Rising Trend of Accidental Landlords

A recent study by the real estate analytics firm Parcl revealed a noteworthy development in the housing market: between 3% to 8% of homeowners who listed their properties for sale in September 2024 transitioned into accidental landlords by November 2024, depending on their respective metropolitan areas.

This shift presents unique opportunities for real estate investors, particularly in the realm of 1031 exchanges—an investment strategy aimed at deferring capital gains taxes.

Understanding 1031 Exchanges

Under Section 1031 of the U.S. tax code, property owners can defer capital gains taxes by reinvesting the proceeds from the sale of an investment property into another property that is not a primary residence. Despite representing an impressive $100 billion in annual transactions, data from the National Association of Realtors (NAR) indicates that fewer than 10% of eligible real estate transactions utilize 1031 exchanges.

The Challenges of Current Processes

According to Judd Schoenholtz, co-founder and CEO of the 1031 exchange firm Deferred, the outdated nature and cumbersome documentation involved in traditional 1031 exchanges deter many investors from taking advantage of this option. “The process is so outdated and document-intensive, so people don’t take advantage of it,” Schoenholtz noted.

Innovative Solutions from Deferred

To tackle these challenges, Schoenholtz, along with co-founders Alex Farrill and Aaron LaRue, launched Deferred, a qualified intermediary platform simplifying the 1031 exchange process. Unlike conventional intermediaries, Deferred employs artificial intelligence to automate documentation, making transactions smoother and more efficient. Notably, the service is offered without direct charges to clients; instead, the company earns revenue by collecting interest on the funds held during the exchange.

Deferred shares a portion of the interest generated with its clients, enhancing the attractiveness of their model. The firm aims to democratize access to 1031 exchanges, allowing investors of all sizes to maximize property investments. “By making 1031s more accessible, Deferred will enable every investor to exchange into new properties—revitalizing neighborhoods and fueling economic growth,” as stated on the company blog.

Recent Developments and Funding

Deferred’s recent acquisition of Plenti Financial, a firm experienced in facilitating nearly 7,000 exchanges, is set to bolster its capabilities. David Greenberger, a real estate attorney and former leader at Plenti Financial, now oversees exchanges at Deferred, enhancing their expertise in the sector.

In addition, Deferred has secured $3.6 million in seed funding, with contributions from notable venture capital firms such as B Capital and Fika Ventures, and support from executives at well-known companies like Zillow and Opendoor. Schoenholtz emphasized the transformative potential of this funding: “At Deferred, we’re redefining what it means to be a Qualified Intermediary by combining cutting-edge fintech infrastructure with deep real estate industry expertise. This funding enables us to expand access to 1031 exchanges, ensuring that every investor—not just institutional players—can leverage this powerful wealth-building tool.”

Looking Ahead

Schoenholtz expressed enthusiasm about collaborating with both residential and commercial real estate agents and brokerages to facilitate their clients’ 1031 exchange requirements. With the founders’ successful track records, including previous ventures such as Open Listings and Balance Homes, Deferred is positioned to influence the real estate investment landscape positively.