How To Protect Your Investments
Real estate investing has always been seen as one of the ways to build wealth, but one topic often overlooked is the importance of tax strategies in maximizing returns.
Welcome back to episode 94 of “Inspired To Invest”
In today’s podcast episode, we had the pleasure of speaking with Dave Foster, a qualified intermediary for 1031 Exchanges and the founder of The 1031 Investor.
With over 25 years of experience in real estate, Dave has mastered the art of leveraging tax strategies to enhance investment portfolios. One key instrument in this regard is the 1031 Exchange, a provision in the tax code that allows investors to defer capital gains taxes when selling investment property, provided they reinvest the proceeds into another similar property.
The concept of the 1031 Exchange is fundamental for any investor looking to enhance their financial future. It essentially allows property owners to sell a piece of investment real estate and swap it for another without paying taxes on the profit at the time of the exchange.
This offers a unique opportunity for investors to grow their portfolio and defer tax liabilities, keeping more money in their pockets for reinvestment. What many do not realize is that this strategy is not just available to resident investors; even non-resident foreigners can take advantage of the 1031 Exchange, although there are specific procedures they must follow. This makes the concept of cross-border investments significantly more accessible for Canadian investors interested in the booming US real estate market.
Throughout the episode, Dave shared his own journey in real estate, referencing his very first acquisition, a duplex in Denver, which taught him valuable lessons about the importance of tax planning. He reflected on a situation that led him to write a check for $30,000 in taxes upon selling that property.
The realization of that unexpected cost became a wake-up call and prompted him to learn about the various tax strategies available, ultimately leading to his extensive knowledge of the 1031 Exchange. It is a common scenario for many beginning investors; they often overlook tax implications, resulting in significant losses. However, as Dave noted, the journey is filled with learning curves and opportunities to embrace education rather than quick profits.
One notable lesson that emerged from our discussion is that advanced planning is essential. Whether you’re in the realm of real estate or other forms of investment, taking the time to educate yourself and strategize can lead to better outcomes. Dave passionately articulated that real estate is not a “popcorn game,” an instant gratification venture, but rather a “slow cooker,” where success requires patience, time, and planning. This perspective is a refreshing reminder in a world that often seeks immediate results.
The episode also tackled the challenges associated with property management and the entrepreneurial spirit that drives investors like Dave. His energetic approach sees him engaging in a variety of real estate ventures—vacation rentals, commercial properties, and even agricultural land.
Each project brings its own set of challenges, teaching investors the importance of adapting, learning, and finding their unique investment niche. For Dave, and many like him, real estate investing is about understanding cycles, acting on opportunities, and ultimately building a legacy that benefits future generations.
In addition to discussing individual investment strategies, Dave also emphasized the significance of collaboration and joint ventures within the realm of investing. This approach offers not only shared resources and knowledge but also the ability to engage younger family members in building and managing their investments. As he transitions some of his investments into projects involving his children, he is actively laying the groundwork for intergenerational wealth—a compelling insight into how estate planning can shape a family’s financial future.
Listeners seeking real-world advice on avoiding costly tax implications won’t want to miss this enlightening discussion. By understanding the power of the 1031 Exchange, investors equip themselves with the tools necessary to navigate their financial futures with confidence and integrity.
Each of these insights underscores the core message: those looking to invest wisely and strategically should prioritize understanding tax implications, preparing in advance, and seeking out expert guidance where necessary. This episode not only sheds light on significant tax strategies but also encourages a more profound appreciation for the planning involved in building wealth through real estate.
Ultimately, in the ever-changing landscape of investment, those who equip themselves with knowledge and strategic foresight will emerge as the true winners.
To connect with Dave go to @davefoster1031 on social or https://the1031investor.com online.
Thank you for KnightsbridgeFX for bringing us this month’s episodes. To learn more about how you can save money when you have currency to exchange, go to https://knightsbridgefx.com and on social @knightsbridge.fx.
“Inspired to Invest” is proud to support the Beyond Success Program, a not-for-profit financial literacy program for students, launched by More To Give & MAK Investments. Find out more at @more2give.ca. Thank you for tuning into “Inspired To Invest”.
Join us again for our next episode May. 21
Thank you for tuning into “Inspired To Invest” hosted by Serena Holmes and remember, when you invest in yourself, the sky’s the limit!
Real Estate Podcast Transcript
Speaker Names
Serena HolmesHost
00:03
Hey everybody, welcome to Inspired to Invest. I have Dave Foster with us from St Petersburg, florida, today. He’s a qualified intermediary for 1031 Exchanges and founder of the company, the 1031 Investor. As a multi-industry visionary, he has more than 25 years experience working in all phases of real estate investing and he brings his clients a fresh perspective and a clear vision for strategic development using tools in the tax code such as the 1031 exchange as well as section 121, which is the primary residence exclusion. As an investor himself, he views each investment as a unique opportunity to maximize returns. A degreed accountant with a master’s in management, dave also just released a bestselling book called Lifetime Tax-Free Wealth, so make sure you add that to your Amazon cart the Real Estate Investor’s Guide to the 1031 Exchange. Thank you for being with us today. How are you today, dave?
Jay ConnerGuest
00:52
Well, I’m doing great, although when I looked out my window today, thank you for confirming that I’m in St Petersburg because I swear it looked like Michigan out there.
Serena HolmesHost
01:02
Yeah, I’ve seen some of that. I think I saw a picture of Pensacola and the beach with the snow and I was like, oh, it looks like where we are.
Jay ConnerGuest
01:09
My kids actually drove all the way to Tallahassee just to be in a snowball fight.
Serena HolmesHost
01:14
That’s so funny. Well, I mean, the reality is, I’m sure it won’t last for you guys quite as long as us. So I’m just outside of Toronto and we’ve gotten pretty steady snow this year compared to the last few years.
Jay ConnerGuest
01:27
Indeed.
Serena HolmesHost
01:28
Awesome. Well, let’s just dive right into it. So obviously you’re very passionate about real estate investing, but also how to strategically maximize tax efficiency, and I think that’s something that I always find really interesting when I do speak to investors in the States that you guys have the 1031 exchange, because here in Canada we have 66% capital gains and we’re basically taxed it out. So maybe you can dive into where it all began for you and then how you started to figure out maximizing these different opportunities.
Jay ConnerGuest
01:59
Right, well, at some point well, actually it was early on when my accountant informed me that I had a silent partner on every real estate deal I did.
Serena HolmesHost
02:13
Yeah.
Jay ConnerGuest
02:13
And his name was Uncle Sam.
Serena HolmesHost
02:15
Yeah, of course.
Jay ConnerGuest
02:16
Fortunately Uncle Sam didn’t take 66%.
Serena HolmesHost
02:19
Yeah, yeah, that’s new for us.
Jay ConnerGuest
02:20
Just in the last few months, but I wrote a check for $30,000 on my first real estate deal and that just was not part of the plan.
02:31
And when I think back now, 35 years later, what could that $30,000 have done if it would have stayed with me? And it reminded me of something that a mentor once said to me, which is, yeah, you do make your money in real estate when you buy. That’s what everybody says, he said. But, dave, the true measure of wealth is not how much money you make, it’s how much you keep. And so that’s when I just went on a lifelong search of trying to become efficient.
03:06
I love how you used the word tool to describe it. So many people use loophole and dodge.
Serena HolmesHost
03:15
I know I talked to someone about that recently and they’re like I don’t know. You know we were talking about compensation and I said you know, is this okay if we invoice my business Because obviously it’s more efficient from a tax perspective, it costs him less. Make me more. He’s like I don’t know about these. You know, he kind of reworded it. He started to say loophole and he’s like you know, tax optimization.
Jay ConnerGuest
03:35
I was like well, why wouldn’t you Like you’re silly not to Well, another mentor told me once, challenged me from that way of thinking exactly he said stop looking at the tax code as the way in which they take your money and instead start looking at it as a behavior incentivizer.
03:56
The reason there are things in the tax code like the 1031 exchange are because they want you to do a certain behavior and if you do that, you’re rewarded. That’s what I started doing and we were able to use it ourselves to fund an entire lifestyle, and I’ve done it for thousands and thousands of clients, and it all stems around the fact that in the United States, the government wants a vibrant, real estate industry.
Serena HolmesHost
04:27
Yeah, understood Now for someone that’s listening that has never heard of the 1031 exchange. Can you explain a little bit about what that is and how you can leverage it to minimize your tax impact?
Jay ConnerGuest
04:38
Yeah, very simply. Anytime you sell anything right, you pay tax on profits. Anything right, you pay tax on profits. But when you sell a piece of real estate, if you use the 1031 process, which means you’re going to buy new investment real estate worth at least as much as you sold then you get to indefinitely defer paying all of that tax and all of the depreciation write-off that you’ve taken on that. So in other words, you’re getting to use the government’s money for your benefit and as long as you keep that moving forward, you will never pay the tax.
Serena HolmesHost
05:18
Now, how does that work at the end? You know, obviously we don’t live forever. So how does that work when you’re passing a portfolio down to your children, or what would be the best, the most efficient way to do that with a portfolio? I don’t know if that’s necessarily connected to the 1031, but, like just as a whole, what do you think is the best?
Jay ConnerGuest
05:35
Oh, absolutely it is and it falls in. If you don’t mind, we can kind of turn this into a little discussion on what I call the four D’s of 1031 investing. So we talked about the fact that it’s indefinitely deferred, which you picked up on. We get to keep using that money for ourselves as long as we want. That’s the power of compound interest, because you’re getting to take somebody else’s money, make money for yourself, then you make money off of the money you made, et cetera, et cetera. Now the second pillar of the 1031 exchange is that it allows you to take advantage of any place that you find the real estate cycle to be, because you can exchange from any type of investment real estate into any other type?
06:28
Is it time to move into commercial single family industrial? Anywhere in the United States if the property you’re selling is in the United States, so you could move from areas of high appreciation to areas that are just now starting to percolate. It’s a beautiful way to take advantage of market efficiencies and build your portfolio.
Serena HolmesHost
06:54
Now, is there any limitation for people that are non-resident? So obviously-.
Jay ConnerGuest
06:58
There actually are, so does the tax laws apply.
Serena HolmesHost
07:02
Like I know, we’ve got the tax treaty, but do you know if there’s any differences?
Jay ConnerGuest
07:06
Anybody, no matter any taxpayer, can do a 1031 exchange. Even foreign nationals can do 1031 exchanges, but there are special ways that they have to do them. What most of our Canadian investors will do once they figure this out because it’s very difficult if you own the property in your own name but you’re not a US-based taxpayer, it can be done, but it’s probably not a discussion for today. We’ll talk you through it. But what most of our investors will do is they will form domestic entities, american US LLCs. Those LLCs can absolutely do 1031 exchanges. So, yes, it’s available for everybody.
Serena HolmesHost
07:50
Okay, yeah, I just wanted to double check on that. Now, in terms of where your investing journey started, can you talk a little bit about your first real estate acquisition and then kind of what your portfolio looks like at the moment?
Jay ConnerGuest
08:02
My first acquisition was a duplex in Denver. My wife and I wanted to get off the corporate train and the Minnesota girl, the Kansas farm boy living in Denver, decided they wanted to buy a boat and sail the seas. So that was the impetus that started our journey, and we saw one better way to do it than to become real estate investors. Somebody yelled it’ll be easy.
08:32
And so I bought a duplex, fixed it up, put renters in it, later sold it, and that incurred the $30,000 tax bill Because I did not know about the 1031 exchange and there was a lawsuit that was settled right at that moment that changed the whole landscape so that it was going to become usable for everybody. So from that moment on, we started doing 1031 exchanges and taking advantage of the primary residence exemption to craft our portfolio from Colorado to Connecticut, to Florida, where we bought a 53-foot sailboat with tax-free dollars and raised our four children on board, while living off of our vacation rental portfolio Wow, for 12 years.
09:23
That’s awesome so if you have a sailboat.
Serena HolmesHost
09:27
What would you say is the coolest place or your favorite place that you’ve traveled to?
Jay ConnerGuest
09:33
Actually it’s very accessible here in the United States. Fort Jefferson or the Dry Tortugas, a Civil War fort. That’s about 80 miles off the coast of Key West. There’s a little island with a Civil War fort. Wow, it’s so much fun yeah.
Serena HolmesHost
09:50
I’m familiar with that. My first rental property was actually a short-term rental in Florida. So I definitely wish that I was aware of the 1031 exchange, because I bought it when the dollar was at par and One of those units that it was actually not really very profitable, like if you could book January to March. That was always booked. You can book it five years in advance, but we had a lot of vacancies so I decided to sell it after that four year period and I didn’t really, you know, take a significant hit when it came to taxes because of the losses. But looking back, like if I knew then what I know now, like I would have shifted that maybe into like a multifamily property in Florida because the cap rates are strong, your rent rolls are more favorable. So there’s a lot of things that I could have done and you know, especially now, like our dollars, obviously not in the greatest position.
10:38
So it would have been nice to have kept that money in the United States and take advantage of that, but I, you don’t know what you don’t know right.
Jay ConnerGuest
10:44
Well, and that’s exactly what we were talking about when you were able to look at where the market is, the 1031 can be adapted to fit it, yeah.
Serena HolmesHost
10:53
Yeah, yeah. So when?
Jay ConnerGuest
10:53
I saw that.
Serena HolmesHost
10:54
I was kind of like what do I do now? Right? So it’s just like a lack of education at that point in time, but it’s definitely something where I know a lot of Canadians that invest in the US for a number of reasons, but that’s definitely a very big one. Now you talked a little bit about just you know, real estate investing will be easy, that some people said. So I assume that there’s a story there. Can you talk a little bit about some of the challenges and obstacles that you have experienced as you’ve grown and shifted your portfolio?
Jay ConnerGuest
11:21
Well, I think everybody gets the glamorous idea that being a landlord is hands-off. Yeah, you know you. Just you buy property, there’s people that live in it and checks come to you every month. That’s really not the reality, first of all, yeah, so people find that out. For me, there is a very unique challenge that my wife has had to live with for 35 years now, because I never met a deal I didn’t want to do and I have a very bad case of curiosity which killed the cat but makes me want to endeavor into any type of real estate investing. So she said to just hang on for the ride, as I have moved from typical rentals to commercial development. I built a house that became a major motion picture set. We did vacation rentals. I’ve done subdivisions. There’s learning curves with every bit of it.
Serena HolmesHost
12:26
Yeah.
Jay ConnerGuest
12:27
And you just have to learn to live with those learning curves. Yeah, and some people are smart enough to once they get through the learning curve, they then repeat over and over and over again. Yeah, that just bores this ADHD guy terribly. So I know sooner, get the learning curve figured out, then I’m off to a different type of investing. So that’s the challenge that we’ve dealt with, but it’s been fun. We’re at a point now where we’re actually starting to look into legacy investing and for me that still fits with the 1031 exchange, because we are still converting properties from investment into our primary residences, where we’re able to slowly convert some of the deferred tax dollars into tax-free. I’m now investing with my children and younger relatives to 1031 into properties that they manage. So it’s a great way to joint venture.
13:33
And you asked about the end of life scenario. That’s the fourth D, which is not defer, it’s to die. We’re all heading there. But if you die owning real estate, all of the profit from all of those years that was deferred in the 31 exchanges is wiped away. So my heirs will inherit those properties that we’re joint venturing on right now. They will inherit them. They will not pay the tax. My estate will not pay the tax, I will not pay the tax. My estate will not pay the tax, I will not pay the tax. So really, if you follow the model long enough, it actually becomes tax-free.
Serena HolmesHost
14:19
Wow, yeah, that’s incredible. Well, on that note, we’ll just take a really brief break from our sponsors and we’ll be right back. Hi, everybody, welcome back to Inspired to Invest. I’ve got Dave Foster here with me and we’re talking about maximizing the use of the 1031 tax exchange in the United States and how you can essentially save on your capital gains taxes as long as you’re buying another property within a certain window after you’ve sold a property. Now we’re talking about some of those ways to optimize tax and some of your challenges and things like that. What I want to know is what would you say is one of the craziest things that you’ve ever experienced as a real estate investor?
Jay ConnerGuest
14:55
Oh, my goodness, Crazy things, you know. Actually, one of the craziest things now was a client that I’m actually currently working with who wanted me to come down and personally supervise some of the document transfers, but he lives in a nudist colony. But he lives in a nudist colony and I just went really, and politely declined the opportunity. Unfortunately, he still wants to work with us, but I was trying to figure out where do you put your pen?
Serena HolmesHost
15:34
Yeah, you got to wear a backpack. That’s funny. Now, when it comes to things like lessons and advice like obviously these strategies just in themselves are probably some of the best advice someone could have. But just in your journey, what would you say are some valuable lessons that you would want to pass along to someone starting out?
Jay ConnerGuest
15:49
There is. You cannot put a price on the value of advanced planning.
Serena HolmesHost
15:58
Real estate investing.
Jay ConnerGuest
16:00
I know in recent years it’s kind of felt like it oh, you can buy it, sell it tomorrow. It’s a popcorn game. No, it’s not a microwave kind of thing, it’s a slow cooker. To take advantage of it, you need to spend time, because any amount of planning that you do that doesn’t result in a deal is still education and education.
16:25
It’s like I used to love when the stock market investing way back when it was just becoming vogue for the the, there were the beardstown ladies and all sorts of investing clubs were cropping up. You would go in. People would start their careers by first doing practice investing. So there were programs where you could pretend that you had a thousand dollars you start investing in, you get to see how you do. Well, real estate’s the exact same thing. It just moves a little bit slower. You’ve got to practice to find the niche that you really like, what works for you, and particularly with the 1031 exchange, the longer you can give yourself to be able to do it and plan, the better the results are going to be.
Serena HolmesHost
17:11
Yeah, yeah, no, that makes perfect sense. Now, what would you say is next for you? Obviously, you’ve done a lot, but would you say you’re more focused now on helping your family build well? Like you know, I feel like you’ve done a lot, um, but would you say you’re more focused now on helping your family build well? Like you know, I feel like you’ve probably reached a certain level of success for yourself. So what’s your primary focus at the moment?
Jay ConnerGuest
17:27
yeah, well, we are still, because I just love helping people with the 1031. So you’re absolutely right, we’re doing legacy building, uh, using the 1031 exchange with our younger next gen, and we’re also training some of them, because my kids all learned the six requirements of the 1031 exchange by the time they were like seven. So now they’re graduating, now they’re economists and they’re real estate professionals, and we’re gonna continue the role of helping others with 1031 exchanges. I’m now starting to move my own, investing personally into more passive opportunities and into agricultural land. Okay, cause I really see those are the two. Yeah, it moves very, very slowly, but that’s okay, because that’s the one thing they’re not making any more of. So land may not be in the path of progress now, but it will be sooner or later. So what better way to position our relatives and our descendants in the future?
Serena HolmesHost
18:31
Now for your passive real estate investments. What kind of things are you looking at?
Jay ConnerGuest
18:35
I’m doing two different things. It’s kind of problematic with the 1031 exchange because one kind of problematic with the 1031 exchange? Because one of the requirements with the 1031 is that you sell real estate and you buy real estate. So a lot of your listeners are going to be familiar with the term syndication. That’s the big word these days. For the last 15 years. A syndicator will buy a piece of property and they’ll bring in investors to invest with them. They will run it, so it’s totally passive for the investors. But there’s a problem with that with the 1031 exchange because what the investors are buying is not real estate.
Serena HolmesHost
19:17
Right, it’s a share.
Jay ConnerGuest
19:18
Exactly, so you can’t do the 1031. Right, so what we will do, and what our clients are doing, is we will sell real estate, do a 1031 exchange and let me toss some numbers, but it’ll make sense. They sell a property for 500,000. It’ll have $200,000 in loan, so they have $300,000 of cash. They need to buy $500,000 in real estate, so they’ll buy a house for $250,000 cash.
19:50
They’ll take the other 50,000. They’ll use that as a down payment on a $250,000 house. So at the end of the day they bought enough, but they have their equity concentrated and once that equity is concentrated in the free and clear house. They’ll refinance it.
Serena HolmesHost
20:09
They’ll pull that cash out Right, because that’s taxed, and then invest in the syndication.
Jay ConnerGuest
20:14
That’s exactly right.
Serena HolmesHost
20:15
Yeah, yeah. No, I understand that completely Now in terms of a favorite quote, since the name of this podcast is Inspired to Invest.
Jay ConnerGuest
20:25
I always like to ask people if they have a particular quote that motivates or inspires them. It’s actually a verse of scripture where Jesus said the two greatest commandments in the world were to love the God with all your heart and strength, and to love others as yourself. If you take care of those two things, the rest of life just follows.
Serena HolmesHost
20:50
Love that Now for anyone that wants to get in touch to learn more about what you do and some of these strategies. What’s the best way for them to find you?
Jay ConnerGuest
20:56
Best way to find us The1031investorcom. Once you go there. Youtube opens up calculators, open up articles, open up. You got the opportunity to talk to us. Just go to the1031investorcom.
Serena HolmesHost
21:12
Great Thank you, and we’ll include that in the show notes below, Of course. Thank you for taking time out of your day to be with us and for anyone that is watching or listening. We appreciate your time. Make sure that you have followed along at Inspired to Invest Podcast on social and remember, when you invest in yourself, the sky’s the limit. Thanks again.