How to Pay $0 in Taxes with a 1031 Exchange | Real Estate Investing Secrets

1031 exchange. You can just defer to taxes until, you know, till the end of your life and basically all those taxes all along the way disappear.

Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larsen. If you haven't yet, get a copy of our book for free at our website, Next Level Income.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in. On today's show, we welcome Dasha Beardsley. Dasha, Overseas investor relations for Lone Star Capital Capital's over 1500 investors. She ensures her and her team consistently deliver prompt and thorough communication. Dasha specializes in managing Lone Star and its investors, 1031 exchange transactions, and she just wrote a new book on it that we're going to share with you today. Additionally, she oversees Lone Star's marketing initiatives including content creation, social media, and in person events across the country. She graduated magna cum laude from University of Southern California with a degree in real estate development and joined Lone Star Capital before she even graduated. Dasha, welcome to the show.

Thank you. I'm very excited.

Yeah. So some listeners might be familiar with your name. We've had your brother Rob Beardsley on a couple times on the podcast. I've got his book here, his latest book here, Structuring and Raising Debt and Equity for Real Estate. He's written a book on underwriting as well. But I'm super excited because you surprised me last time I saw you. You got your own book and we're going to talk about it today. Maximizing wealth through syndicated 1031 and exchanges, which some people may, may be hearing that for the first time. But Dash, I'd love for you to share a little bit about your background and then we'll, we'll get into Lone Star strategies and obviously talk about your, your new book here.

Yeah, absolutely. So I'm originally from the Bay Area in California. I went on to study at USC University of Southern California, and I got a degree in real estate development. Um, so while I started college and started my degree, my older brother Rob Beardsley started Lone Star Capital. Um, so it was funny. We kind of started our journeys at the same time and didn't really have any plans to intertwine. But by the time that I was a senior in college, I ended up working pretty much full time for the company and only taking night classes. So I really Kind of sped up my integration into, into the industry. So it's been super great since that was in May of 22 that I graduated. And so I've been full time ever since. And I'm now the director of investor relations for Lone Star Capital. So it's just been, been a great journey so far.

Yeah. I'll never forget meeting you with, with Rob at a meeting and you were, you were telling me your plan. I was like, you're still in school. I was like, oh my gosh, you're, you know. Yeah. I'm envious because you got, I got a few years on you here, Dasha. But no, it's really special. I think a lot of listeners know I lost my sister, my younger sister last year tragically in a car accident. So it really, it's a really special thing that you guys get to have a family business. And I will say by getting to work with you a lot over the past few years, you bring a tremendous amount to the team. So for those listeners that are just getting to know you for the first time, Dash is, Dash is phenomenal at what she does. Share a little bit about Lone Star, what you guys do, what you focus on, and in terms of the real estate world and commercial real estate specifically.

Yeah. Well, thank you also for the kind words. I appreciate that a lot. So Lone Star Capital started in 2018. We focus on buying multifamily properties in Texas only. So that really kind of goes to our overall investment strategy is being very focused in what we do. So we are only in multifamily and so far only in Texas. You know, eventually we'll grow outside of that, but we, we want to be experts in whatever we do. So we're, we're not all over the place. So that's really what we do. We. Among real estate, we do value add strategies. We also are pretty known for doing tax exemptions and sort of quasi affordable structures. So. And then, you know, we've kind of also been doing a bit more core properties recently. So there's kind of a range of the types of business plans that we do. We. Within multifamily in Texas, but generally speaking, we're, we're very, we're very focused in our strategy.

Yeah. And what I love is you guys, you guys are focused on the, hence the name Lone Star Capital, focused on the Texas markets. You know, value had made a lot of sense, you know, 10 years ago and when you guys jumped into it and then the, the tax abatement strategies have been, have been really effective. Because we've done, I think, six of those now with you all over the past few years. And the great thing is I've talked on numerous panels on this. I've been on a. You know, we have affordable panels here about affordable housing in Asheville, North Carolina, which Asheville's had a real problem because Asheville City Council did not approve a lot of projects for a lot of years for multifamily housing. And rents were going up 20% plus per year. It was the third most competitive market in the country, which, for those that might not be familiar, most competitive in terms of rents means the worst rent growth, like the worst for renters. So they've tried to start doing some things, but you all early on figured out how to work with, you know, some of these structures and maybe you could walk through kind of how that works because it's. It's very powerful if you can, if you can lower your tax bill. It's also very powerful to provide really almost instantaneous affordable housing with these structures.

Yeah. So there are various tax exemptions specifically in Texas, of course, so there's many programs specifically the ones that we have done the most of our restrict rents based on the area median income. So that one of the benefits to a landlord or, you know, an owner of property like us is that these restrictions adjust as the growth happens in that market. So area median income, you know, it gets reassessed every year and. Or the. The data updates and so the rent restrictions also get reassessed as that market grows and the incomes in that area grow. We're also able to adjust the restricted rents accordingly. In exchange for that, there is typically an 85 to 100% property tax exemption. And of course, in exchange we have to restrict. It's usually about 50% of the unit. So of course it's very helpful from a kind of. It's kind of more conservative business plan because we're not assuming to bump the rents a ton in order to achieve the returns that we're looking for, but it also is beneficial in getting attractive debt terms and other things like that. So overall, really great strategy. Yeah. And so we've been doing a lot of that. There's some other programs that we have done, one, particularly in San Antonio, that we're looking at doing again, property in Houston. So but there's. There's a lot to keep up with that and it's kind of that. That part of the industry is kind of always changing and you know, just with legislation and, and all that, so always keeps us busy yeah, well, it's.

A real crisis in this country with affordable housing. You know, housing prices are at record highs. Interest rates are high. The affordability gap is in your records in terms of, you know, the cost to buy a house in terms of monthly payments versus rent. So, you know, most households are out there, you know, moving into apartments because they can't afford a home. And the challenge, I know you guys are, Houston's one of your top markets that you guys focus on. It's been, it's been a top five market. It's been a blockbuster in terms of growth, you know, and across numerous different metrics. But yeah, it's interesting, I think, because, you know, the value add in these deals is in the paperwork and you mentioned that, you know, net rents, you know, net revenue can, can actually come down in these projects. But because you're gaining so much back in terms of the tax savings, because Texas has fairly high property taxes without their income tax ends up being a net benefit. So it's a real, it's really cool to see the win, win, win structure. You know, you get a win in terms of housing immediately, you get a win for investors and you get a win for, you know, the politicians that are there because they say, hey, look, I basically just waved a wand and you guys got, you know, another couple hundred units of affordable housing where, you know, I think last I looked, San Francisco was spending like $800,000 per unit to build affordable housing. And, you know, your group has been doing it for like 150 a unit, but it's, it's not coming out of the pockets of the cities themselves, which is really, really innovative. So I applaud, I applaud Houston. It's cool to see these innovative structures to solve this affordability crisis that we have.

Yeah, yeah, it's awesome to be able to do it more efficiently like you said, and kind of like waving, waving a wand and being able to do that very kind of quickly and efficiently. You know, there's tarmac on, on that.

Yeah, exactly. You know, you focus on your side of the business. You, you talk to investors every day. Dasha, the, the market's been in flux a lot over the past five years. I mean, five years ago we were just seeing, you know, amazing returns from properties that have been purchased. You know, over the last 10 years, debt markets have been, have been struggling. You know, what are some of the things that you've, you've seen and heard from investors, you know, over the past year in terms of, you know, investing and challenges that may be out there in the market that they're seeing.

Yeah, I'll say for investors that were investing in, I want to say, like the last five years, a lot of them are kind of worried because of things happening in their portfolio. Kind of just anticipation, you know, thing necessarily that's particularly wrong with the deal that they have invested in or, you know, for example, I mean, we have a few properties still left in our portfolio that are on floating rate. And so investors can be nervous just because they've experienced foreclosures and capital calls and. And all of that. We've been really fortunate that we haven't made a little call or ever had a foreclosure. So we're really fortunate in this market cycle, you know, to be protected for the most part. But, yeah, I would say that there's definitely some fear. But overall, I would say that we've had a lot of demand from investors. A lot of investors do recognize that, you know, five years ago, when everyone was hot on. On investing in multifamily, that wasn't really the time to be doing so. You know, prices were bid up, and that was time to be super aggressive. You know, we, we believe in kind of buying at all times in the market and just being more strategic about it, you know, understanding what types of assets are, you know, unreasonably priced at what part in the market and things like that. So. But yeah, just generally speaking, when the market's hot, that's not really the time to be super aggressive. And so a lot of our investors understand that. And so we've been having a lot of demand on the investor side right now. So we're super fortunate about that. I think, you know, there's maybe a variety of factors why that's the case. While generally speaking, raising capital is pretty difficult in this market. But I want to say maybe it's because of all the educational, all the content that we do online and educate investors about the market and kind of where we're at.

Absolutely. That's one of the things you guys have done a phenomenal job at. And I want to talk about that. But I do also want to touch on. You guys are vertically integrated, so you have an operations team in house. I know that's been a real benefit as expenses have gone up over the past few years. You know, inflation's been a monster for a lot of people, you know, which has been, you know, we've then seen rates go up. So we've seen this whole cascade effect from inflation and the Fed trying to get that under control from the money that flooded in the market under the last administration. Anything that you can share in terms of, you know, operations and having, having operations in house in terms of being able to help assist in your portfolio.

Yeah, and this is something that, that takes time and it takes scale and, and not just time, but time to, to perfect and really get like a smooth, smooth machine going. But there's like vertically integrated is not the same across, you know, different operators and things like that. There's, there's levels to being vertically integrated. So you know, it's kind of a blanket statement that's, that's used or blanket label that's used. But really we've been vertically integrated with property management in House since 2021. So we did that fairly early in our, in our development as a company. But we've really been putting in a lot more effort to become a lot more vertically integrated in the last year or so. So we brought HR in house, we brought accounting in house. We previously we were just like property management and construction management in house. Now we have a construction house in or sorry in house construction team. And so that's, you know, we're really just working on building that out as well. So just we've realized that having more controls across the entire process, you know, from accounting to construction, where we've been finding so many more ways to, to save money. For example, we're working on having a dedicated pest control person in house. So it's going to be a full time person that's just going from property to property, which can um, obviously reduce costs. Pest control is not a cheap expense for properties. Especially you know, in Texas where it's very hot and humid in the summers, also can provide a better experience for our tenants because a lot of the times with pest control companies, you call them, you know, they're not going to come out until 24 hours later. But if we have someone full time, you know, the, the salary is spread out across 22 properties that we have. Yeah, that's, you know, that person can go out almost immediately and problem. So and also maybe do more preventative care. So I'm going on a little tangent with pest control, but there's so many.

No, I think that's a great. Yeah, I think that's a great point though. And you know, I think that's as we've seen margins compress across multifamily and you know, returns have mediated a bit. You know, being able to control expenses like that and fine tune those knobs and put somebody in Place, you know, the scale that you guys have, in addition to you having that. That integration, you know, makes a difference. And I've gone. I've gone through this with Rob, you know, multiple times and looked at, you know, line items for. For different things. And, you know, it's. It's a. Like you said. How many. How many total units do you guys have in the portfolio now?

We have over 5,000 units.

Yeah. So you take 5,000 units and you look at the economies of scale with something like that. And like you said, you can not only reduce cost, but you can actually have an improved experience and improve quality control over that, which is. Which is fantastic. You know, again, especially in this market, I think there's a lot of value in that. But you mentioned something, and I. It was one of the topics I wanted to discuss, which is how. How education forward you guys are. I always thought it was impressive. You know, Rob wrote his book on underwriting, and then he. He put his underwriting model out so everybody could see it. If you're listening and you want to take a look at that, we can put this in the show notes, too. But Lone Star Capital, you have your underwriting model right there, right there on your website, available for download, which I think is really valuable for investors. I know it's hard to understand. If you're not a real estate person like yourself or like me, you're looking at this giant spreadsheet. It's like, how do you get all this? But you can listen to Rob, and he'll go through that on some of these podcasts, or you can get a copy of his underwriting book and have a better understanding of the process that you guys go through. So it was no surprise when, you know, I heard you guys were coming out with. With another book, but I was sitting across from you. I think it was at dinner. I was like, wait, you wrote a book? I was like, how am I just now finding out about this? Dasha, you got to come on the podcast, and it's something. So some listeners are familiar with 1031 exchanges. I've done 1031 exchange. I've assisted my family in doing 1031 exchanges. I was actually just on the phone with an investor today that's selling the commercial building and doing a 1031 exchange. Before we jump into, like, what. What the value is, you know, what. Why are you guys so education forward? Like, what have you seen is the benefit to investors by providing this education at Lone Star?

I would say that the quality of the types of investors that we get by being. Education forward is, is one of our main drivers. Yeah, I guess we, we like working with, whether it be still like a 50,000 investor, which is our retail minimum. You know, we still appreciate working with investors that understand what's going on in the market. And, you know, while that's not a requirement, we would prefer that all of our investors are more educated on just what's going on. It makes discussing things easier when things don't go exactly according to plan or they're better. It's easier just throughout the process for, for us. And, you know, I also think that in general, we, we don't want to run a business that is. Requires the ignorance of our investors. Like, we want our investors to like. I think there's definitely some, you know, I don't want to say predatory that might be a little too aggressive. You know, some, some businesses require that their customers don't really know what's going on in order to.

Yeah, like a payday loan business. If you look at and understand like the, the rates that are charged, it's like, it's insane, you know.

Right.

It's, it's crazy. It's great. I mean, I would say that's kind of, that, that's almost like a predatory type end of the spectrum for sure.

Right. But there's kind of things all, all along the spectrum. And so we really value transparency and. Yeah, so I would just say that's just one of our views and the opposite of predatory, whatever that that word would be.

Yeah, no, you're transparent. But also you, you do, you do share, share the education so investors can become more educated. So then they have the knowledge to look and say, okay, is this a better deal? Is this a good fit for me? And do those things. And you know, getting Back to the 1031 exchanges, you know, we're just, we're just getting some new legislation here. So we're seeing like bonus depreciation come back at 100%, which is, which is a real benefit for real estate investors. I always like to say, if you're, if you're doing real estate the right way, you're not paying taxes. Because we have this wonderful thing that I talk about in my book, depreciation, which is a paper loss, it's written off. But a lot of investors have made a lot of money in properties and they have this kind of lazy equity. As I like to say, it's locked up inside properties. And I say, well, I don't want to sell my property because I have to pay all These taxes. And then I'm going to be left, instead of with a million dollars, I'm going to be left with $700,000. And I don't want to sell it because I'm going to lose all that money. And then I reinvested. I'm going to do that. But let's talk about a 1031 and why the government have these in place. Let's start with that.

Yeah, so I would say, I mean, this law, this started, I forget when it was, but it was, it's been around for a very long time. And it was originally intended to help farmers buy more land and just grow their business. So this just generally speaking, works for real property. So that doesn't work for like intangible assets such as stocks. But 1031 exchange, I would, I would guess that the government still has it around because it wants to incentivize real estate investing, keeping transaction flow going, just kind of promoting the overall health of the economy and allowing investors to, to grow, grow their wealth and you know, just incentivize them to, to continue to actually own real estate. But so with 1031 exchange, it's like you mentioned, it can be fantastic. You know, it's a fantastic way to grow your wealth without having tax drive in between selling your property. So it's, if you're selling every call it three years and you have a huge tax bill in between, that's really dragging, putting a drag on your returns and kind of, you're compounding your wealth at a much lower rate as if this taxes. So 1031 exchange allows you to defer all of your capital gains tax and also, which I'm sure you, you know and appreciate it also defers capital depreciation recapture. So that's especially relevant right now with 100% bonus depreciation. And I'm sure people listening to this call would love to fully utilize 100% bonus depreciation. And then, you know, when you sell, that's kind of another thing that you have to think about. But if you're 10 exchanging, you're also deferring your, your recapture of that depreciation.

So, so just, just to pause on that. Yeah. So if, if you invest $100,000 as investor, or let's say you buy a building, right? You buy a, say a $500,000 property, maybe it's just a rental home, and you hold it for a long period of time. My stepfather, we just sold a couple of his homes and they're fully paid off, they're fully depreciated so, you know, you could depreciate these over 27 and a half years for straight line depreciation for a residential property or multifamily, which qualifies under, under that same depreciation bucket. But the government says, hey, you, you took this loss, now we got to add that back essentially as a gain on the backside. Am I saying that right?

Yep, that sounds about right.

Yeah. So then, you know, the challenge is you're like, well, wait, now if I sell this property, I'm gonna have to pay all this depreciation. Maybe I did a 1031 prior, which I've done on buildings. It's, it's like, it can be a massive jump up in your basis. So, yeah, you can defer your gain, but you can also defer that recapture as well. And people like to say swap till you drop, which is if you continue to do this over a long enough period of time, your heirs receive these properties at a stepped up basis and then that all goes away.

Right. You can just defer taxes until the end of your life and basically all those taxes all along the way disappear. So really great for estate planning as well.

Absolutely. So why did you write the book and what can readers expect when they, when they go through it?

So we have a lot of sophisticated investors that own their own real estate. A lot of real estate investors are familiar with 1031 exchanges, but what was really missing was the knowledge that you are able to do 1031 exchanges in a syndicated offering. So basically the kind of previous understanding or common, common knowledge would be that if you have a property, let's just say a four unit property in California, that your only real options are to 1031 exchange to another property that you own and operate yourself, or, you know, you could maybe partner up with some other friends of yours or family members. But generally speaking, options are much more limited because under that thought process, because, you know, you just kind of have to own and operate. And so I think that that was also a big reason why, like you were mentioning, you know, people who own property but they don't really want to sell, they have a big tax, tax bill at the end of it. Another reason is because people don't want to necessarily manage the next property. So if they have like a system that works well, they could be kind of sitting on, like you said, lazy equity. And the alternative is just not as attractive. So we had a lot of investors that once they found out that we have this offering, they were, you know, very pleasantly surprised and super interested and so to this day, even how much we've marketed it still, if we have an event and we kind of share with the crowd, this is an offering. And you know, if you're interested, come talk to me about it. Still, so many people are surprised and shocked and very, very interested. So I just, I really thought that this is something that needs to be talked about more. Because While doing a 1031 exchange into a syndicated offering might not be for everyone, a lot of people want to have more direct investments that they actually manage themselves. But I think it's really important to know everything, all of your options and kind of pick the, pick the one for you specifically. So I think that it's a, it's a great offering that a lot of people don't know about.

Yeah, no, it's great. And I like your book is. Your book is concise. I like, you know, it's about the same size as my book, which is, which is nice. You could read it on about like an hour and a half flight down to Texas, for instance. You got case studies in here, which is fantastic that people can go through. We're gonna have a link in the show notes as well. You got a website maximizing1031.com that listeners can go to to get a copy here. And now another question is, do you all, do you all actually do the 1031s in house or would an investor have to go out and find their own 1031 intermediary? And what is a 1031 intermediary?

So an intermediary, their primary role is to be in receipt of the funds that you receive upon sale, so the sales proceeds. So that's one of the easiest ways to disqualify yourself from a 1031 is to actually be in receipt of your sales proceeds. So it's very important to find a qualified intermediary prior to the sale of your relinquished or, you know, your old property that you're looking to change and. But they can be a lot more than that. A qualified intermediate can kind of help you along the process and explain to you what's really going on. You also have an identification period where 45 days after your sale, you have 45 days to identify potential properties that you're going to on.

So if I, if I sell a property on September 1, I have 45 days from the close of that property to then decide what, what the next property I'm going to invest in, Is that correct?

Exactly. And so you have multiple options. There's certain ways that you can Identify more than three. But typically, but there's more restrictions if you want to identify more than three. So just for the purposes of this conversation, you have three to identify and you submit that to your qualified intermediary. So that's, you know, that they're kind of your main contact throughout. That being said, if someone's doing a 1031 exchange with us, I'm working closely with the qualified intermediary of our investors and it's just kind of the three of us in the process and the exchange rather than just me and the investor.

Yeah, terrific. No, and I know you guys do a fantastic job of, of, you know, making it turnkey for investors, which is, which is another big thing that you guys do do a great job of. Your, your platform's great, your education is great. Yeah. So it's no surprise that, that you guys do this. Um, what are some downsides of 1031 Stasha?

I would say, you know, it's a very tight timeline. So you know, you have 45 days to identify and then 180 days to actually close on a, on a property. And so I think a lot of the times, not that I've necessarily heard this from investors, but I can imagine that a lot of people looking to do a 1031 exchange, it's kind of like this is Rob's favorite quote, the tail wagging the dog. So people are really trying to save taxes on their sale, you know, at all costs when that might create some pressure. Most important is to preserve your capital and not if there's some. Don't force the 1031 it to happen. Yeah, so I think that's kind of the main thing to think about. And that also while it's fantastic, like actually doing a successful 1031, I don't think that there's, that there's, there's no real down size that I can think of. But just in general there's risks to deals falling through. So the types of deals that you want to commit to, you know, you want to be pretty within that 45 day period of the, the deals that you're identifying. So I just think it's can be a little difficult to pull off. But at the same time, you know, if you are partnering with someone that's reputable, that has high transactability and like, I mean by that is, you know, a group that can actually close on properties, raise the money that they need to in order to close and, and things like that, you're in a much better position.

Yeah, absolutely. And that's one of the things I know you guys have done, which is, you know, if I'm selling a property, I'm going to do a 1031. You can align closing and say, hey, we have this property in the pipeline and allow investors to identify it with a little bit of advance notice in front of investors that might be getting, you know, the news, you know, when it's announced to everybody else and really figure that out. What's the best way I just mentioned the, the website. What's the best way for investors to one, get a copy of your book, Dash, and then two, learn a little bit more about Lone Star Capital, what you guys do.

Yeah. So the, the website to find the book is www.textizing1031.com and then our website has case studies, our portfolio, all of that information, which is www.lscre.com.

Wonderful. And we'll make sure we have all this in the show notes here. I encourage you if you're listening today, check out Lone Star Capital. Check out the website that dasha just mentioned, l s c r e.com for a lot of great educational resources and get a copy of Dasha's new book if you have a 1031 coming up or you just want to learn a little bit more about them. Maximizing wealth through syndicated 1031 exchanges. And author Dasha Beardsley. Thank you for sharing your information and your knowledge to our audience today.

Thank you so much for having me.

Hey Chris, here again. I hope you found this episode valuable. Now I have one more thing to give to you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.