Invest Smarter: How Deferred and ETS Are Simplifying the 1031 Strategy
Back to another episode of the Healthy, Wealthy, Wise podcast. I'm your host, Heidi Henderson, and today we're talking about one of the most powerful, but often misunderstood wealth building tools in real estate, and that is the ten thirty one Exchange. So joining me is someone who is completely transforming how investors approach these exchanges. This is Judd Schoenholz. He is the co founder and the CEO of Deferred, the technology powered ten thirty one qualified intermediary that created the revolutionary no fee exchange.
Heidi:Judd is on a mission to help real estate investors grow their portfolios, preserve equity, and maximize returns through smarter, more transparent solutions. Before launching Deferred, Judd co founded Open Listings, a home buying platform backed by Y Combinator that was later acquired by Opendoor, where he led their buyer business through IPO. He's also the former co founder of Balance Homes, which is an engineer and product designer by training with a career that spanned tech, real estate, and digital innovation. I am thrilled to share that Engineered Tax Services has officially partnered with Deferred to offer ten thirty one exchange services to our clients because we believe their platform brings a completely new level of transparency, simplicity, and cost savings to our real estate investors. With ETFs performing over 600 cost segregation studies every month, this partnership is a natural evolution in helping our clients defer taxes and reinvest more of their hard earned capital.
Heidi:So with that, I'm so excited to have Judd on the show. Judd, hi, and welcome to the show.
Judd:Thanks for having me.
Heidi:I'm looking forward to the conversation. This is a fun one. So you have a pretty fascinating journey from open listings to Opendoor and now launching deferred. So what inspired you to dive into the world of ten thirty one exchanges and what problem were you aiming to solve?
Judd:Well, I was looking to do a ten thirty one exchange actually. So I guess I had heard of 1031s. It's something that bounces around if you're in real estate or understand anything about taxes and tax real estate. But it was when I was looking to actually exchange a property when I understood exactly the dynamics of how it worked and uncovered this qualified intermediary industry. And so once we pulled that thread, me and my business partners, it was, it was really fascinating.
Judd:Think one is it's just the most flying and archaic type process you can imagine. If you're looking to do a ten thirty one, the qualified intermediary is the service that holds the funds and helps you structure the exchange and then, you know, distributes the funds on your behalf so that you don't take receipt of the funds and it doesn't become taxable. We can talk about ten thirty one's, the specifics of it in the future. It was like a file cabinet business. People were running it on spreadsheets, if you're lucky, maybe, you know, written down pieces of paper.
Judd:And for us, it, it really is like a financial technology business. Once you look at it under the hood, it should be managed entirely with software. You should see a full audit of everything that's happening. There's a lot of money movement involved. So you want to do that probably with, you know, FinTech rails as opposed to manual processes.
Judd:So that was one. It was, we just saw a huge opportunity to make it a much better process for clients. And then also for the people, the people managing the exchange, they're spending, you know, 60 to 80% of their time producing paperwork and tracking things down and things that could just be automated so that they could focus better on customers. So this whole interesting technology problem that we saw. And then I think the second piece is the qualified intermediary, because they hold the funds, they actually earn interest on the funds, not by doing anything weird, just by holding it in a depository account.
Judd:And so the unlock for us, the secret was the qualified intermediary is charging the client $1,000 But if they're doing a $5,000,000 exchange and they're holding the funds for ninety days, they're making $50,000 And they still send your client a check for that $1,000 15 hundred dollars for the exchange, which seemed kind of crazy to us. So we inverted that business model and we just don't charge fees. And it's not that crazy because 80% of the QI revenue already comes from holding the funds. So building the best QI experience, the best technology, and then inverting the business model so it's better for clients. And ultimately what that allows is there's no risk to do an exchange because we don't charge a fee.
Judd:If you talk to smart investors, they're gonna go pay that exchange fee just to have a free option on potentially saving the taxes. We don't make that a choice. Free if you go through the exchange. It's free if you don't. If you change your mind, there's really no downside to starting an exchange with deferred.
Judd:And so yeah, we came across the business and we're fascinated by it and have just been pretty obsessed with it for the past year and a half.
Heidi:Yeah. I'm super excited to have this conversation because I think what you guys do is it's a complete game changer. This is industry that has been around for quite a while. Do you happen to know stats on, how long has ten thirty one Exchange been in play?
Judd:So it's been in the tax code since 1921, which is crazy. So over a hundred years, I guess the background is what it allows is if you sell a property, basically any property that's held for investment, meaning not your primary residence and not a vacation home you're using for more than, you know, fourteen days a year or 10% of the time you rent it out. So basically any other property that's commercially owned, if you sell it and reinvest the proceeds into another held for investment property, you don't pay the capital gains taxes. And so it's great for the real estate investor because they can move funds around. It's also, I think, great for the economy because you take funds from these appreciated properties that are sitting there, and you encourage people to move money around and redevelop new properties and sort of the highest and best use of real estate.
Judd:So we love it from those factors. And yeah, that's why it's, I think, been a core part of the tax code since 1921. It's evolved. There weren't a lot of rules back then about how you're supposed to do an exchange. So there's been different ways that it has evolved to sort of make it more convenient and obvious for taxpayers.
Judd:But yeah, I think if you talk to sophisticated real estate investors, this is a core part of their strategy. I think the thing that was surprising to us, and you asked about statistics, there's very little statistics in the industry. I think the IRS released a report and it's from 2013. Otherwise it's, it's pretty hard to find. It's, it's hard to find, good data.
Judd:Something like less than 10% of properties that can be ten thirty one exchange are actually exchanged. So we came into this. Yeah. So, people are just paying the tax, whether they don't want to pay the fees or there's low awareness, but they don't want to deal with the timing. And so we view these as solvable problems.
Judd:We think basically every property should probably be exchanged if, you know, if you're looking to put the money back into real estate. And yeah, so just try to raise awareness, make it easier, reduce the friction, reduce the fees, and help more people go through the exchange process.
Heidi:The $10.31 exchange is one of the biggest tax deferral strategies that exists. It's one of those things that always seems to come up when there is a debate about tax reform. Have you heard any updates or are in any discussions in the current administration as they're diving into tax reform about ten thirty one exchange?
Judd:It's a great question. I think in the previous administration, it was in the economic plans as a thing to look at to potentially not cut. I think the last Biden proposal, which never made it into any bills or any actual tax reform, was something like they were going to cap it. So we were going to cap the benefit. And so potentially only like $500,000 worth of exchanges, I think, was the last proposal.
Judd:And that obviously didn't happen. I think to give credit to the existing industry, they did a good job of explaining how maybe it looks like a tax break, but it actually encourages all this redevelopment and encourages all this economic activity. And the net tax benefit from that, along with the usefulness for the redevelopment of the properties and the economy, it it creates way more economic activity than the tax break would offset. So I think they did a good job of sort of controlling the narrative there. And then, yeah, I haven't heard anything about the current administration.
Judd:I understand that I'm not a student of history here, but that maybe Trump's been a beneficiary of the 10/31. So I don't know where he is like line item, line item maybe his tax bills, but, I don't think that would be the first thing that they've cut. So no, I think it's endured for a hundred years for a reason. And I think it'll continue to endure and, you know, it, it it's evolved in terms of how it's been done and used to be able to exchange all sorts of things, that you can't exchange anymore, but real estate's persisted. And I think it should, it will and should persist for the next hundred years.
Heidi:Yep, absolutely. So as I'm looking at ChatGPT, thank you, what did we ever do without AI?
Judd:Oh, wait, well, but shout out, you know, we built a special version of, it's built on ChatGPT, but there's a tool we have called Arty. Yep. You can find it on our website. And it's a version of that, but it's specifically trained on all the tax code, 1031s, all the private letter rulings, a lot of very specific tax, but specifically ten thirty one. And we got it actually to pass the CPA exam.
Judd:So this is probably a whole episode in and of itself. That is. But, yeah. So, it's a really useful tool. It's totally free.
Judd:So, yeah, definitely ask it some tax questions. But I think, yeah, ChatGPT is getting pretty good at just, the baseline ChatGPT is getting pretty good at taxes, too.
Heidi:Yeah. So we have used your AI, and we agree. It is a fantastic tool, and it is such a great resource for real estate investors, not just on ten thirty one exchange questions, but a lot of tax technical questions. And to your point about what we're seeing in regards to tax reform and what the discussion is about that, certainly the current administration is highly favorable towards real estate incentives and tax deferrals for driving transactions. So yes, we also have not heard that there's anything on the table in regards to changing or removing the opportunity for ten thirty one exchange.
Heidi:ChatGPT does say, and you can tell that it's a rough estimate, that it's interesting that there's not a lot of data out there about exchanges, but it's estimating somewhere about $100,000,000,000 to $170,000,000,000 of real estate value is exchanged every single year, and roughly 6% of transactions, which is actually, I think, surprisingly small. I love what you were saying that tell me again, what was the percentage of properties that could do an exchange that actually utilize it?
Judd:Well, I think we've seen that somewhere to six to 10% number of potential. So any investment property could be exchanged and only It depends, I think, whether you slice it by all or commercial or asset class, but I think sub 10% is definitely where we're at. And that, I think that a hundred billion dollar number, I think that comes from potentially an NAR report, but I, that's what I've seen bandied around as well. So a hundred billion dollars worth of property is actually exchanged. People are definitely taking advantage of it.
Judd:Again, yeah, core real estate strategy. And then where we come in is just try to make it easier and less friction and lower fees and more pervasive and yeah, trying to just be the best exchange company in the world.
Heidi:Yeah, absolutely. Will, what you guys are doing, to your point, is so innovative. I always say on this podcast, I love interviewing companies that I see as disruptors, and you are absolutely one of those companies. The traditional ten thirty one exchange model or process, it's been expensive, has been completely opaque. So there's zero visibility with where those funds are while they're being held in an escrow account.
Heidi:I had always assumed maybe by fault I had always assumed that there's some type of a regulatory scenario where when that money's held in escrow, when it's pending, they've sold the building, we're now, what is it, one hundred and eighty days waiting to close on the new replacement property. I actually assumed that in escrow that the property owner's not eligible to earn interest on that money. Is that not true?
Judd:Yeah. It's just not true. I think it's- Wow. It's a closely guarded secret from the Well, I mean, it's- so again, savvy real estate investors, people who, are doing this often, they know that somebody's earning interest in their money and they have the ability to individually negotiate it. And I think that was one of the things about the industry that we didn't love, that there's this kind of in equal treatment.
Judd:If you had the new, the right way to ask and the code word, you know, you could earn interest on the funds, but if not, you're not going to. And so I think some companies policies, you earn a small amount of interest, many don't pay any interest. So we just wanted to make it more transparent of a business model. I mean, I mean, to be fully transparent, we make money earning a share of that interest, but we just try to make it, as optimal as possible for the client. We want to, you know, deliver the service at the lowest possible cost.
Judd:Yeah. So yeah, that's
Heidi:a Well, Because I mean, other intermediary, intermediaries, they essentially are holding all of the interest earned on that plus some fees, right? To clarify.
Judd:Yeah, yeah, yeah. No. And I'm like, how can I give the most amount of interest to our clients? Being as efficient as possible. That's ultimately what we're trying to do.
Judd:But other people could try to match the pricing, but I think ultimately it's building technology to make the process faster, to let the client do more. You mentioned how it's archaic from a CPA perspective. I think the other thing that we're focused on is what we call multiplayer. We want the CPA, the real estate agent, the wealth advisor who's potentially helping to actually be able to log in and use the software as well. And so maybe as an individual exchange where you're doing one exchange, it's easy to manage, but we talked to CPA firm and some of love, ETS, and allowing you to see the 60 clients that we're actively working with together and to see where they're all at and to have a centralized repository for all the paperwork and for us to actually help you do some of the paperwork.
Judd:We're not allowed to give tax advice. We're not allowed to be a CPA, but we could summarize things and make your lives easier and make everything more accessible. So those are kind of the things we're trying to do just to be the best.
Heidi:Yeah, absolutely. Okay. So let's talk about this no fee exchange because it sounds too good to be true. And even when I tell people they're like, wait, what? So you have to explain how this works and how deferred makes this possible.
Heidi:I know it's a lot because you guys have built a really cool platform, but let's back up a little bit and really explain what does this process look like and how did you do it?
Judd:Sure. Well, it's more simple than it sounds. Think, we hold the funds for, so as the qualified intermediary, we take receipt of the funds when the property sells. We hold those funds. Some exchanges are pretty short.
Judd:We only hold the funds for a few days. Let's say the client is reinvesting into a DST fund. It's ready to go. It's all lined up. You know, we'll process it.
Judd:We've had one day holds. We're, we're, we work very fast. The process for the ten thirty one uses you have forty five days to identify what you're gonna buy. And so we're gonna need to hold those funds for at least the identification period. If the client decides not to go through with the exchange, still no fee, hold the funds for forty five days, get the funds back at the end of forty five days.
Judd:And then, within the tax code, you have one hundred and eighty days to purchase what you've identified. So we can hold the funds for a short period of time. We can hold the funds for one hundred and eighty days. What we do is we hold the funds into a, we call it a segregated dedicated bank account for that client. It's held at a major publicly traded banking institution.
Judd:We work with a bunch of different banks. Like a high yield savings account, it just earns interest. It's not nothing risky about the money. It's held in an FDIC insured account. And so yeah, the bank pays interest because that's the bank's business model.
Judd:I think they're lending out the money on the back end, but it's essentially held in short term treasuries. So because the funds generate interest, and our average exchange amount is in the hundreds of thousands of dollars, the average amount we earn per exchange just for interest from the whole period is in the multiple thousands of dollars. And so it's not like that crazy. We just don't charge that extra thousand dollar fee on the, you know, flat fee on the exchange. And so for shorter exchanges, yes, we make less money and it's great for the client.
Judd:On longer exchanges or larger balances, we make more money. But the way we look at it is it all comes bowed in the wash and the no fee makes a lot of sense. And it's winning a lot of business, making people really happy, reducing the friction and sort of the downside to doing an exchange, especially if it doesn't go through. So, yeah, it's really not very complicated. Think the way we best explain it is just to understand that the QIs are earning interest and not necessarily transparent sharing with the client usually.
Judd:And so we just try to be super transparent about that and we don't need to charge an extra fee on top of the interest earned.
Heidi:Yeah. It's actually very simple. It makes all the sense in the world. And I have to laugh because this has been an industry, to your point, that has been around for a hundred years. And it's just been a little bit it's almost like getting title.
Heidi:You know, going to the title company for title insurance. It's just the thing you do. It just goes to the title company. I feel like ten thirty one Exchange has been kind of the same deal. It's just, you just push it to the intermediary and don't worry about it.
Judd:Well, there's an interesting title analogy. This is a free business idea for everybody, there's more regulation in title and escrow, and it depends what state you're in. But my understanding, and I'm not an expert here, is that the escrow fee is also a loss leader. The escrow company is making money selling title insurance. So they're going to make $6,000 selling you a title policy and they still charge you an $800 escrow fee.
Judd:So, you know, free idea, but maybe you should have a, you know, a no fee escrow, which monetizes on the title insurance. And I'm not sure why that doesn't exist, but it's, it's, it's similar to title and escrow. We're very similar to a title and escrow business. I actually think in many ways, these changes more straightforward. It's more linear.
Judd:And that's actually good because I think then you can apply technology to really streamline it and automate it versus in my experience with title and escrow, they're wrangling, you know, wrangling cats with 10 different parties. And, it's, it's a little more of an open ended, complicated process.
Heidi:Yeah. So interesting. Talk a little bit about IRS compliance. Like how does the model deal with IRS compliance? Talk a little bit about your team that developed this.
Heidi:Sure. Because this is the intersection of technology and technical. I mean, it's exactly what we deal with at ETS, dealing with a lot of the tax incentives and deploying some technology, but how do we deal with compliance in very complex areas with a lot of regulation? So how have you guys had to handle that?
Judd:Well, I think that was one of the most surprising things coming into the business. The traditional QIs, it's kind of like a trust us model. Like, maybe we held the funds and maybe we gave you the right report at the end, but ultimately it's the CPA's job to file the taxes. They're ultimately responsible for the compliance, the IRS compliance and filing. The QI is this, you know, necessarily this disinterested party.
Judd:So, but that was surprising to us. I think, I mean, one of the first things we did was we modeled all the rules in software. And so there's maybe like a hundred rules, not that they apply to everybody, but through all the edge cases. And so modeling all the rules in software means that every single exchange that goes through our system, we know that it passes all the rules. And so you've got this one check that this exchange is compliant.
Judd:We can show you all the rules it's passing. If it comes up with an error, it can surface it to the Exchange officer and the user. And so I think just like modeling rules and software is the first step, and we can make sure that everything passes. I think the second thing we do is we have what we call an audit trail. And you see the full history of everything that's happened on the Exchange down to a date stamp across every part of our platform.
Judd:And it's really useful for us internally. We can see why something changed. Let's say the name changed on something, and then this doc had a different name. We actually have a full, it's not like, Hey, these docs don't match. It's like, Hey, we see where and when this actually happened.
Judd:And at the end of the change, we can actually produce the full audit trail. This is an internal thing, but you actually see the full history of the change. You see that it's passing all the rules. And so to this idea of like IRS compliance, we move from trust us to something that's much more verifiable and auditable. And so I think, knock on wood, we've been fortunate enough not to go through any audits, although it happens regularly.
Judd:It's just part of the IRS process. But instead of producing like a few end documents and a letter at the end saying that we think this is compliant, we actually can produce the full audit trail, the fact that it passes all the rules along with the normal documentation. So I think that's like a really important part of our process, not really what we lead with in terms of like marketing the service, but something that's like highly differentiated and a reason to use us as an exchange company as opposed to the like trust us model.
Heidi:Yeah. Yeah. I mean, that's one of the many advantages with, with using your platform. Talk a little bit about some more other advantages that maybe a first time investor who's looking to do a ten thirty one exchange, what are some of the things that they'll notice about using your platform?
Judd:Yeah. Well, it's a great question. I mean, I think first time investor maybe be nervous, but I would encourage them to try it. But I think one thing that we allow that's very unique is this idea of self-service. And so right now, you know, with other, before we started the way you did an exchange is you like called somebody and maybe they took the right notes, maybe not.
Judd:And maybe they sent you back the right documents, maybe not. We built an online platform that people can actually go through and they can do as much or as little of the exchange as they want. They can still call. They can probably, actually they can fax, they can email, they can come and type it in with us. But if they want, they can also go through, we call it self-service.
Judd:And so they can enter in all the details about the exchange. It goes pretty detailed to make sure that they're passing all the different rules. They enter details about the relinquished property. Their identification can be done online. So you can basically do the entire exchange in software.
Judd:You don't have to, but it's very cool. It also means that like you can see the details in software. Maybe today you'd like see an error on the closing statement or something, if there happened to be an error. With our platform, you can go see here's the property I'm selling. Here are all the details.
Judd:Here's the seller. Here's the amount. You can edit it. So you actually have visibility into like the full aspect of the exchange. And again, if you wanna self-service, I think you could probably set up an exchange.
Judd:We haven't really speed run up. We should time it, but you could start, start the exchange, fill out the information, sign the docs, generate all the docs, get an email, I'd say in a minute, through Slack service, which is kinda crazy. No. That's great. And then that's like, the key points are like helping somebody actually structure correctly, answering all the questions, making sure that the entities are correct.
Judd:Sometimes you have these layered of entity. It's not that we are encouraging everybody to speedrun it. We're still heavily reviewing it, on the back end, but because the Exchange is able to do that, it's pretty unique and I think a way better way to avoid mistakes. Yeah.
Heidi:Have you guys built in like a scanning technology where people can just upload documents? So if they have a purchase agreement or they have something in place.
Judd:That is a great question. It's a little bit of a secret sauce, but yeah. So we're working on a piece where, so the settlement statement is like a key document. It contains pretty much, so everything could be wrong before the settlement statement, but you really need the settlement statement to be right. And not that we got it wrong, but just like you decided not to do an exchange and you have your offer, you know, the seller is the entity.
Judd:It's fine. So the settlement statement needs to be right. We want us on the settlement statement. We want to make sure that the funds are directed in the right place. And so that's like a very important document.
Judd:It also contains all the information you need to do an exchange. We're building the allowance of, okay, you can fill out this form. And as I said, it takes a minute, but you can also just forward us the settlement statement. We can abstract, extract all the necessary information and then send you back the documents you need. And so it's complicated because while there's sort of a, a consistency to how settlement statements work, it's not like the HUD one or something where you can actually trust that the data is exact.
Judd:But if you look forward, the experience looks like totally frictionless. You're just forwarding a couple docs. The AI is looking to make sure everything's right. The exchange officers, the double check, and they're there to really explain everything through the process. But you're not able to make manual mistakes because everything is done through software.
Judd:And so I don't know, I guess it could sound kind of dystopic, but I think what it does is allows everybody to focus on what matters. It allows the exchange officers who are really the experts in helping structure the exchange correctly and guiding the customer. It helps the CPA. They're not doing manual busy work. They're not missing a weird line item somewhere.
Judd:And so it's not really a replacement of people in the process. It's just a replacement of mistakes. And like, you have all these like great checks to make sure everything is perfect. And so I think ingesting documents and turning them into structured data, it's weird. You think it'd be a super solved problem, but working on it in the backend, there's there's tools and primitives for it, but it's not, it's not super solved yet.
Judd:So we're working on it, I guess, is the simple answer.
Heidi:That's awesome. I love your definition of that in terms of replacing mistakes. And that makes a lot of sense with how that's structured. In terms of how it's helping the CPAs, so are you guys going through and doing the Form 8,820 four's where you're calculating all of the exchange basis and the carryover basis and all that?
Judd:We don't fill out the eight thousand eight twenty four, but the way we do it today, and we should talk either on air or after this, is we'd like to go further. We just provide all the necessary documents and information in this closing report for the CPA to do that. I'm not sure where the bounds are. I think we could draft the report. We could say, Hey, your report should look like this, but you need to fill it out.
Judd:We're not allowed to give tax advice. We're definitely not allowed to replace CPAs, but we can definitely help CPAs do their jobs better. We could also, let's say we ingest the 8,024 that you guys fill out and we run it against our records and we make sure it's correct. So I think there's a lot to be done there. I think right now we're at the point where we just give the CPAs the final information that I think is a % correct and in the right formats and makes it easy, but we're, we're not filling out that form yet for anybody.
Judd:But let's, let's talk. We could, we could ship it to you guys. Maybe what's it Tuesday? Maybe by the end of the week we could, we could have it.
Heidi:There you go. By the time we publish the podcast.
Judd:It could stay somewhere.
Heidi:That's awesome. I mean, it's just an interesting process. And even in the current state with intermediaries and how that works with the property owner and then how that's working, like with us doing cost segs. So we're thrilled to have partnered with Deferred at Engineered Tax Services. The relationship between cost segregation and ten thirty one exchange is very hand in hand as well to really maximize the tax deferral and maximize the tax benefits for real estate, whether there was a cost seg done on the relinquished property and or a cost seg done on the new replacement property.
Heidi:We also have some very fascinating items that have come to light in terms of making certain elections to be able to restart depreciation, including the original or replacement basis, which again, really just catapults the benefits for investors, the depreciation, the bonus depreciation benefits that they can capture from investing in real estate. So what's interesting is this whole relationship, as with many things in our world, is now evolving so much with AI and technology in creating such an easier flow, a process flow and a handoff process between different areas of expertise. It's been an area we have historically struggled when we have a client who says, I just acquired this property. I'd like to do cost segregation. However, I did a ten thirty one exchange.
Heidi:Well, that actually complicates it for us because we need the basis amount. We need to know what is the new basis. And the taxpayer rarely knows, or the property owner rarely knows. The CPA is like, I haven't worked on that yet. We'll get to it a year when we're working on the tax return.
Heidi:And so some of that data gets a little bit cumbersome. So having all the right partners in play that communicate and work well together, going through that flow of handling the exchange, working with us on the cost seg, getting the correct data, which then because the same thing rings true with the CPAs when we're performing cost segregation is it's really creating an easier process that is eliminating errors because we're really doing the land allocations, the building reclassifying assets, filing for bonus depreciation, and then linking that all together so that the tax filing actually becomes a bit of an easier process because they have the correct data points to enter in there. So I kind of love that you guys are very much following in line or in suit with that blend of hand in hand service and technology. So to that point, even though you're using amazing technology, you have this beautiful platform, self-service, you've got an incredible AI that answers all the right questions, you still have people, right? You still have staff.
Heidi:You have great professionals that are there ready to answer questions and working with customers. Is that correct?
Judd:Yeah, it's a hundred percent correct. I mean, I think our vision is, again, we will, because we have the best platform, we're able to hire the best people, which is great, right? You are able to take somebody who's a deep expert. And, what you say is, you know, you're an expert in exchanges. Explain exchanges way better than I or Markku or whoever will, maybe in another twenty years.
Judd:But how much of your time are you spending creating documents for signatures? How much time are you spending entering data into duplicate systems? How much time are you spending on really complicated money movement that's fraught with error that could result in a bad mistake? And so you say, What if we take all that away from you with technology and make it really one click so you can focus on the things that really matter, which is talking to customers and making sure that they feel well guided through the process, making sure that the exchange is structured correctly, talking to other service providers like their CPA, like their real estate agent. And these are things that are like very, very hard to replace with software.
Judd:But it's the part, if you talk to our exchange officers, it's the part they love doing. They love educating people on exchanges and they love understanding these like long tail, esoteric, you know, undefined tax things. This is like what they're obsessed with. And so allow them to do the parts that they're really great at and really obsessed with, and then don't give them then, Okay, great. I talked to customers for two hours today.
Judd:Now I have to go do six hours of busy work. Just talk to customers. Also, you're not chained to a piece of software all day. You could take a call from anywhere. One of the things we pride ourselves on is that we're really responsive after hours.
Judd:So we, we staff business hours up to twelve midnight, Eastern time. And the way it's possible is that you need somebody in front of a computer, if you've built really good systems and you've got all your data well organized and everything's really automated, it's mostly just answering questions and putting, and then clicking a button hopefully, or all the little things. So I think we translated the job into one that's way more easy and enjoyable. And then from there, you're able to hire the best people who are just able to do what they love and you get rid of all the, you know, the non sexy, you know, super mind numbing parts of the job. And then you just focus on the sexy tax advice, which is great.
Heidi:That's awesome. The sexy tax advice.
Judd:Well, that's, I mean, that's where, I mean, yeah, we talked about like already answering questions and things like that, but at the end of the day, like, I mean, the team has seen so much, like the debates. I mean, you have to be a real nerd to be excited about these debates we have internally, but Hey, has anybody seen this? What's the best practice for this? And these are undefined things that maybe there's a private letter ruling, or maybe it's a conference topic that somebody has seen, or maybe just some weird state level But there's this world of undocumented knowledge that everybody has. And so how do you, again, just give people the space to be able to focus on that really hard stuff and not be mired down by all the manual work that could be possible or was what they needed to do in their previous world?
Judd:I think ultimately that's a better customer experience.
Heidi:Yeah. That's what's so fun about innovation and really solving problems. It's fun. It's very dynamic. To that point, so what are some of the innovations or the improvements that you are the most excited about that you kind of expect to have online in the next twelve, eighteen months?
Judd:That's a great question. I mean, if we talk about some of them, I'd like to Again, anything that could be one click, could it be zero clicks? Anything that right now is spilling out some information, can it be verified by documents? I think one thing that we're, we talked about helping CPAs do their job better. So I think there's, there's things like that.
Judd:Right now we have the multiplayer mode where they can see their clients, but yeah, going in and actually helping reduce work for our partners is a big piece. We partner with a lot of real estate agents. So we have real estate brokers, commercial real estate brokers who, you know, maybe the end exchanger is not as familiar with 1031s, but if you're a commercial real estate broker, especially in certain asset classes and spaces, you're talking 1031s every day. We've been building and are continuing to build a lot of tools for those real estate brokers. So to give one example, they present the benefits of a ten thirty one exchange.
Judd:It tends to be, no offense to our real estate partners, well, before they start using us, like a really janky handed down spreadsheet, where they're doing some rough tax calculation and they're showing here's your ROE today and here's what it could be in the future. And so we saw enough of these spreadsheets. So we just built, you can see a version of it on our resources page, just an example, but it's mostly distributed through real estate brokers, but we just built a way better version of that for clients. We can point it at listing data for, so it's a listing for their client and it tells them here's the estimate of what their taxes are going to be. I think the other, this isn't a total aside, but people are really surprised by the taxes.
Judd:And I think you guys on the CPA side and brokers, you think, Oh, I'm paying long term capital gains. I'm going it's going be 20%. But well, one is it's 20% off your gain, not on your cash. So there, if you've depreciated a lot or your, your, your leverage amounts are different, you're, you're potentially faced with a gain with less cash out of a transaction. So that's one mind blowing thing.
Judd:I think the other things are depreciation recapture. So, Hey, I've been taking depreciation for ten years with this property. Well, now my basis is depreciated to zero. And so my gain is the full amount. So that's crazy.
Judd:And it's taxed at a higher rate. And then you're also subject to state tax and net income investment tax, NIIT. So you're talking about in certain high tax states upwards of 40% tax hit on your gain, not on your cash. So surprising a lot. And the ten thirty one exchange actually defers the entire amount.
Judd:So that's incredible. So one, just, and you don't want to be a broker trying to explain this. I just badly explained it. I'm a pseudo expert. Giving them a tool that shows them what the, what the tax impact's gonna be, is really mind blowing.
Judd:And it, the tool actually looks at, you know, the basis, the leverage, and it does a pretty complex tax analysis to give them the benefit, the tax hit. And then, and then it explains here's what a ten thirty one's gonna look like if you reinvest the money into these different asset classes with these cap rates. Where you asked what we're excited about in the future. We're building a way for the brokers to actually put in specific properties that they want to show to their clients, because the big part of their strategy is to help them do the ten thirty one and the next property. And then the other thing that we do, which is very cool, is we show the comparison between paying the tax and reinvesting the money in the S and P versus doing the ten thirty one exchange.
Judd:And what you see is depending on the return profile and the taxes, it's going to take you seven to ten years just to catch up after that tax reduction to get to breakeven if you pay the tax and reinvest. And that's at a pretty, I think we assume like a 8% to 10% compounding S and P rate. And so ultimately people are looking to sell and they want to reinvest in the S and P and they, or, you know, in, in the stock market broadly, and they, they look at that as an index and you're gonna take ten years just to get to breakeven with the tax benefit of a ten thirty one. We, this is something that brokers were trying to explain individually through these janky spreadsheets. So we built a tool for them just to do it really easily and manage their business.
Judd:And it's interactive for their clients, which is really cool. So I'm really excited about just like getting that, making that tool really great and getting it into more brokers' hands. And again, it's free, like already like the AI research tool, it's totally free. But the way we see it is if we just are incredibly helpful to our partners, to broker partners, to CPA partners, wealth advisors, title and escrow is another big one. We, they'll just want to work with us and they'll naturally recommend us.
Judd:And so that's, that's how we see it. We, If you look at the problem of ten thirty one Exchange, which we're obsessed with, there's a lot, and we've gotten through many of the optimizations. But if you look at the world broadly of how are people helping potential clients, there's probably limitless things that we could help them do and help people with. And those are the types of things where now that we've got the core piece working really well, excited to put more focus on. And then we've got some other wacky ideas, but I think those are more, you know, like the no fee exchange.
Judd:I think there's other things that can really accelerate the ten thirty one industry. And so Wednesday, we're like, we're there yet. We've got some weird ideas. We just, it's been interesting. So we, we just got a team of people who just like really love 1031s and we're kind of nerdy and we like building software problems for stuff.
Judd:And so, you know, we sample eight just thinking about how 10:31 could be better. I don't know. It's not very cool, but it generates some cool awareness.
Heidi:Well, it's cool for real estate investors, especially when we're looking at how to mitigate tax. And, you hit on a couple of really key factors like the recapture and people not thinking about the tax implications when they sell a property. We deal with this every single day that either, one, they sold a property and didn't consider the tax implications. They thought a ten thirty one exchange was going to be really complicated and just-
Judd:Well, they thought they could do it after. Look, if you know one thing, it's just call us before you close. One thing that we can't change.
Heidi:It's amazing because the tax implications and I love your example of the ten year payback. Essentially, it'll take you ten years to recoup the value or the cost you paid in tax to actually get that back in gains after you cash out. That's pretty compelling. I love that you have that tool. I'm going to link it in the show notes and share I'm actually presenting with a big real estate group tomorrow, and it gets me excited.
Heidi:I'm like, Hey, I'm going to bring the link and give it to them and say, Hey, here's a great resource that can be really And
Judd:if they sign up with us, we can give them their own link. And then we actually can, the thing that's cool that we built is we can point it. It depends whether their listings are online or not, but we can point it at an online listing and actually generate report automatically, which is pretty cool. Wow. So yeah, we're trying to, we're trying to make it easy for people.
Heidi:Absolutely. Easy
Judd:button. Not a lot of clicks. You already entered the information online, so we can just grab it from there.
Heidi:Yeah. Amazing. Well, you guys have absolutely done that, working with developing the Easy Button process. Not only that, the NOFI exchange, which is unbelievable. I mean, you are a complete game changer or disruptor in this industry, and I'm very thrilled to be partnered with you guys.
Heidi:We have had a ton of our clients be very excited. Your team has been phenomenal, so we've got some great contacts and love the conversations. Shifting a little bit before we close-up and kind of finish, over to you just a little bit. I mean, you have really built some amazing ventures. You've been involved in some really cool platforms.
Heidi:And technology is not for the faint of heart. I have so much respect for people who are innovators and who are diving into building something new because it also always feels like a race. Who's the first one to get there with everything that's being developed these days and how quickly technology is moving? So I would love to know what's a piece of advice that you would give to business owners or someone who has an idea and they're thinking about trying to take it to market like you've done. What's a piece of advice or something you've learned through that process?
Judd:Totally. Yeah. Well, I think I'm going to give two. I think one is just do it, get started. I think, know, ideas are free and plentiful, but effort is hard.
Judd:So, you know, a lot of people are like looking how to get over the hump. I talk to a lot of entrepreneurs, and I always want people to just like start and start building and, you know, analysis paralysis is the enemy. So I think when we were just interested in 1031s, we started making content about it. We built a couple of tools. We built a calculator because we barely understood it.
Judd:The calculator is still on there. So we wanted to build in a way that we understood the matching of the taxes and mortgage boot and how these things work. And so I would say just you know, definitely get started. And then the most important piece of advice is talk to customers. Like don't be in your own head.
Judd:I think we thought a lot of things about 1031s. Oh, it could be all magical and you know, I don't know. Once you go through and talk to a customer and watch them, watch them use your software, I mean, we, you know, we think we're, we think we're the bees knees, then you watch somebody use a form that we've been working on for six months and they don't know how to use the, the label is totally wrong or whatever. I think if you get started and you talk to customers and you keep iterating and, you know, one of our principles is to make things 1% better every day. And so you really can't fail.
Judd:You may not end up where you started. You probably will end up probably in a far different place than you started, but it'll be the right place because it's the place that customers brought you to. Like, we didn't start with this idea of a no fee exchange. We just wanted to make exchanges better. And we thought the industry was interesting and we didn't think anybody was taking technology.
Judd:And we just started talking to people. We learned about interest sharing. We started, you know, asking questions about fees and asking questions about how the process should work and understanding how the ecosystem and how, you know, you guys are deeply involved and are recommending it. And we didn't know any of this. If we hadn't gotten started and we hadn't talked to, you know, clients, customers, partners, it'd be nowhere.
Judd:It'd be still in my head. I have this dumb idea about the $10.31 thing or something. So yeah. So I think it's not that comp- it's not that complicated. You just gotta do it, take a leap.
Judd:I mean, well hopefully take the leap, but be smart about it and be conservative. Yeah, go for it and talk to customers and make it better every day. You'd be amazed how much progress you make in a short period of time.
Heidi:Yeah, absolutely. Well, you're definitely showing that. And your group, your team, I agree. I mean, you guys have such great expertise. We have been really so pleasantly surprised with our
Judd:experience with our That's amazing. No, we love working with you guys too and helping clients on all these different aspects and referring clients back to you. I mean, we recommend that everybody try to do a cost seg after they close on their replacement property. So that's a natural handback. And it's been awesome.
Judd:We've learned a ton and it's really great to hear that everybody loves working with us.
Heidi:Well, thank you so much. Judd, thank you so much for being a guest. I'm going to have all kinds of things in the show notes, and we'll share some of these data points and some of these tools with our listeners as well. Just looking forward to continue to expand and share the word and get your name out there because I absolutely believe in what you're doing, and I think it is just fantastic. So kudos to you.
Heidi:And before we wrap up, actually, any comments on what is the best way for people to reach out to you if they'd like to chat with you personally or stay in touch?
Judd:The best way to reach deferred in general, well, you can go to deferred.com. We probably should have said that earlier, DEFERRED.com. I guess it'll be in the show notes in the name. Maybe it's not that complicated, but deferred.com was one of the better decisions that we made. The best way to reach us, you know, it's funny, support, S U P P O R T, I didn't need to spell that, at deferred.com.
Judd:It actually goes to everyone. You get the fastest response. It can be the most esoteric CAST question. I read everything. So that's really good.
Judd:You can also, my first name at deferred, dot com. If you wanna find me personally, that's also great. But I think we've centralized support dot com. It's, it's boring because it's like an email address, but it's another tech innovation where no matter what it gets emailed, we know what file it is. We know who it should go to and everybody has eyes on it and it gets a really fast response.
Judd:So that's always a cool way to get in touch with us. You can call us, fill out a form on our website. I don't know, page me. Pager?
Heidi:What's a pager? I remember those days.
Judd:Now we're always working on this. I say this, but we're like scarily findable. Yeah. Yeah. No, come, come talk to us if you, if you wanna, partner with us, ten thirty one questions, really anything.
Judd:We're just excited to be in the space and moving it forward and, excited for ETS for all the support and the cool partnership we have. And yeah, it's, it's, excited to talk to you.
Heidi:I love it. Thank you so much, Judd. All right. Thanks again. We'll, we'll be in touch soon.
Judd:Bye bye.
Heidi:Thank you. Well, thanks so much to Jed for joining us and for sharing his incredible insights. What he and his team are doing at Deferred is exactly what this industry needs, which is clarity and innovation and alignment with investor goals. We are so proud to be partnered with Deferred at Engineered Tax Services to offer our clients access to this no fee exchange, combined with strategic tax planning, cost segregation, and reinvestment insights, because keeping more of what you earn is the key to long term wealth building. For those of you turning in, the links in the show notes to learn more about Deferred and how this partnership can benefit you and your investment strategy.
Heidi:Thank you again so much for listening to the Healthy, Wealthy, and Wise podcast. Be sure to subscribe, leave a review, or share this episode with your fellow investor or your advisor who needs to hear it. Until next time, stay healthy, stay wealthy, and stay wise. Thank you.
