Unlock Wealth: Mastering 1031 Exchanges for Real Estate Success

Erika (00:00.93)
Hey everyone, welcome to the Real Estate Pros Show. I’m your host, Erika, and I’m thrilled to be joined with Jon Hilley, the owner and CEO of 1031specialists.com. Jon Hilley’s been crushing it in the real estate space, and he has lots of information about how to navigate those complex 1031 exchanges. Jon, it’s so great to have you today.

1031 Specialists (00:26.586)
It’s awesome being here, thanks and thanks for listening.

Erika (00:30.872)
So for our listeners who aren’t that familiar with you yet in what you do, can you give us a quick rundown? What’s your focus and who do you serve?

1031 Specialists (00:41.69)
Yeah, so you’re a real estate investor, you own a property, and you’re about to sell it. You have one of two choices. You either sell and pay up to 40 % of your gains in taxes to the US government, or you do a 1031 exchange and defer those taxes. If you’d like to do a 1031 exchange, you are required to hire a firm called a qualified intermediary.

That is us, that is what we do. We play a very narrow role in your bigger real estate transaction. But if you hire us, you can get the tax benefit.

And so I founded 1031 Specialists a little over two years ago, and in two short years we are a top 10 firm in the industry already. And we really care that our clients have success. So whatever we can do to make your transaction successful, to make sure that you retain that tax benefit, that is our number one goal.

Erika (01:40.75)
So I know we have some listeners that are new to this. Can you go into it more? What exactly makes the 1031 such a powerful tool that people should be considering?

1031 Specialists (01:53.69)
1031 is probably the most powerful tool in real estate to compound your wealth. Now these rules are, this policy, these rules are absolutely not new. They’ve been around in this country really since the end of World War I, more than 100 years.

And a 1031 exchange allows you to sell your investment property. And if you purchase, you hit a couple of key deadlines, which we’ll get into, and you purchase another investment property inside of 180 days, you get to defer those taxes. Okay? And the taxes are, not just…

federal taxes. So it’s not just the 15 or 20 % federal taxes that anyone is subject to. You’re subject to, when you sell an investment property, up to four layers of tax. That includes the federal tax, any state tax, which in California is 13.3%. It includes this thing called net investment income tax. And then there’s another one called depreciation recapture tax. So all four layers of tax can add up to 40%. And with a 1031 exchange,

You get to defer every single one of them. And so what does that mean practically? Well, let’s say you’ve owned a building for I don’t know 15 years and You’ve got a million dollars of gains in this building. Okay? Well, if you’re sitting in California The next time you pay your tax bill, you’re gonna pay four hundred thousand dollars just on that property sale or

You hire a qualified intermediary like 1031 Specialists. You hit the two key exchange deadlines and swap into a different investment property, like a more productive investment property. And you get to defer the entire $400,000 in taxes. So the way I think about this is it is a totally free launch that the US government provides to real estate investors. Why do they do that?

1031 Specialists (03:57.018)
Well, they want to incentivize investment in real estate and building in this country, right? And so the thing about the 1031 exchange is it’s really simple to execute. All you have to do is plan and prepare ahead. And a lot of our clients, especially with the BBB, the bill that just passed,

The game really is, let me buy an investment property with a higher basis, okay? Let me depreciate it down. When I depreciate it down to zero because of the bonus depreciation rules, let me swap into a bigger, better investment property, a higher cash flow producing property. And you keep doing this over and over and over again in your career, and you’re gonna be left with a lot more money at the end of your career.

And so it’s a really powerful tool for investors to basically defer those taxes. And the way I think about that is it is a zero interest loan from the US government. So it’s a tax deferral strategy so you can keep your money working for you, invest in bigger and more productive properties, and be more successful at the end of your career.

Erika (05:14.506)
That’s great. Wow. That can really be a game changer for people out there. And I know you yourself, you have a lot of experience in the real estate and investing state and you’ve done a lot of deals. What advice would you have for people to keep things running smoothly with having so many things going on?

1031 Specialists (05:39.93)
The trick to being successful is just planning and preparing ahead and you know there are When you do a 1031 exchange, you just got to do a couple of things, right? Okay, you have to hire a qualified intermediary prior to closing. Okay from like mine You’ve got to identify what you want to purchase inside of the 45 days after the close of the sale of your first property

And then you’ve got 135 days following day 45, so it’s 180 days total, to successfully purchase one or more of the properties you identified. So, sometimes those timelines are concerning for people. But here’s what I say to that, okay? You live in a condo or a home and it’s your primary home. And let’s say you sell it tomorrow. Does that mean the day after you’re gonna be homeless? Probably not.

Right? Because you’ve planned ahead. Where are you going to live next? And the same is true for your investment properties in a 1031 exchange.

Use the time in advance of selling your property to plan ahead. know, many of our clients will sell on a Monday and close on their replacement property on Wednesday. And the reason they’re able to do that is because they’ve thought through what they want to purchase next. And there’s many strategies that we can talk about about how to be efficient at doing that and how to sort of mitigate that timeline risk if that’s something you’re concerned about.

Erika (07:07.982)
You talked about there kind of being this timeline that you have to follow. And I know you’ve done a lot of these. Have you ever had a moment where you’ve had to pivot fast?

1031 Specialists (07:24.762)
I think especially in this environment that we’re in today, it’s quite a bit more challenging, right? Because there’s a huge bid ask spread between what the seller wants and what the buyer’s willing to pay. And so unlocking those opportunities is quite a bit more difficult today than it was maybe 10 years ago. Here’s what you can do, okay? You can…

before you even sell your investment property that is, know, sort of marks the start of your exchange timeline, you can get your replacement property under contract and just make it contingent on the sale, right? Some of our clients, our more sophisticated clients will purchase options on a property. So basically paying an amount upfront to someone that says, I have the option to purchase this property at this price inside of the next six months.

So options are available for people. Some of our ultra high net worth clients are even doing reverse exchanges, okay, where you can go and buy your replacement property first and sell your current investment property within six months to complete your exchange. So there’s all these different things you can do to mitigate those timelines. But yeah, sometimes, you know, diligence fails and it’s close to the wire.

and you’ve got to hustle. But here’s what I tell people, okay? If you’ve got a quarter million dollar tax bill coming, for most people in this country, that is a full year’s worth of salary, okay? So treat this like a full-time job until you get it done, because that tax impact is so significant that…

It matters so much to your ability to continue compounding your wealth tax free. Right? And there’s a table that I’ve put out on social on X. And it sort of walks through the math of choosing to pay tax each time on your transaction versus choosing to defer the tax and do a 1031 exchange. It’s the same starting equity, same gains each time. And the only difference is the tax bill that you’re paying. Okay?

1031 Specialists (09:44.698)
And if you do one transaction, there’s obvious benefits there. But when you do one 1031 and then another 1031 and you keep doing them, because there is no limit to the number of 1031s that you can do,

The amount of compounding that happens there is extraordinary. And you will be millions of dollars wealthier at the end of your career if you choose to do a 1031 versus choose to pay the tax each time. That’s just what the math says. yeah, think there are things to navigate. are challenges that always come up in a deal. But treat this like a full-time job because it is worth it.

Erika (10:28.002)
That’s really solid advice, John. When we were talking earlier, you were talking about how you have lots of partners. I know a lot of our listeners are always looking to connect with people, build a network. What kind of advice do you have for them?

1031 Specialists (10:47.812)
Don’t be shy. mean, a lot of this business is built by us reaching out to brokers that have deal flow and other advisors, whether they’re financial advisors, CPAs, attorneys. And…

people are human, actually really like taking those calls. Especially brokers, which if you can build up as a real estate investor your broker network, you will see a lot more deal flow. Okay? And those brokers, what do they do all day for their job? They cold call. Cold call them.

Say hi, say hey, I’ve got this amount of money, I’m looking to do a trade in the next 12 months, in this area, at this price, who do know that can help me, or can you help me? And I think sort of unshackling yourself from the fear of calling someone you don’t know will generate just an enormous number of opportunities that you won’t see just looking online.

Erika (11:47.138)
Yeah, I love that. You were literally flipping the script by cold calling them. So you’re on that call now. What are you looking for in a good broker?

1031 Specialists (12:01.828)
I think for us, it’s a bit about qualifying the broker and understanding what they’re doing and what they’re seeing in their business. And it’s really like the 80-20 rule of life, where there’s 100,000-ish commercial real estate brokers in the country, and 20 % of them are doing most of the volume. And so you need to know that

And especially in that business where there’s quite a bit of turnover just because it’s so hard. It’s really hard to make 100 calls a day and do that for years and years and years. But yeah, finding the people that are doing big volume, finding the people that not only are doing a lot of volume and transaction work.

but that really serve as advisors to their clients. You know, it is one thing to go into a listing appointment with someone that is very wealthy that owns a building and says, here’s the marketing I’m going to do, here’s the comps, here’s where I’m going to sell this app for you, choose me. Okay? It’s a whole nother thing for the broker to take the content that we provide to them and say, hey investor,

Of course I’m going to, this is table stakes, of course I’m going to sell your building. Here’s the marketing plan, here’s all the stuff. I don’t want to talk about that right now. I want to talk about what do you want to do once you sell your building?

Do you want to hundreds of thousands of dollars in tax or would you prefer to defer those taxes? And if so, let’s talk about what’s next for you. What’s your next investment opportunity or area you’re looking in and let me see where I can be helpful. And so for us, the best partners for us kind of take the advisory approach in their ethos and their entire business because that’s really playing the long-term game.

1031 Specialists (14:03.324)
And so that’s what we look for specifically in partners. But yeah, and they’re looking for, in reverse, they’re looking for a qualified intermediary that answers the call in the third ring that will pick up the phone on Saturday at 8 p.m. to answer urgent questions and that cares deeply about the client experience.

Erika (14:26.648)
That’s great. I love what you were saying there. There’s so many nuggets to take from there about who you decide to partner with. It can make or break things with your business.

1031 Specialists (14:39.002)
Absolutely.

Erika (14:40.994)
Given your expertise, if someone is new in investing, what kind of advice would you give them knowing that they have the 1031 exchange available to them?

1031 Specialists (14:57.498)
I think I invest in real estate and the really sophisticated families I know invest in real estate largely for the tax benefits. Okay, use the tax code to your advantage, whether that is the new bonus depreciation rules, okay, whether that’s the 1031 exchange.

in whatever ways you can find the right CPA and financial advisor to show you the way even when you’re starting out early.

do that. Okay. The tax code is written to incentivize certain behavior. And one of those behaviors is really the building and investment of real estate in this country. So let’s recognize that. Let’s use that to our benefit. And man, like why, why would we not? That’s what the most sophisticated people in the world are doing. That’s why the rules are written the way they are. So my advice is, is, is really more on less on

what you buy and where you buy it and what dynamics you’re looking for whether you’re looking for appreciation of cash flow or whatever. It’s more about whatever you want to do and whatever niche you want to invest in. Look at the tax implications of doing it and how to mitigate the taxes in every single way that you can and you’re going to be way better off.

Erika (16:25.198)
Yeah, yeah, clearly. Well, John, we are so glad that you’ve been here dropping all this knowledge before we go. If someone wants to reach out, learn more about what you’re doing. Maybe they need services related to their 1031. What’s the best way to get in touch?

1031 Specialists (16:47.084)
I’m here, my team is here to basically, we don’t sell anything. We consult and we try to be helpful as you’re thinking through whatever is best for you. And the easiest way to reach out is…

You can visit our website, 1031specialistswithansattheend.com. can call us, 631-GET-1031 or 631-438-1031. Or you can shoot me an email, and I’m John, J-O-N, at 1031specialistswithansattheend.com. And yeah, hit me with any questions. All we do pretty much all day long is free consultations for people that have questions or want to think through a different structure that they’re doing.

And our job is to make you more successful as a real estate investor.

Erika (17:35.904)
I’d love that. John, we need more folks like you doing things the right way and helping people build that wealth and keep it.

1031 Specialists (17:45.914)
Thanks, Erika.

Erika (17:46.392)
For everyone listening, if you got value from this episode, make sure that you’re subscribed to the Real Estate Pros show. We’ve got more conversations lined up with heavy hitters like John who are out there building amazing businesses and helping others. We’ll catch you on the next one. So great having you, John.

1031 Specialists (18:05.082)
Thanks Erika.