The 1031 Brief Podcast Ep. 3: Are You Leaving Money on the Table?

Ashley has a conversation with Julie Baird, President of First American Exchange Company, about whether early 1031 planning can affect buying power. They discuss how to approach investigating replacement-property options and how to create better deal flexibility in an exchange. They also walk through simple examples, common missed opportunities, and the practical questions investors should raise before a sale closes.

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TRANSCRIPT

Ashley Stefan:Two investors can sell similar rental properties with almost identical comps and end up with very different buying power. Let's say one investor closes, pays the tax bill if there's no exchange, and maybe reinvests what's left in another asset. The other investor asks the 1031 questions early, sets up the exchange before their closing, and can keep more equity working in their next property because they defer their tax bill.

Two properties with the same sales price, but different planning approaches, and therefore potentially very disparate investment results. And that raises the question behind today's episode. Are you leaving money on the table?

Welcome to the 1031 Brief, a podcast from First American Exchange Company. I'm Ashley Stefan. On this podcast, we break down real estate, tax and 1031 exchange concepts in plain English so investors and advisors can have better informed investing conversations.

Before we get started, a quick reminder that while extremely insightful, this podcast is for educational purposes only. It's not legal, tax, financial or investment advice. Every investor's facts are different, so please consult your own tax advisor and legal counsel about your particular investment details.

Today I'm joined by Julie Baird, President of First American Exchange Company. Julie's background brings together real estate law, title, and years of hands-on 1031 exchange experience. Before stepping into her current role, she served as national counsel for First American Exchange Company and worked in private practice on real estate transactions in the San Francisco Bay Area.

She's also a past president of the Federation of Exchange Accommodators and a frequent speaker and author on 1031 exchange issues. Also a longtime advocate for mentorship and leadership in commercial real estate.

Julie, thanks so much for being here.

Julie Baird: Thanks Ashley. I'm really happy to be here and looking forward to the conversation today.

Ashley Stefan: Well, I’m really glad you're here because a lot of questions have been coming up recently from investors who are trying to decide whether to sell or to hold, and then whether to reposition their funds or to move into something more passive. A lot of them do know that a 1031 exchange might be available because they're selling an investment property, but they don't always know when they actually need to start looking at the 1031 exchange option. So I'm excited to put some of those questions to you today because you've seen this from the legal side, the 1031 exchange side and from a practical deal and business perspective also.

Julie Baird: Yeah, I'm really eager to talk about this because one of the parts of this work that I really enjoy is helping investors think through an exchange more strategically. It's not just a tax rule, but it's really a planning tool. And when someone raises the questions early, there are usually more ways to look at the transaction. It's kind of like unlocking additional puzzle pieces that really can provide more ways to protect options and more time to avoid having to make decisions under pressure.

Ashley Stefan: Okay, well that actually leads me to an initial and practical question, which is: are investors right to be asking themselves, if I move on from this property, am I somehow giving up leverage or value by not planning ahead?

Julie Baird: Yeah, that's a really helpful mindset to have at the beginning. So, most investors don't begin by digging into the tax code section or supporting regulations, right? They really start with the practical facts about what property they own, how it's been performing, and ideally what they want to achieve, whether that's in terms of ROI or some other financial metric or even a more personal consideration like a geographic relocation, or do they want active or passive management?

Ashley Stefan: So what you're saying is that the next move might be buying a larger or better improved property, or moving into something that's easier to manage, or even it could just be changing markets. It just depends on the specifics of that particular investor. Is that accurate?

Julie Baird: Yeah, that's exactly right. The 1031 exchange conversation should really happen first in this really sort of more broad planning context. It's about taxes for sure, but it's still also about the practical buying power, the overall investment goals, and the logistics of any portfolio changes that the investor might be thinking about.

Ashley Stefan: Let's put some simple numbers around this conversation. I think it's really helpful to illustrate different outcomes for investors who do different things with their 1031 exchanges, or investors who choose not to do it at all. So, for purposes of illustration, let's say an investor sells a rental property, all cash, for $500,000. And just to keep the math really easy here, let's assume the adjusted basis is $300,000. So, there's a $200,000 gain. And assume just as an example that the combined tax cost if the investor sells without an exchange is $50,000. Of course, the actual tax result could be completely different based on the federal and state tax circumstances and depreciation, income level, all of those things. But this example path that we're going with leaves this investor with $450,000 in cash before considering transaction costs, okay. Are you following still?

Julie Baird:I'm with you.

Ashley Stefan: So by contrast, if they successfully take the exchange path, it could allow them to keep the full $500,000 less any transaction costs, right, working in their qualifying replacement property. So, in looking at this example and that difference, would you agree that investors are sometimes leaving money on the table, so to speak, if they don't do a 1031 exchange?

Julie Baird: You know, it's such a great question, and I would say anytime an investor essentially gives up capital that they could have stayed invested, you have to look at the circumstances. Not every time is it going to be true that a 1031 exchange would be the better choice. But investors need to at least ask these questions. And, if they don't, and their equity doesn't work out as well for them as a result, you really could say they left money on the table.

People often describe a 1031 exchange as a tax benefit, and that's totally fair. But in practice, it's also a buying power amplifier.

If the investor plans to remain in real estate, it's really meaningful to have the ability to invest that much more cash and capital in your next property, especially if you're looking at a really big tax bill.

Ashley Stefan: So the $50,000 in the example I gave isn't just a measure of the tax owed to the IRS. It's also representative of how much buying power the exchanger has, right?

Julie Baird: Yeah, that's exactly right. It's that extra equity that may help with the down payment, or it could help support a stronger acquisition strategy by reducing the overall financing that's needed and allowing a stronger offer. It could also enable an investor to grow their portfolio.

Ashley Stefan: That is a great point. And I want to highlight your mention of the down payment being larger with a 1031. So, for example, if financing is involved, not only is that extra $50,000 you're deferring in taxes going to boost the purchase price that you can afford by $50,000, it would change the actual scale of the next purchase, right?

Julie Baird: Yeah, exactly. So, if you look at it this way, if an investor has more equity and the lender's comfortable with certain loan-to-value ratios, and that equity may support a larger purchase than the investor could have made after paying taxes at closing. The details, of course, are going to depend on the deal and the lender. But let's go back to the example that you were talking about. If that investor was putting $500,000 of equity into a property, let's look at one scenario. Assuming a 20% down payment, acceptable financing terms, and of course the investor's ability to qualify, that $500,000 of cash could theoretically support a purchase price of up to $2.5 million.

Alternatively, had the investor paid that $50,000 of taxes at the time of sale and then decided to reinvest the remaining $450,000, assuming the same 20% down scenario, this supports a lower purchase price of $2.25 million. So, that's a $250,000 difference, which is really meaningful.

Ashley Stefan: Wow, yeah. That's a really helpful way to frame it. And just to put a fine point on it for any listeners seeing dollar signs — you know, details of this kind of portfolio shift would need to be discussed in depth with your tax advisor to figure out if moving up in value to that degree actually makes sense for you, or if it can be done given your particular financial picture. But generally speaking, it seems super clear that the 1031 exchange can really boost an investor's ability to engage with the market and actually participate in the real estate economy.

Julie Baird: Yeah, exactly. And I think that's the practical takeaway here. A 1031 exchange isn't just about delaying a tax bill in the abstract, right? It can really affect what the investor is able to do next. That extra equity could materially change the size of the replacement property that they can purchase or the amount of debt that they need. It also can accelerate the timeline for growing a portfolio in line with their long-term goals.

And sometimes investors don't realize all of this until after the sale is already too far along to be able to pull an exchange together. And I also do want to point out a point that you made that not every sale should be an exchange, but all investors should at least understand the option early enough to make a well-informed decision. Once the closing on the sale happens and the proceeds are received, that opportunity is gone.

Ashley Stefan: So Julie, I want to talk about who this actually applies to because I think there's a common misperception about who's actually eligible for 1031 exchanges. A lot of people hear 1031 exchange and they picture a very large investor or an institutional transaction or someone with a whole portfolio of commercial real estate, but that's not always the case, right?

Julie Baird: Yeah, that's right. It can be a much broader group of people than I think what people might assume. So, it could be someone selling one rental home that they've owned for years. It could be a small multifamily owner who wants less day-to-day management, or maybe it's an investor who wants to move from one market to another because they're moving cross country due to some life circumstances or changes. Sometimes there are small family business owners selling real estate used in their business and they want to buy more appropriate property for their changing business needs. It could even be a family that wants to consolidate several properties that they've inherited over a bunch of years, they want to consolidate into one, or the inverse — maybe they want to move from one larger property into several more geographically diverse smaller ones.

So, the question really isn't, you know, is this investor sophisticated enough for a 1031 exchange? But really it's: is this investor selling qualifying real estate? And do they want to stay invested in qualifying real estate?

Ashley Stefan: That does seem like a much better way to frame it because it takes the focus off the size of the investor, right, and puts it on the actual plan. So really the question for any investor selling qualifying real property is: are they cashing out or are they repositioning their funds?

Julie Baird: Yeah, exactly. And if an investor wants to leave real estate entirely, a 1031 exchange may actually not make sense. Or if they need liquidity from the sale, that also might point to a different approach. And if replacement options in the current market just don't make sense, that really matters too. But, I guess, when someone is selling investment or business use real estate and planning to buy other qualifying real estate, the 1031 exchange question should always be asked.

Ashley Stefan: Okay. And asking that question doesn't mean the investor's already decided to do the exchange or is going to be locked in, at least not before the transaction or the sale occurs, right?

Julie Baird: Yeah, that's right. And that's a really important distinction. Sometimes after looking at all the facts, the answer's going to be no, this just doesn't fit. And that can be a completely reasonable answer. There's no risk in exploring the option and deciding an exchange actually doesn't make sense, versus the risk of not asking and finding out too late that an exchange may have been helpful, but the opportunity is now gone.

Ashley Stefan: Let's talk about how that happens, because I think most people aren't intentionally leaving value behind. So, from your perspective, where does the opportunity usually get missed?

Julie Baird: Yeah, it's a great question. And unfortunately the most common issue is just late planning.

A lot of investors have the general sense that this tool, you know, a 1031 exchange, exists. So, they may have heard about it from a broker or an advisor or another investor, but they don't always bring the 1031 exchange into the transaction early enough to do all of the background work needed to evaluate the option well. So sometimes they wait until the sale is ready to close, or worst case, until after closing. And by that point the options are very limited if you're lucky, but they may be gone entirely.

Ashley Stefan: So, it's not just whether the investor understands the concepts that can cause a lost opportunity in an exchange, but also whether they raise it at the right point in the transaction.

Julie Baird: Yeah, that's right. Timing really is everything. So, when the conversation starts early, the investor has time to understand the numbers involved, like their total tax liability and income goals. They have time to engage meaningfully with their tax advisor, contact a qualified intermediary before closing, and start looking at replacement property options, speak with lenders and so on. There's a long list there. When these conversations start too late in the closing process, all that decision-making space becomes really compressed. And then sometimes the simpler road is taken just for logistical purposes.

And this might mean foregoing a transaction that actually could have been economically beneficial.

Ashley Stefan: So not being meticulous in your preparation for a 1031 exchange seems like a recipe for stress at best and for compromised decision making at the worst.

Julie Baird: Yeah, it really can be. A rushed exchange can also push an investor who does decide to exchange towards a replacement property that just doesn't really fit their plan. And that's not the goal. Tax deferral has value for sure, but the investor still needs to be comfortable with the next investment.

Ashley Stefan: That feels like a really important point. A 1031 exchange shouldn't be used to justify a bad investment, basically.

Julie Baird: Yeah, exactly. The better outcome really is planning early enough that the tax strategy and the investment strategy are working together.

Ashley Stefan: I want to spend a minute on the 45-day identification period because I think this is one of those rules that sounds manageable until someone's actually living inside of it. So, from your perspective, what should investors realistically expect or know about when they're approaching this challenging timeframe?

Julie Baird: Right. Time sensitivity isn't a new concept in real estate, right? And usually something that occurs in good faith during a typical closing that stalls an ultimate deadline or timeline can be managed. So, for example, a lender asks for more information or due diligence turns up an issue and more inspections are needed. Typically, more time can be negotiated in those circumstances. By contrast, in a 1031 exchange, that 45-day identification period is firm and it's based on calendar days, not business days. So even for experienced investors, they need to be prepared to plan for any contingency that they expect could occur when they're identifying replacement options. Inside a 45-day identification window, that can create a lot of pressure really quickly.

Ashley Stefan: So the problem is not necessarily that something dramatic happens, it's that normal transaction issues are just harder to absorb because the timeline is so fixed.

Julie Baird: That's right. And if the investor has only one replacement property in mind, one issue with that property can really put the whole exchange at risk. If after the 45-day identification period that deal falls through, backups can't be added.

Ashley Stefan: So backup properties are not just nice to have listed within the 45-day identification window. It's possibly a fail-safe.

Julie Baird: Yeah, that can definitely be true. Backup properties are often part of the planning. There are some cases where an investor may only want to do an exchange if one particular property can be acquired. And in that case, they may not want to identify other properties. There are some situations where having identified properties can impact the timing of the return of the excess exchange funds or funds in a failed exchange. So, an investor shouldn't by just, you know, identifying random properties just to fill out a list. There's a real strategy involved.

The identification rules are technical, and investors should work really closely with their tax advisor, legal counsel and qualified intermediary to make sure the replacement property is identified correctly and is appropriate for their overall investment goals.

Ashley Stefan: So okay, the standard isn't find anything. It's more like find real options that you would actually want to invest in that could actually work for you, right?

Julie Baird: Exactly. From a planning standpoint, that's exactly right. An investor really should be thinking about whether those options are realistic. Are they available? Can they get financing? Do they fit the overall investment goals? And are there contingencies if the preferred property does not work out?

Ashley Stefan: I also want to talk about documentation of the exchange because not every exchange risk is obvious from the outside. Some of the risk is more technical and it's in the details, the timing, the documents, the way the transaction is structured. So where would you argue that precision matters the most?

Julie Baird: Ooh, can I say it matters everywhere?

Ashley Stefan: Sure can. But for our listeners, can you name maybe one or two places?

Julie Baird: Of course, of course. So, things like the property, the taxpayer, the timing, the documents, the flow of funds, the identification and, ultimately, the replacement acquisition — all these things need to line up. A 1031 exchange has a lot of moving pieces, and small details can really affect the overall result. So, investors need to understand what exactly is being sold, what are they going to acquire, whether the same taxpayer is actually selling and buying, are there related party issues involved? They may also want to analyze whether or not any of the properties had any personal use and whether the property is actually qualified, or in other words held for investment or business use, and whether any cash or non-like-kind property may create taxable boot.

Ashley Stefan: And those aren't details that you want to casually discover at the end of your transaction, right?

Julie Baird: Nope. And the more complicated the facts are, really the earlier you want to raise them.

Ashley Stefan: What would you put into that complicated facts category?

Julie Baird: Yeah, gosh, off the top of my head, we just had kind of a list that we were talking through. So related party transactions, partnership issues, prior personal use or mixed-use property, seller financing, construction or improvements or replacement property that needs some work, investors who want to receive some cash from the sale. And any of those things are perfectly manageable depending on the facts, but they really need careful review.

Ashley Stefan: Okay, so I guess a practical takeaway for our listeners could be: don't try to clean up the facts before you call your advisors. Bring the facts as they are and let them help you to figure out if a 1031 exchange makes sense or if there's something that you just don't want to disturb.

Julie Baird: Yes, it's so true. That's a hundred percent correct. And, you know, any tax advisor or attorney, in addition to the qualified intermediary, can only help and give guidance within the context of the issues and the facts that they know about. So, the earlier those facts are on the table, the more time the team has to evaluate them. Late surprises are never good surprises, and they can be so much harder to solve.

Ashley Stefan: Let's talk about some of the tools investors may not know to actually ask about. So, we've been talking mostly about a standard forward exchange where the investor sells, then they buy replacement property. But real life doesn't always line up that neatly. And this is where reverse exchanges and improvement exchanges fit into the conversation. Could you talk about that a little bit, and why they matter?

Julie Baird: Absolutely, these types of structures matter because they can actually preserve options in situations where the standard forward exchange just doesn't fit the facts very well. So, in a standard forward exchange, we've got this familiar order, right? You sell first and then you buy. But sometimes the right replacement property actually appears before the relinquished property is ready to close. So, in that situation, the investor may want to evaluate whether a reverse exchange could be appropriate. Other times the replacement property might need some work, and the investor actually wants to use some of their exchange funds to build qualifying improvements on that property before the exchange is completed. And that's where an improvement exchange becomes part of the conversation.

But these are much more complex transactions than a typical forward exchange because they involve the qualified intermediary actually creating a temporary holding entity. And that entity is going to take title to, or park title to, the target property for a period of time until the investor is ready to or able to sell that relinquished property, or they've finished building those improvements on the replacement property. So these tools can be helpful in many situations that require some added flexibility, but they are definitely not shortcuts by any means.

Ashley Stefan: Okay. Well that really ties back to the whole theme of the episode. The earlier an investor asks the 1031 question, the more tools may still be on the table, but some of them are more challenging to use than others.

Julie Baird: Yeah, exactly right. Late planning really narrows the options really quickly.

Ashley Stefan: I want to touch on one more area because I think it comes up more often than people may realize, especially for investors who have owned property for a long time. So sometimes a property hasn't always been used in the same way. Maybe it started as a primary residence and later became a rental, or maybe part of the property is used for personal use, but part of it is an investment property or used for business use. So, maybe the owner's thinking about retirement, downsizing, or just changing how the property is used.

So, when we're thinking about these two types of uses, personal property and investment property, how should listeners be thinking about Section 121, which is that home sale exclusion, and how it could interact with 1031 planning of an investment property?

Julie Baird: Right. Definitely working with their tax advisor, of course. As a little bit of background, just to share, so Section 121 is this rule that may allow a taxpayer to exclude up to $250,000 of gain, or up to $500,000 of gain for certain married taxpayers filing jointly, on the sale of a principal residence if the ownership and use tests are met. By contrast, a 1031 exchange applies to qualifying real property held for investment or productive use in a trade or business. So, at a really basic level, the two rules are looking at different uses of property. But in real life, as we know, a property may have more than one story. So, it may have been a home and then later a rental. Or, like you mentioned, it may have had one portion used personally and another portion used for investment or business purposes — like a duplex where an investor lives in one unit and then uses the other unit for a rental.

In some fact patterns, taxpayers and their advisors can evaluate whether Section 121 can exclude part of the gain and then whether Section 1031 can defer part of the gain on top of that.

Ashley Stefan: But that analysis I'm guessing depends heavily on the facts. Is that right?

Julie Baird: Very much so. So, for example, timing really matters. Has the property been used as a principal residence for two of the last five years? If not, Section 121 isn't going to apply. And of course, at least some portion of the property has to actually be investment property or used in business at the time of sale to qualify for an exchange. So, this isn't an area where an investor should just assume the result based on some article that they read or something they heard from another investor. The full timeline and the full property story and the specific facts really matter.

Ashley Stefan: So if a property has had both personal and investment use, that history is something that the investor should bring up early in their conversations with their tax advisors or their lawyers.

Julie Baird: Yeah, exactly right.

Ashley Stefan: Okay.

Julie Baird: Yeah, they need that full story in order to evaluate all of the options.

Ashley Stefan: Alright, so let's make everything we've discussed today, which is a plethora of amazing information, more practical for our listeners. Let's suppose that somebody is preparing to sell an investment property and they want to avoid leaving value on the table. What is the big thing they should be thinking about first?

Julie Baird: I think I would frame this as a short checklist. So first, talk with your tax advisor and run the numbers. Understand the potential gain, the depreciation, the various state tax issues and the after-tax result if there's no 1031 exchange.

Second, get clear on the goals. Is the investor trying to stay invested in real estate? Are they trying to move into a different market or a different asset type? Do they want a more passive structure or a larger property? Or do they actually need liquidity or do they want to move away from real estate? All of those things would factor into the decision.

Third, contact a qualified intermediary long before closing. The exchange needs to be set up before the sale closes and the investor has access to the sale proceeds.

Fourth, start the replacement property search early. And in most cases, that search should include some realistic backup options, not just the one ideal property.

The fifth point is identify anything unusual in the facts. So related parties or mixed-use history, some prior personal use, partnership issues with the taxpayer, any construction needs or seller financing, or the desire to receive some cash at the time of sale should all be raised early in the process.

And then finally, making sure the real estate team — so the lender, escrow and settlement team, legal counsel, tax advisor and qualified intermediary — all understand your timing and your goals and any nuances related to the transaction.

Ashley Stefan: That is a clean list and none of those steps are especially complicated but they do require the investor to just start the conversation in advance of the closing. More than a few days or even a couple of weeks is the preference, I believe, right?

Julie Baird: That's right. And the list is a lot, but it's pretty simple and it really does solve a lot of problems if it's followed.

Ashley Stefan: And an important point, again that I want to re-highlight is that not every investor should do a 1031 exchange, right? The goal is to evaluate the option before that option actually disappears.

Julie Baird: 100%. That is spot on. So the mistake may not be deciding against doing a 1031 exchange, but it could definitely be not evaluating one ahead of time.

Ashley Stefan: Well, thank you so much. This has been so helpful. We'll also link a worksheet in the show notes so that listeners can walk through some of these core questions that you brought up with their advisors. And we can also include our capital gains tax calculator as a starting point for people to start that run-the-numbers conversation. What do you think about that sort of resource for investors, Julie?

Julie Baird: Yeah, love that. Those are fantastic resources and they can be really good educational tools, just as long as I can remind the listeners to remember this really doesn't replace tax advice. These tools can really help organize the conversation, but the actual decision needs to be made with the investors' own tax and legal advisors.

Ashley Stefan: Well, Julie, this has been really helpful. And I think the takeaway for listeners is pretty straightforward. If you're selling appreciated investment real estate and you think you might want to stay invested in real estate, you've got to ask those 1031 questions early. So run the numbers with your tax advisor, understand the tax and buying power implications, talk with your attorney or team if you have one, and don't forget to bring in the qualified intermediary way before closing. What am I forgetting, Oh, investors also need to be thinking about building a replacement property plan that can survive some real-world surprises. Do you think I have everything?

Julie Baird: Yes, and that was a much more articulate, succinct way to put it than my sort of verbose list. So, that's exactly right. And just remember, a 1031 exchange isn't just, you know, a closing document or a tax form at the end of a deal. You have to live with the results of your planning and decisions. And when investors treat it that way, they usually end up with more, you know, refined questions and a better idea of what the timing rules will require and a clearer sense of what they're actually trying to accomplish. And again, not every sale should become an exchange, but as you said, if an investor is selling qualifying real estate and intends to stay invested in real estate, the option is worth evaluating before the transaction gets too far along.

Ashley Stefan: Julie, thank you so much for joining me.

Julie Baird: Thanks for having me, Ashley. I really enjoyed it.

Ashley Stefan: And thank you everyone for listening to the 1031 Brief. We'll link a simple "Are You Leaving Money on the Table" worksheet in the show notes with some of the core questions to ask before listing or closing on an investment property. And in our next episode, we'll continue looking at the planning choices that can shape exchange outcomes long before the deadlines arrive, specifically through the lens of the reverse exchange.

See you next time on The 1031 Brief, where we bring you information useful enough to remember and practical enough to use.

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This podcast is for educational purposes only and isn't legal, tax, financial, or investment advice. Please consult your own tax advisor and legal counsel about your situation.

This episode is copyright 2026 by First American Financial Corporation, all rights reserved.

This transcript has been edited for clarity.

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