver, Colorado, to move their portfolio of real estate across the country to Florida and end up sailing away on a fifty-three foot sailboat and raising their four children without ever paying a penny in tax on real estate transactions. And that was because I had discovered the 1031 Exchange. We planned for it, we used it, we looked ahead and said, “What do we need to do to keep this going?” And ten years to the day of setting the goal, we sailed away, the boat was paid for with tax-free dollars, and we raised our kids with our portfolio of vacation rentals that we had. That’s why I believe in education.

Meghan Escobar (03:15)

Wow, what a story. Thank you for sharing that. And with everything that you have going on and you’ve come so far along into your journey, I asked you how long you’ve been in the industry and you told me three decades, so…

Dave Foster (03:31)

Okay, that sounds really worse. Okay.

Meghan Escobar (03:34)

I’m sorry. He told me thirty years, guys.

Dave Foster (03:37)

Less than 30 years. Way less.

Meghan Escobar (03:41)

I thought it gave you some skin in the game, but I guess…

Dave Foster (03:44)

There you go. Just saggy skin, that’s okay.

Meghan Escobar (03:47)

Yes, that is okay. And every operator that I’ve ever had the opportunity to sit with, they has a moment in their journey that a deal that maybe had gone sideways or a time that they had to pivot really fast. Would you mind, Dave, sharing one of those moments for you outside of all the success that you’ve created?

Dave Foster (04:07)

Well, that was the whole emphasis of this entire thing. My biggest screw-up was my very first real estate transaction. I bought a property, I fixed it up, I put a renter in it, and we said, “We’re off to the races.” We sold it and we went, “Yeah, a sailboat, here we come.” And then my accountant said, “Hey, wait a minute, you gotta write a check to the IRS for thirty thousand dollars.” Nowhere in the plan was that.

And that was going to put our 10-year goal severely back. And that was when I started to research as a degreed accountant: What did I do wrong? What did I miss? And I found the newly statutory case law on 1031 exchanges. Wow. And that was the pivotal moment. From that moment on, everything we did was centered around using that. And that’s what allowed us to still reach our goals.

Meghan Escobar (04:54)

So that saved you from having to write that check.

Dave Foster (04:57)

Yeah. And if you think about compounding interest, Meghan, if I would have had that $30,000 working for me, like the 1031 Exchange does, instead of having to pay for the government, making 10% a year for 30 years, how much money would that be worth right now? Hundreds of thousands of dollars. That’s the power of the 1031 Exchange. And that’s why, as you see, over—it gets more powerful the longer a timeline you have. And again, what do we have to have with longer timelines? More planning, more strategy, more understanding of how to do it.

Meghan Escobar (05:32)

And your favorite word?

Dave Foster (05:34)

Education.

Meghan Escobar (05:35)

Always be learning, yes. With kind of pivoting into that, can you talk to us a little bit about what the next focus is for you, and the company maybe?

Dave Foster (05:47)

Right. Well, things have stagnated transaction-wise across the country for everybody. Either sellers haven’t come to their senses and started to lower prices, or buyers aren’t willing to come up, or nobody can make numbers pencil with interest rates the way they are. There’s a myriad of reasons why this is happening. But just from a one-to-one correspondence, if there’s less transactions, you’re going to see fewer 1031 exchanges. I’ve been through this rodeo a few times, we know it. So we’re all kind of sitting back going, “Okay, what’s next? What can we do?”

And I think for us, for our clients, for just people involved generally in real estate investing at any time, there are a couple things that we’ve started to plan for, and a couple things that everybody needs to plan for, and they center around:

First, the real estate cycle. I think you’ve got to get an understanding of what your interpretation of where the real estate market is so that you can start to anticipate what comes tomorrow. For us, we are hoarding cash because we feel like with the delinquency days starting to rise, there’s gonna be some buying opportunities. Now that’s not 1031, that’s my investing side, but it’s part of the real estate market.

We’ve also started to train and hire up some new consultants, anticipating that in the next year to 24 months we’re gonna see this thing finally bottom out and start to grow.

All of this illustrates one of my key factors that I live by, and that is that my involvement in 1031 exchanges, my use of them, and by doing them for others will allow me to react to whatever the real estate cycle is telling me at any time. Because with the 1031 Exchange, you’re not stuck in a certain class. You can sell any type of investment in real estate and buy any type of investment in real estate anywhere in the country.

So is it time to get out of Austin? Is it time to move back into California? That works. Is it time to get out of multifamily, if you can, and time to go into vacation rentals? That all works with the 1031. But it only works if you know where you want to go. And so I always tell my clients—one of my first questions when they call and tell me, “I want to sell my property, and it’s a 1031,” I say, “Why? What’s the why? Why do you want to sell? Is it an older property that you bought when you couldn’t afford anymore, and it’s got capital expense items looming?” That’s great. “Have you taken all the depreciation you can out of it, and it’s time to go buy a property where you can get new depreciation because you’ve got a great W-2 job? Is it time to buy more, or is it retirement? Is it time to sell several and buy one?” The 1031 Exchange allows you to adjust and do all of that without ever having to pay tax to the government. That’s beautiful.

Meghan Escobar (09:21)

Absolutely. I think—

Dave Foster (09:22)

No.

Meghan Escobar (09:23)

They get enough of our taxes in other ways.

Dave Foster (09:26)

Yes, they do. Now the second part of that is also what’s happening in my life cycle. Because just like the 1031 can respond and be used wherever the real estate market is, it can also be used to position me, right, wherever I want to be.

Meghan Escobar (09:44)

Your why, Dave.

Dave Foster (09:45)

Exactly. What’s my why? I am doing so many 1031 exchanges now for people who are going into vacation rentals. You know why? Because they’ve got a lot of other rentals, and they started having kids. Now I was a little alternative; for me it was, “I’m gonna exit all the way, get me on a boat.” But for these people, the opportunity to 1031, avoid tax, buy a property that’s going to generate income and that they get to start building family memories? What an opportunity, because that’s where they are in their life cycle.

For me, because I’m a very, very young 30-year veteran, is I’m starting to look at more passive opportunities. Larger opportunities, more things like the multifamily, the Delaware Statutory Trust, which are passive real estate syndications that I can buy into using my 1031 exchange dollars. Because again, I don’t want to stop now and start paying tax. And I don’t have to, but I can start to position my portfolio towards retirement and ultimately…

I don’t know if you know this, but the final tax hack of all is to die. I don’t recommend it, but we’re all gonna do it. When you die, your heirs get your real estate at a step-up in basis, which means they never pay any tax on it. You never pay any tax on it. Your estate never pays any tax on it. So all of those decades I have of deferred tax that I owe…

Meghan Escobar (11:20)

Mm-hmm.

Dave Foster (11:21)

It goes away, yeah. And my children get a lovely inheritance. So those are the two things that I see we’ve got a great future in helping our clients plan.

Meghan Escobar (12:09)

Sounds like a really good plan if it’s in place the right way.

Dave Foster (12:14)

Is that the key? The best plan. I used to be known as “ready, fire, aim” Dave. I’ve had to change that a little bit, so now I do aim a little bit more and fire later.

Meghan Escobar (12:24)

Good stuff. I didn’t know that. And that’s something I’m really happy to know. And I do come from a background of insurance and investments; I did that for 14 years and maybe I knew that somewhere along the way, but it was a great reminder if I didn’t, just to that—like that doesn’t carry over to your heirs. Like if it’s set up properly from the beginning, you can avoid…

Dave Foster (12:45)

Yeah, absolutely. Absolutely. And we’ve got a lot of people that’s what they’re doing. They’re gonna age, they’re gonna hold on to the property, make retirement dollars off of it. A lot of times they will put their children in charge of the assets so they no longer have to do anything with them, but they keep the property in their name. And that’s what keeps the 1031 deferral going.

Meghan Escobar (13:08)

Until death, exactly. Yeah. Good information, very good information. All right. Well, I know one thing that I do also want to bring up—we touched very briefly on it—it’s something that you newly launched and the nonprofit organization that you’re building on. I think it is something that is worth chatting about because of the way or where the world is today. We talked a little bit about middle class diminishing. And so you about a year ago launched Live to Love. Talk to us a little bit about…

Dave Foster (13:43)

Live to Love started out as a family foundation. It’s a 501(c)(3) now, specifically because of that. Again, back to my heart, which is to give people the tools to be able to better themselves. And when we see the middle class collapsing around us, there are people that are doing really, really well because why? They had the tools, they had a gifting, they had a drive, they’re making it work, and that’s awesome.

Meghan Escobar (14:06)

Yeah.

Dave Foster (14:06)

But there’s a lot of people who do not have that drive or don’t have those tools. And unfortunately, I’m not seeing those being given in the general education market. I’m not a fan of what we’re teaching in schools, how we’re teaching it—we can go all day on that. But to combat that, we started Live to Love, which is aimed at ground-level, boots-on-the-ground resources to people who have a drive and a desire to get tools in their hands.

We were launching some strong initiatives in financial literacy for young teenagers who don’t even know what a checkbook is, let alone how to balance one. You think about this: when’s the last time you touched a dollar bill? Maybe you keep cash.

Meghan Escobar (14:58)

I do, actually, yeah.

Dave Foster (15:00)

The other day one of my children came to me and said, “Dad, can you take this money? Because I don’t know—I can’t deposit it. Capital One doesn’t have an ATM anywhere close. Can you just Zelle me money?” Well, what does that money mean to him? It’s just funny money, yeah. It comes into our bank account, we see zeros, and it goes. You keep an eye on it. Financial literacy is huge. By the way, I’ve made mistakes. You probably haven’t, but maybe you did. We all…

Meghan Escobar (15:30)

More than I would like to admit, Dave. More than I would like to admit.

Dave Foster (15:33)

Some of those mistakes haunt us longer than others. And so we have a real heart for single parents. There it is—you notice she covered up the extra zero, it’s really a hundred. There’s money bags here. We’ve got a real heart for single parents that are trying to raise kids because they’ve got a double whammy: not only do they have to get themselves out of a hole, but they gotta raise their kids too, and they’re doing it in a stacked environment.

So there’s a lot of hungry people in the world, yeah. There is enough food produced in the world to feed the world right now. I don’t even want to contemplate, because it makes me so angry, why we can’t fix that. But since we can’t, it’s like the starfish analogy. That’s one of our initiatives. Are you familiar with that story?

There was a guy walking along a beach, and he came across this beach that was just full of starfish up on the beach, all dying because they were out of the water. And there was a young boy that was picking up the starfish, tossing them out of water. And the man says, “Hey, don’t you understand that’s not gonna help this problem at all? This isn’t gonna fix this. It’s not gonna make a difference at all.” And the young kid said, “Yeah, maybe.” He picks one up and throws it in. “But it made a difference to that one.”

We can’t fix everything. But I can make a difference for that one, yeah. And so that’s what we’re trying to do.

Meghan Escobar (16:56)

I’ve never heard that story and I will use it now moving forward. So thank you for sharing that with me. Thank you for sharing that with the audience. I’m sure there’s somebody else out there like me who has never heard that story, and it’s very simple and easy to resonate with.

Dave Foster (17:13)

Everybody’s got a neighbor, yeah. And every one of those neighbors has something that they could use to help.

Meghan Escobar (17:18)

That’s right.

Dave Foster (17:19)

As such is, we started to make a practice about a year ago: we sit on our front porch every day, never in the backyard anymore, ’cause it lets us meet the neighbors.

Meghan Escobar (17:28)

That’s so cool.

Dave Foster (17:30)

It’s all it takes, really.

Meghan Escobar (17:31)

Yeah. Yeah, and we talked about how you’re down south, I’m down south in Florida. I’m originally from up north where meeting neighbors, talking to neighbors, like it’s just not a thing. And down here, it’s just everybody wants to know you, right? It’s such a different environment and I think more of what we need today—human connection. As we are growing at such a vast level in the digital world, it’s so easy to get lost and caught up in that World Wide Web that we forget about the importance of saying hello to your neighbor.

Dave Foster (18:03)

Absolutely. If we could get it just a little bit away from the artificial, so we can see the real people behind…

Meghan Escobar (18:09)

Yeah.

Dave Foster (18:10)

The statistic. It’ll make all the difference in the world. By the way, pro tip: when you’re sitting on your front porch, make sure you got dog treats. And that way, the dog as they’re walking will always make them come over.

Meghan Escobar (18:19)

Well, the dogs always come over to me anyway. I think that says a lot about my energy. I don’t even need treats; they just wanna say hi and they get a pet. But I always like to give treats, too. So noted, noted, noted. Good stuff. Well, thank you for sharing that. I think that it was a perfect way to exit out of the show, just sharing where your passion is heading from somebody who’s been in such a high-level, fast-paced industry, constantly on the go, on the go, on the go, on transaction, transaction, transaction, right? Now it’s more of like: what can I do to impact that one starfish?

Dave Foster (18:57)

Well, and you know what I think just for people in general, yeah? For real estate investors in general, if you’ll stop trying to work so fast and start trying to work more strategically. I tell my clients all the time: the 1031 investor, meaning the client profile—the 1031 investor is a slow cooker. It’s a Ninja Pot. It’s not a microwave. Your best results are gonna come over time by doing it right.

Meghan Escobar (19:24)

Yeah, great advice. Great, great advice. And before we do wrap up, Dave, if anybody wanted to connect with you, whether to learn more about the 1031 exchange strategies or tax education, or Live to Love and how they can help grow, or maybe someone’s listening in and actually needs those services as well, what are the ways to connect with you on both ends?

Dave Foster (19:51)

Absolutely. YouTube education channel, articles, calculators, opportunities to talk to myself and my other consultants and help you strategize are all found at the1031investor.com.

Meghan Escobar (20:03)

Beautiful. And the nonprofit information is on there as well?

Dave Foster (20:08)

Well, it’s kinda still a little quiet, but ask me about it.

Meghan Escobar (20:12)

Okay. So connect with you, and then if that’s a conversation they want to, you’ll position it. Okay, beautiful. And we’ll be sure to grab those links from you so we can just drop them down below. Nobody even has to go to Google anymore; we can just click and connect directly to Dave. So we’ll make sure to have those listed below. Dave, thank you so much for taking the time out of your day to be here and sharing your wisdom, sharing your perspective. I definitely think that the audience will be getting some great insight from this show today. So thank you so much.

Dave Foster (20:47)

Great time. Thank you.

Meghan Escobar (20:48)

Absolutely. And for those of you that are tuning in, if you got any value from this, please be sure to hit like and subscribe. We’ve got conversations coming in like this every single day, like Dave, building real businesses with real people in real time. We’ll see you on the next episode.