Are you looking to maximize your real estate investments while minimizing tax liabilities? In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Stephen Haskell, Vice President of 1031 Exchange Sales at RealtyMogul, to explore powerful strategies like 1031 exchanges, Delaware Statutory Trusts, and Qualified Opportunity Zones. Whether you’re an experienced investor or just getting started, this episode is packed with actionable insights to help you build wealth and diversify your portfolio.
In this episode, you will learn:
- The tax implications of property sales, and how a 1031 exchange helps
- How to prepare for a successful 1031 exchange, including strategies to meet the strict identification and closing deadlines.
- What a Delaware Statutory Trust is (DST), and how it can provide diversification and a hands-off investment option.
- How Qualified Opportunity Zones (QOZs) work and their benefits, including tax deferral for non-real estate assets and tax-free appreciation after 10 years.
- The latest trends in real estate investing, including a discussion on the use of technology to optimize investment decisions.
- And more!
Resources:
www.realtymogul.com | stephen.haskell@realtymogul.com | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by a special guest, Stephen Haskell, Vice President of 1031 Exchange Sales at RealtyMogul. With a deep-rooted expertise in investment and real estate, Steve is here to shed light on the intricacies of 1031 exchanges and other key topics in the personal investment landscape.
Steve’s impressive career includes a role as Senior Vice President at a top investment firm, where he worked closely with clients navigating 1031 exchanges and direct investments. He also led the San Diego office at Kay Property and Investment, establishing himself as an authority on Delaware Statutory Trusts (DSTs) and passive real estate investments. His strategic insights have helped facilitate hundreds of millions of dollars in real estate investments through various private securities.
In addition to his financial expertise, Steve brings a unique perspective from his 14 years of service as an officer in the United States Air Force. Stephen, welcome to the show.
Stephen, welcome to the show.
Thanks, Marc. It’s a pleasure to be here.
Understanding the 1031 Exchange
Can you start us off by explaining what a 1031 exchange is, and why it’s beneficial for real estate investors?
Sure. The 1031 Exchange has been around for nearly a century. Every few years, it faces some uncertainty, often when a new administration takes office. For instance, the Biden Administration included a proposal in its Blue Book to limit or eliminate the 1031 Exchange. Despite this, the program is so deeply integrated into our economy that eliminating it would be devastating. Extensive research supports its importance, and it’s clear that it’s here to stay.
The 1031 Exchange allows real estate investors who own non-owner-occupied properties — real estate held for business or investment purposes — to sell a property and reinvest in a “like-kind” property to defer taxes. A “like-kind” property refers to one held for business or investment purposes. It doesn’t include your primary residence or a vacation home, but it could be raw land, an Airbnb, a medical building, a hotel, or a multifamily complex.
By utilizing a 1031 Exchange, investors defer taxes such as state and federal capital gains taxes, income taxes, depreciation recapture tax (which can be as high as 25%), Medicare tax, and other potential local taxes. Without the exchange, these taxes can amount to 30-40% of the sales price of a property. The ability to defer these taxes helps investors preserve capital and family wealth, which is especially critical since real estate often represents a significant portion of their net worth.
Key Considerations for a Successful 1031 Exchange
You mentioned the depreciation recapture tax, which is something people often overlook. For example, if you buy a property for $1 million and later sell it for $2 million, you might think you have $1 million in capital gains. However, because depreciation lowers your cost basis annually, you could end up owing more than you anticipated. This makes the 1031 Exchange even more beneficial.
Exactly. When you account for the tax consequences of selling actively managed real estate, the taxes can consume much of the profit. Add the costs of buying and selling real estate, and it’s clear that the 1031 Exchange is a significant advantage for investors. It’s especially useful for those looking to exit active management, diversify their holdings, or relocate investments to more landlord-friendly states, like moving out of California or New York.
Some people shy away from the 1031 Exchange, thinking it’s too complex. Can you walk us through the process? Is it as daunting as it seems?
It can feel overwhelming, which is why I recommend starting months before listing your property. Once you sell, the clock starts ticking. From the day escrow closes, you have 45 days to identify a replacement property and 180 days to close on it. This timeline can feel tight, especially considering due diligence tasks like inspections and third-party reports. If your selected property falls out of escrow, you could face tax consequences.
Preparation is key. To comply with IRS rules, you must:
- Purchase a property of equal or greater value.
- Reinvest all proceeds through a qualified intermediary (QI), who holds the funds from your sale to ensure you don’t touch them, avoiding what’s called “boot” (taxable cash).
- Meet the timelines and maintain consistent title ownership — e.g., if you sell under an LLC, the replacement property must also be purchased under that LLC.
Replacement Property and Debt Considerations
What happens if the property I sell has debt? For instance, if I sell a $1 million property with $500,000 in debt, how does that affect the replacement property?
While you need to replace the debt, the primary IRS rule focuses on purchasing a property of equal or greater value. Using your example, escrow would pay off the $500,000 debt and send the remaining $500,000 in equity to the QI account. You’d then need to acquire $1 million in property — this could be achieved by combining the $500,000 equity with a new $500,000 loan, or by adding more cash to reduce the loan amount. The key is meeting the equal-or-greater-value requirement.
Some investors want to transition from full ownership to a fractional ownership model, like becoming a limited partner in a larger project. How does titling affect this?
The IRS requires consistent titling between the sold and replacement property. However, the Delaware Statutory Trust (DST), approved in IRS Ruling 2004-86, provides a solution. With a DST, investors can sell a property and reinvest in fractional ownership of larger assets. For example, at RealtyMogul, we help clients diversify by investing in multiple assets — a piece of a Walmart in Texas, a multifamily building in Raleigh, a self-storage unit in Nashville, and a medical building in Washington. DSTs offer turnkey solutions, with properties already stabilized and managed. They’ve grown in popularity over the last decade due to their flexibility and ease of use.
Delaware Statutory Trusts (DSTs)
How does it work in terms of the Walmart or that self-storage? Is that an established entity? In terms of the fractional ownership that they’re buying, who are they buying it from? Is it the sponsor? Because a lot of times you see, “Okay, we’re going to raise capital for a project, here’s the cap table,” and everyone can see what it is, and then the project starts. But here it looks like the project has already started since not everyone is 1031 exchanging at the same time. How does the ownership and the shares work in that sense?
Great question. We also have another 1031 vehicle called the Tenants in Common (TIC), which operates much like what you just described. We work with over 100 sponsors who raise capital with tenants in common, usually through 1031 exchanges. They line up the capital, buy the property all at once, and then there’s some closing risk. This can be unnerving for investors in a 1031 exchange because if the sponsor can’t close on the asset, the exchange could fail unless a backup option is in place. If you’d like, we can discuss that further.
In a DST (Delaware Statutory Trust), it works differently. The sponsor — the company that buys and manages the property for investors — first purchases the property outright. The DST itself holds the title. If you search public records, you’ll see something like “ABC Delaware Statutory Trust” as the owner.
Typically, the property is stabilized and cash-flowing. Revenue flows from the lease into the sponsor’s bank account. As 1031 exchangers come in, they buy fractional pieces of the DST. Closing on the trust usually takes three to five business days. Once the investor’s funds are in, revenue distribution starts immediately.
Once the sponsor raises enough capital to match the property’s purchase price, the capital raise ends. No additional funds can be raised, and the investors collectively own their proportional share of the real estate. They receive a pro-rata share of the Net Operating Income (NOI) and any appreciation when the property is sold.
Does the share price that investors purchase change over time? For example, if the trust purchases a property for $1 million and a year later the property is worth $2 million, does a new investor buy in at the $2 million valuation, or is it still at $1 million?
Unlike open-ended funds where valuations fluctuate and investors can enter at different prices, a DST is a closed-end entity. The price is fixed at the beginning of the capital raise. Whether you invest on the first day or the last, the amount you pay and the ownership share you receive are the same.
What’s the typical lifecycle of a DST? Are there any DSTs that go on indefinitely, or is there always a set timeline, such as five or 10 years?
On average, a DST is held for five to seven years. This timeframe can vary based on market conditions. The real estate market has been strong over the last 10–15 years, so hold times might extend in the future. Sponsors target the 5–7 year range, but unexpected opportunities or market shifts can lead to earlier or later sales.
One key factor is the debt structure in a DST. Most DSTs have loans with a balloon payment at year 10. Early in the loan term, prepayment penalties are common, creating a sweet spot for selling between years five and seven.
It’s also important to note that DSTs cannot refinance. The debt terms are fixed when the property is acquired, which means the property must be sold before the balloon payment. While this restriction adds some risk, it simplifies the investment for 1031 exchangers who don’t need to secure loans themselves. For example, if a DST has a 50% loan-to-value ratio, an investor putting in $100,000 essentially controls $200,000 of property — $100,000 in equity and $100,000 in debt — without personally signing for the loan.
Post-DST Sale Options
What are the options when the property owned by the DST is sold?
When a DST property is sold, investors have four options:
- 1031 exchange into another DST
- 1031 exchange into property they own outright
- Pay taxes on the proceeds
- Combine the above options
If I choose to pay taxes, am I paying on gains since I’ve owned the DST, or does it include gains from all previous 1031 exchanges?
It’s cumulative. As long as you continue 1031 exchanging, taxes are deferred. However, if you decide to liquidate and not 1031 exchange, you’ll owe taxes on all prior gains and depreciation recapture from every property you’ve rolled over.
Due Diligence and Investor Strategies
Okay, makes sense. Now, let’s pivot to due diligence. How does RealtyMogul vet DSTs for the platform, and how can an investor determine if a specific DST is a good choice?
This is an important topic, especially since real estate is not immune to market risks. At RealtyMogul, we lead with transparency. If you consult with us, we’ll highlight potential risks and ensure you understand the pros and cons.
Our broker-dealer, RM Securities, conducts extensive due diligence on DSTs before listing them on the platform. This includes:
- Background checks on the sponsor’s leadership team.
- Reviewing third-party reports like appraisals, engineering surveys, lease audits, and environmental studies.
- Raising questions with the sponsor to address any concerns.
Our investment committee, led by our CEO Jilliene Helman, goes beyond “box-checking” due diligence. They evaluate whether they would personally invest in the property. They examine submarket conditions, fee structures, and whether the property’s potential growth is sufficient to overcome initial costs.
If a deal doesn’t meet these criteria, it’s rejected — even if it meets standard industry requirements. This approach may limit the number of DSTs on our platform, but it gives us confidence in the quality of offerings.
We also help investors build customized portfolios to diversify their holdings, reduce concentration risk, and manage potential market volatility. That said, this is real estate, so while diversification helps, market conditions still play a role in outcomes.
Qualified Opportunity Zones (QOZs)
Yeah, that makes sense. One other topic I wanted to bring up is Qualified Opportunity Zones (QOZs). A lot of people have been hearing about them recently. Can someone do a 1031 exchange into a Qualified Opportunity Zone? Maybe you can explain how they fit in, especially considering we’ve been discussing 1031 exchanges and Delaware Statutory Trusts (DSTs) for tax deferral. Qualified Opportunity Zones seem to offer not just deferral but also elimination of some capital gains. Are there still opportunities in QOZs? I know there was a deadline at one point for investments — are those still available?
Yes, there are still opportunities in Qualified Opportunity Zone funds, but many benefits have phased out. Previously, there was a step-up in basis, allowing investors to eliminate part of their tax consequences by investing in QOZ funds. Now, you can only defer taxes until your 2026 tax return. However, if you hold your investment in a QOZ fund for at least 10 years, any appreciation upon sale is tax-free. That big step-up in basis is still a key benefit.
Another advantage is that QOZs don’t require a qualified intermediary or the same tight timelines as 1031 exchanges. Many clients who fail their 1031 exchange — whether due to missed timelines or target properties falling out of escrow — use QOZ funds as a backup. These funds are also great for assets like stock, businesses, or art, which don’t qualify for 1031 exchanges.
That said, QOZ investments often involve doubling your basis through significant improvements, which can include construction and taking on debt. This introduces more moving parts and development risks, compared to DSTs or stabilized assets, which are much less dynamic.
You mentioned how QOZs can act as a hedge if someone’s 1031 exchange falls through. Are there other strategies for sellers who are nervous about potential failure of a 1031 exchange?
Definitely. We often hedge closing risk using different IRS identification techniques through the qualified intermediary. The IRS allows three main rules:
- The Three-Property Rule: Identify up to three properties, with no price limitations.
- The 200% Rule: Identify properties worth up to 200% of your sale price, with no limit on quantity.
- The 95% Rule: Close on 95% of the value of the identified properties. This rule is rarely used.
Using these rules, we create backup options. For instance, if a client identifies a primary property but it falls through, we reserve DSTs as backups in their identification list. DSTs are advantageous because their prices are fixed, due diligence is complete, and they’re ready for closing. This setup ensures clients can fall back into a safe option if their primary choice doesn’t work out, avoiding tax consequences.
Close coordination with CPAs and intermediaries is crucial to ensure compliance with IRS rules when setting up these backup options.
Trends in Real Estate
What trends are you seeing in the real estate financial markets?
Real estate has become very expensive, which is pricing out younger generations, like millennials and Gen Z. Many of my clients, who are long-time owners with significant appreciation, are seeing their properties yield very low returns on equity — often 2-3%, especially in coastal markets.
Fractional ownership models like limited partnerships, LLCs, DSTs, and tenants-in-common structures are becoming more popular. These allow diversification, reducing the risk of being overexposed to one property or market.
Platforms like RealtyMogul are leveraging AI to streamline the acquisition process. Our system analyzes thousands of data points to match clients with properties that align with their criteria. This is especially helpful in competitive markets, improving efficiency and success rates for 1031 exchanges.
That’s interesting. Given how expensive real estate is, do these deals still make sense for investors?
It depends on the investor’s perspective. Many focus on the return on investment (ROI) rather than return on equity (ROE). Long-time owners often realize their ROE is much lower than expected after accounting for property management fees, taxes, and maintenance.
Currently, we’re seeing positive arbitrage with cap rates exceeding interest rates, which creates opportunities. While initial cash-on-cash returns may appear lower, properties can be repositioned to achieve attractive yields over time. Multifamily properties, in particular, are trading below replacement costs, which we see as a strong growth indicator.
Alright, Stephen, we’re just about out of time. Thanks for sharing your insights! How can listeners connect with you and learn more about RealtyMogul?
Please check us out www.realtymogul.com. We have a great knowledge center where we have videos and articles that help explain and educate all of our clients and investors. Listeners can also email me at stephen.haskell@realtymogul.com.
Great, we will link to all of the resources discussed today in the show details. Thanks again, Stephen. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.