What is a deferred sales trust and how can help you avoid more taxes? Today, Scott Carson and Brett Swarts from Capital Gains Tax Solutions talk about the Deferred Sales Trust and why it might be an ideal tool to replace 1031 Exchanges. Brett discusses the mechanics of the transaction, who it might be the ideal tool for, and those who aren’t a fit for it. Don’t miss this episode to learn how to avoid capital gains taxes while still having control over your investments.

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The Deferred Sales Trust: Avoiding Capital Gains Tax With Brett Swarts

I’m excited to have our guest. I’ll tell you, we’re all in the marketing and media and real estate aspect of things, and this guy is going to share some great knowledge stuff because I know we’re always evolving. We’re always adding assets, whether it’s notes or the property side. It’s great to grow. It’s great to level up. Oftentimes, it can lead to some different tax consequences and issues that you don’t want to pay Uncle Sam all of your hard-earned work down the drain and taxes. He is the Founder of the Capital Gains Tax Solutions and Host of the Capital Gains Tax Solutions Podcast. Each year, he puts hundreds of business professionals with the deferred sales trust tool to help them save and help earn his high net worth clients solve capital tax gains deferred limitations. I’m honored to have our buddy, Brett Swarts, join us. I’m looking forward to how his show is growing and how he’s doing. How’s it going, Brett? Are you doing great?

I’m going great. Thanks so much, Scott, for having me on the show.

How did you evolve or get into what you’re doing? Let’s talk a little about your background and how you got into being a Capital Gains Tax Solution expert?

Most commercial real estate owners, business owners, high-end primary homeowners, they struggle with capital gains tax. My story goes back to 2006 in helping those types of owners. In particular, it was investment real estate owners buy and sell investment properties via 1031 exchanges mostly. I learned the sticks and bricks and the financing side of it between 2006 and 2011. During that time, one of the biggest events in the financial market history, 2008 crash. We were looking to figure out ways to help our clients never have to face the pain of losing all or some of their equity through that crash. A lot of it was because of the 1031 Exchange. To be honest, we were brokers who were helping people who do that and that’s how we get paid.

We found that it doesn’t fit every situation and people were overpaying. That’s how they got hurt when they sold in 2005, 2006 and 2007 and upper leg into bigger properties with equal or greater debt and oftentimes overpaid. 2008 hit, 2009 hit, people started losing property, especially here in Sacramento, California where I’m from. We set on a mission to see what will we do differently if this happened again and what could we change? My manager at the time brought in a gentleman to speak on this deferred sales trust. Most of your readers are going to say, “What is that? I’ve never heard of it. I’ve heard of a Delaware statutory trust. I know about a 1031 but what does a deferred sales trust?” They started to tell us that you never have to do 1031 ever again. You can do away with 1031 if you want to. You can use this to defer taxes. It’s 1031 for a business sale or high-end primary home sale.

Essentially, it’s an installment sale that allows you to defer tax and you can get out of debt and you could invest in the note. You can invest in stocks, bonds, mutual funds, different real estate syndications. It’s much more flexible versus 1031. That started me down this journey on how to add value to clients. At the time I was married, we had a baby and we’re making next to nothing in real estate because A) The market had crashed and B) I was new to it. I didn’t have a lot of value to add to clients. I’m trying to make a deal work, trying to add value, trying to be creative and look for solutions and into the deferred sales trust. It changed the way I approached every deal and I started to win more deals, win more listings, add more value and connect with more people because indeed it can solve certain challenges that 1031 can’t do.

For our readers, we’ll touch base back a little bit. Let’s go into when somebody would consider this and maybe talking about what’s a 1031 exchange for our readers who don’t know. Let’s go with the nuts and bolts and work your way into that. How does that sound?

The 1031 exchange is part of the Tax Code, the IRC Section 1031 and it allows someone to buy an investment property and then sell that investment property. If they have gained, they can buy another investment property. Essentially, you’re trading up. There are certain rules you have to follow equal or greater value. You have to identify within 45 days, close within 180 days. As long as you follow these rules, you can defer 100% of the capital gains tax, kick the tax down the road and then use that equity to earn interest and more cashflow and buy bigger properties. It’s one of the best ways to build wealth. That being said, it has some errant limitations such as we call it the sell high, buy higher 180 days later.

The intent or the goal for us is like our parents taught us to sell high and buy low. Don’t sell high and buy higher 180 days later. Unfortunately, that’s what the 1031 forces too many of our clients to do, and too many of the readers. What can you do? You want to buy an optimal time. What does that mean? That means buying when you find a deal maybe diversifying outside of your deals. With the deferred sales trust, this is the solution. You can move all the equity into the deferred sales trust at closing, get rid of all your debt, then you can go purchase investment real estate or wait until day 181 or 5 years. Here’s the key, all tax-deferred. Even better, you could diversify. You might say, “I’m tired of the toilets, the trash, and the liability.” This is where a lot of our clients are. They’re the Baby Boomers. The older generation, they’re getting older and they’re looking for ways to retire out of all of these toilets, trash, and liability.

In fact, according to the American Bankers Association, there’s about $17 trillion that will pass from one generation to the next and the next twenty years. This is the largest wealth transfer in the history of the planet that we know of. It’s by the Baby Boomers. The American Bankers Association has found that there’s about 77 million in the US alone and every single day about 10,000 of them are turning 65 and they’ve built wealth for 20, 30, 40 and 50 years. They are tired of the toilets, the trash, the liability but they can’t stomach pain 30% to 50% in capital gains tax and depreciation recapture upon the sale. What do most of them do? A lot of them will hold on. They hold onto their business, their hold on to their real estate. They held on from the 2008 crash and they’re backing up again but they feel trapped because they don’t want to sell and trade.

 

A deal story, Peter sold an apartment complex in Sacramento and he sold his property for $1.75 million. He’s a Baby Boomer and he said, “I didn’t want to trade my 18 units for 36 units.” In other words, “I didn’t want to trade 18 problems for 36 problems. I had done this all my life. I’m tired of this. I want to be out of debt. I want to be tax-deferred and I don’t have to deal with any more evictions, tenants, toilets or trash. Brett, this is the first time anyone’s ever brought this to me.” He loves it. He closed the deal and he’s happy. He goes, “I’ve never had much time and energy.” Back to the Baby Boomers, they’re struggling with this. Some of your readers may not know, but a business sale, it doesn’t qualify for 1031. You can’t sell a business and move into an unlike real estate, it doesn’t work. Most people sell businesses and pay taxes.

That’s the first most obvious candidate for this. If you have a business, if it’s worth $1 million or more, if you have tax, let’s say $500,000 of liability or so, then you want to talk to us. The second one is the high-end primary homeowner. If you live on the coast or maybe you have farmland or big property on a big piece of land, we can use it for that. 1031 doesn’t work for that. The last one would be for the investor who is looking to be what I call smart in this environment, being cautious not to overpay for a property. We had a client do that in 2006, he sold the peak, but all of the equity to the deferred sales trust, waited five years to redeploy the capital back into investment real estate.

That property he sold, the buyer who bought it was foreclosed on by the bank. What happened? He uses his deferred sales trust money, as a self-directed IRA to purchase that same real estate that he sold. Here’s the cool part. He did it at $0.60 on the dollar. He called the Monday morning quarterback. He dropped back, he made the perfect play. He sold at the peak, got out, diversify and put it into conservative allocations of stocks, bonds, and mutual funds. Even when the market shifted, he wasn’t hurt there. He bought the real estate back at a discount. That’s what we do. We help people create and preserve more wealth. More than that, we help them build an optimal timing, wealth plan. We designed it around what they want and what their needs are. It can be different for different people in different stages of life. All of these help them create and preserve more wealth.

Let’s go through some of the mechanics because I’m already hearing questions from our audience that are going to be thinking about this. You sell your property, you set up an entity, you set up a trust. Can anybody set up that trust, any attorney or any estate planning attorney or no?

We say don’t try this at home. This is a specialized installment proprietary structure of which has 24-year track record, thousands of closes, fourteen no-change IRS audits, which is the most important thing. Whatever tax deferral strategy you go with, you want to make sure that they’ve been tested with their clients against the IRS and they have survived those audits and/or thrive. We have thrived. We have had zero change audits and fourteen deals of which the largest one was $125 million commercial real estate property in San Diego. We are batting a thousand with the IRS. The IRS knows who we are. They know what we’re doing. You do notes, so you know this for sure. It’s an installment sale. It’s IRC 453. That is the Tax Code. It goes back to the 1920s. It’s a way to carry paper.

When you carry paper, you’re in a tax-deferred state. Scott, you own a $10 million property and I say, “Scott, I want to buy your property. It’s me and you imagine and if I gave you a $2 million down payment, you would receive $2 million and you need to pay tax on that. The other $8 million would be in a deferral state, tax-deferred until and if I pay you. If I gave you zero down payment and you carried back the full $10 million, the same thing, except you haven’t taken the $2 million you have zero tax due. Nothing’s triggered. The $10 million is in a deferral state. The same way at 1031 works. You can send the $10 million to the QI Company.” Therefore, Scott doesn’t have it in his hands.

The difference is we do it as the business trust and this business trust can go for ten years at a time and keep renewing every 10 years for 10 years and keep going, pass it onto your kids. Whereas a traditional installment sale typically goes for 3 to 5 years. There’s not a lot of prepayment built-in. You’ve forfeited the 1031 at that point because you’re past the 180 days and you owe the tax. Whereas ours, you can go for as long as you want. That’s what the IRS said. They said, “You are doing an installment sale.” You’re being creative with this third-party trust, which is our role. We’re the third-party trustee. We were non-related. We’re in it for business purposes. There are certain rules you have to follow. You are doing this, but as long as Scott hasn’t received that $10 million, he got to live off the interest payments.

That’s where most of our clients do. They receive some around 6% to 8% depending on how the return goes in the note and then they pay an ordinary income on that, but they keep the principal intact. Instead of let’s say having $6 million, you would have paid the tax, you have a full $10 million minus some fees from us and then you’re living off that creating, preserving more wealth. The ocean is blue, meaning you can go and invest wherever you want, however you want and diversify wherever you want without having to do a 1031 Exchange.

What happens to that $10 million? You said some installment loan. Does it balloon in 5 or 10 years and then they can take the cash and do where they want with it? They don’t receive the capital?

It’s absolutely flexible. Most of our clients like to pay the tax the second day to never, Scott. That means they’re going to keep the $10 million principal intact, live off the interest. At the end of ten years renewed for another ten years like a refinance. You keep doing that. Here’s the nuance here, which is powerful and we’re taking off here for the investor. You can use up to 80% of the funds the next day, like a self-directed IRA to buy into an investment real estate or put it into notes or put it into alternative investments. With a brand-new LLC, establishes a couple of things. One, it’s a brand-new basis if you happen to buy a property. Two, you are 80% owner of that LLC, 20% of the trust, which owes you the money back.

Here’s the key, that means after the preferred return, you get all of 80% of the upside of that. Let’s say you found 20% cash-on-cash return investment and you bought into that deal with a partner somebody else, either the debts in your name or someone else’s name. Essentially, you can get most of that upside through that LLC. That’s the beauty. When you sell, you can move all the funds back in and you keep going and it compiles into one trust and you keep buying and selling properties in and out of the trust the whole time at optimal timing. This is the part where the readers might be saying, “My head’s spinning a little bit.”

We understand that. It’s like riding a bike for the first time until you ride it. Until you have a team that guides you with this and has done thousands of closes, this is our role. It’s not the structure, it’s not forming an LLC with a random attorney. You are hiring specialists in us. Brain surgeons, the way I call it, I’m the nurse and the brain surgeon is the tax attorney who’s the number one installment sale attorney in the nation doing it for 24 years. He’s a tax genius. He’s a CPA and tax attorney and this is what he does and what he’s done. He’s the one who puts it all together, he and his law firm, and then we execute this plan with you. It’s all 100% legal and we’ve already paved the way. Most people don’t know about it because they haven’t connected with us yet.

 

Who would this not be for? If somebody is looking to a 1031 exchange or to do this, who’s this not for?

To remind you, the number one person is the business owner, high-end primary homeowner because they have no 1031 option. The next best person is the commercial real estate owner and it breaks into two camps. The first one is an active commercial real estate, operator, owner who can find value add and this is key. If they can find value-add opportunities that make sense, they’re not buying it because they’re deferring tax. They’re buying it for the intrinsic value of the opportunity itself, the location, the forced depreciation, the cashflow, all of those things. You can find that deal. I’m in California and I don’t know how it is in Texas and different places, but values to me are through the roof.

To me, it’s a lot like 2006, 2007 again with these values and it doesn’t make any sense. I own commercial real estate. I have my own senior housing, multifamily, mixed-use, retail office. I’m an investor myself too. We are having a hard time making sense. I’ll tell you a deal store, we sold seven units. I did for a client, I’m a commercial real estate broker here in Sacramento for $270,000 per unit. This is a 1965 property flat roof that had some 2 and 3 bedrooms. Rents are pretty good, $1,300 to $1,600 pretty solid. $270,000 in a 4.3% cap. The buyer was borrowing at a 4% interest rate and in 4.3% and he ends up buying it all cash. He was in 1031, it was the perfect scenario.

We were selling to a 1031 buyer, but my seller, we were looking at other properties, we’re looking at a 21-unit property, but it was also about a 4.3%, 4.5% cap and he goes, “Brett, why am I selling this and buying this with all this debt and overpaying?” I said, “Exactly.” He says, “Tell me about that deferred sales trust thing again.” I said, “Great.” We walk through it and he goes, “I can get a better return. I have none of the toilets and none of the trash, none of the liability, none of the rent control. I can wait for the market to shift.” We talked about ten reasons on the right side of why do the deferred sales trust and what are the reasons why he wouldn’t? He wouldn’t have if his tax liability wasn’t big enough, which is getting to the answer to your question.

If his tax liability had only been $50,000, we say, “Pay the tax.” If it’s $75,000, pay the tax. In fact, our minimum is $100,000 of tax liability for about every $400,000 to $500,000 of equity. His scenario, he’s selling for $1.9 million and had to pay off some debt. He also had a partner on the deal. He got out of debt. He deferred about $300,000 in liability. He was big enough there. His proceeds were above $500,000 where it was good there. He was a perfect scenario because he’s going to increase his cash-on-cash. He has no more liability. He’s a full-time working career businessman, he doesn’t have a lot of time to chase tenants and he didn’t want to overpay.

He learned in 2008 what happened. He bought in 2009 this property for $685,000 and sold it for $1.9 million. He has seen it all, but it wasn’t easy for him because he comes from a real estate family. He grew up with his dad. They own about 20 million to 30 million in apartment complexes in the Napa, Northern California region. They’re wealthy and have done well for 1031 exchanges. It was difficult for him to let go of the 1031 and jump onto the deferred sales trust. This answers to your question, who is this not for? It’s for the person who I would say a real estate is like a religion and one of the doctrines is the 1031. I love commercial real estate. It’s my number one choice for investment in earning well. I love 1031 exchanges, but I don’t love them all the time.

I know when to break free from the 1031 and go to the other one, which is an installment sale. It’s probably caught a lot like your industry, Scott, you go, “You make a lot of money in multifamily, but you can make a lot of money in notes too.” You can make even more, “Yeah, sure. They had the depreciation over there.” Why don’t you balance your portfolio, do some different things rather than always just doing this one thing? That’s the shift there. As long as you can be openminded and shift and be coachable, we’re going to guide you with that but if you’re not open-minded and not coachable, then it wouldn’t be for you. It is a bit different than your traditional 1031.

I’m a numbers geek and I love that stuff with what you’re sharing, it’s such valuable. You compare it a little bit to an IRA. What are some things you can’t use inside of your trust with that as far as investments or things you’re buying?

You can’t put it into a primary home. The same reason you can’t 1031 into a primary home because that’s considered private property and therefore it’s considered constructive or actual receipt. It can’t be that. If you’re going to spin it on a fancy car or something else, cash out of that amount and go buy that fancy car or travel. Anything that’s personally used. Backing up one step, the reason the government gives us these options, Scott, is the study of macroeconomics. They say, “If we can incentivize the money to flow in and out of the economy in a pro-business, pro-investment way, it’s going to spur economic growth, which is going to spur more jobs, which is going to spur more tax revenue.” It’s the study of macroeconomics. This is why they put these laws in place. That is one thing that it can’t go into as a primary because it’s not spurring economic growth.

Everything else is pretty much fair game. You can put it into notes. You can put it into stocks, bonds, mutual funds, investment, real estate, syndications, and operations. As a commercial real estate operator, it’s a great way to attract wealth from those who you’re looking to invest in your deal or your fund, because you’re going to save them 30% to 50%. Here’s another stat for you. Remember we talked about that $17 trillion that’s going to pass, half of that $17 trillion, let’s call it $8.5 trillion. That’s in an investment real estate, primary homes and businesses. Private equity that represents an illiquid asset, 50% of that $17 trillion is illiquid. It means, if we can unlock this illiquid into a deferred sales trust, they can put that into syndication.

We think it’s the number one way to attract high-net-worth individuals and help them unlock all of that capital that’s sitting there. We did a deal in Cupertino. It was a $3 million home sale for a single lady who had lived there and this is three miles from Apple headquarters. She sold her house. It skyrockets through the roof. She had her 121-Exclusion, which is only $250,000 for the capital gains. Above and beyond that, she owed over $300,000 in tax. She was able to use the deferred sales trust to not only be able to free herself from these houses and be able to move and relocate, but also live off a passive income stream versus having to take a reverse mortgage or do something crazy with her house. She’s diversified debt-free and it’s producing cashflow for her. That’s the power of the deferred sales trust.

This is the first I’ve heard of that though. That’s the beautiful thing about what you’re doing is the opportunities out there. You’re right, there are a lot of people that are going to be facing taxes in the next 10,000 people turning 65 or older a day. Who’s an ideal referral source for you? Commercial realtors, estate planners, what’s a good referral source for you?

Part of our passions here is equipping business professionals with this tool so they can add more value to their clients. Especially in this day of automation, where automation is challenging the value proposition of every single business professional. High-end realtors, commercial real estate brokers, financial advisers. When you can bring value to add strategy that’s beyond the automation that is a bit complex and it takes a team to execute this, you’ve set yourself into a different realm. We call it the blue ocean versus the red ocean. The red ocean is where all the sharks are at and all the blood in the water because everyone’s competing for the same thing. Commercial real estate brokers, CPA, financial adviser, estate planning attorney, we’re in a train and partner.

We have thousands of them across the US who are still in their industry, still doing what they’re doing, but they jump into the membership of what we provide and then we help them to market and educate their client base. Anyone who’s dealing with the top 20% of the wealth in America, any ultra-high-net-worth individuals, that is the ideal business professional that we can help. If the tax is not big enough, then we can’t help our fee out, eats up the tax savings. It’s got to be typically highly appreciated assets. Our average deal is about $2.6 million and we’re deferring somewhere around $400,000 or $500,000 in tax. For closing, it’s $1.4 million deal, $1 million deal. We’re also closing $40 million deal. All ranges, but that range, $2.6 million, make sure they have enough equity, then we can help them all out.

How can people screw up their trust? What are the things that can shoot themselves in the foot? I’m sure you’re smiling. You’ve seen it done a few times, I imagine. Are people screwing up?

That’s much on our side or even on their side, once the trust is in place, it’s clockwork. As long as we follow the rules and we’ve yet to have any of them fail at the IRS or even any of the advisers not return the amount they need it. You can shoot yourself in the foot by not being there early enough. For this to happen, we have to schedule it before the close of escrow. Even more than that, schedule it before all contingencies are removed. Let’s walk through the first two. The business owner who’s selling out, let’s say a professional practice of veterinarian or dentists, orthodontists, optometrist or big tech business, whatever. They don’t have a 1031 option. We need to get to them before the buyer removes all contingencies. That’s the first thing.

You can contact us, CapitalGainsTaxSolutions.com and we can give you that language. It’s an option language. It doesn’t cost anything to get all that. Once you put that one sentence inside of your contract, it’s an option that you can execute on that and therefore you’re good. If you don’t put that in there and then the buyer moves all contingencies, you shot yourself in the foot because the government says, “No, you are already going to close, Scott. You jam this thing in here, the strategy in here beforehand.” We’ll say, “No, sorry, we can’t help you.” We’ve gotten those calls before. The other call is this, “I closed last week and I found out that I’m going to owe $1 million in tax. Can you help me?” We’re like, “Sorry, it has to happen at the close of escrow.”

For the commercial real estate owner, we can save a failed 1031 exchange. Imagine I got the call and they said, “They remove all contingencies closing next week. Can you help me?” We’ll say, “Not at the close of escrow, but if you use a QI company that we partner with,” not all QI companies are the same. You want one that’s going to give you both options for the 1031 and the deferred sales trust. “If you use that one you go for your 1031 doesn’t work out, great. On day 46 or day 181, we can save a failed 1031 exchange. It doesn’t cost you anything.” Nothing extra but it gives you all of the flexibility as long as you put this language in there.

 

That’s important for everybody to know. I’ve got to find them before the contingencies end. The IRS is going back and looking at the contracts and looking at the dates and things like that too.

On the IRS audit, that’s exactly what they’re doing. If they were to do an audit on any of us, they’re going to look at the verification of dates and verification of what happened. The story needs to match up. Otherwise, the taxman is going to say, “You didn’t follow the rules. Pay us the tax.”

We have an aging crowd but also talking about some of the markets that we’re seeing going on. Multifamily being overpriced and also being one of the hottest markets out there. I’m seeing stuff that’s being overpaid for. People flocking to invest in syndications and apartments and things like that. How can those owner-operators or the people that are putting those deals together benefit from this as well too?

The owner-operator, by the way, or any reader who’s buying multifamily or any property, you’re going to ask yourself, “Who is the ideal seller to buy from? Who are they?” They’re the Baby Boomers. They’re older, and they’ve been nice to the tennis that kept the rents low. They’re a bit sleepy or a bit tired, meaning they haven’t done a lot of upgrades because they got to know the community and they’re nice people. They have only had 100-unit property and it’s cashflowing like crazy. They haven’t sold it yet. Why? They don’t want to trade 100 problems that they know for 200 problems that they don’t know. They don’t want to do 1031. They don’t want new property tax to reassess depending on what state you’re in. They don’t want more debt. They don’t need it anymore.

When they get the call from the broker or the syndicators saying, “Why don’t you do 1031 or why don’t you do Delaware Statutory Trust?” which is another form of 1031. The deferred sales trust is not a Delaware, it’s different. They already received those calls. When you call them and say, “No, this is something different altogether.” They say, “What do you mean?” “You don’t have to go into debt. You don’t have to buy a property. You can get rid of all of your 100 problems and put it into a diversified portfolio.” “Tell me about that.” All of a sudden, you’ve added value because you solve their problem. Not just the external tax problem, the internal problem of their time, their energy, getting out of debt and feeling secure in their investments, getting diversified. That’s what they want. The 1031 doesn’t provide that.

Liquidity too, that’s the other part of this. At any point, you can cash out of this trust all or some of it and pay the tax on that given amount. Whereas if you stick it in another illiquid asset, it could be 7 to 10 years with the Delaware Statutory Trust or whatever. That is the best way to market to these sellers who are selling because you’re providing that solution. Second, the commercial real estate broker. All the time, they get this, “I would love to sell it if he gave me an up-leg. What if we can save a failed 1031? We can. What if we can get rid of the up-leg altogether?” Those are the dots that I would connect for them. If any of your client base who are already accredited investors, who are probably high-net-worth, they have other assets that they want to sell.

They may be selling a business. What you don’t want to do is get the call that the person sold a $5 million business and paid $2 million in tax and says, “I have $3 million to invest with you.” That’s the worst call. You want to tell him the deferred sales trust so they can say, “I sold my $5 million business. I deferred all $2 million in tax. I have $4 million to invest with you.” The other million would stay in stocks, bonds, mutual funds. It’s a reserve account. It’s still their money’s, still earning interest, but you can’t put all $5 million into that one deal. The four can go in, the syndicator gets an extra million. The client’s happy because he has an extra $2 million here. What does he do? He goes and tells all of his other friends who are in that same business and they do the same thing.

To me, a lot of operators that don’t know about this, they’re missing a huge opportunity. The last one is when they go to sell the operation. They’re doing a deal with two syndicators and they’re selling a $22 million apartment complex in Nevada. They are facing a large capital gains tax. What they’re going to do is all of the other investors are going their own way but each of these two investors is going their own deferred sales trust, meaning they can go into their own individual one, separate from the other. It severs the partnership interest. They’re going to use those funds and invest in their next deal together. Collectively, they’re saving around $1 million. That’s the power of the deferred sales trust. The key is to get with this early, let us map it all out and tell you, “A) Here’s the math on this side. B) Here’s the math on this side. You decide what you want to do.”

This would be a good tool if you’re an apartment investor looking for deals to be educated on this as a way to reach out to people that deal that you want. Mom and pop or somebody got this looking, but are afraid of 1031 to set this up on where they owner finances the property to you in this trust as an opportunity, an option. Correct?

Yeah. Here’s the key. They’re not owner financing to that buyer because of a lot of moms and pops, they think that’s the only solution. They have to find this perfect buyer. That buyer is neither an investment grade. He’s a single individual. He may also not be even financeable. That’s why he’s asking for owner financing. The question is, Scott, do you want to entrust, let’s say a $10 million note to this one single person that you may have to foreclose on your property or would you rather take that $10 million and say, “Take the whole property, you’re gone?” Let’s put it into ten different syndications over here across five different product types. One of them is a note, multifamily, a mobile home park, a senior housing. Let’s diversify within the investment real estate world versus that one single person. That’s the difference. In a traditional installment sale and the deferred sales, trust installment sale, both have the foundation of the installment sale. One gives you diversification across as much as you want. Go for as long as you want. One does not give you diversification, you’re only tied to that property and you’re tied to that particular buyer who may or may not be nice to deal with.

Where does that $10 million then come from the diversify? If I’m a 65-year-old owner, I want to sell my property but I’m afraid at 1031 exchange. We set this up for sales trust. Am I still going to sell it to somebody and get the $10 million but that goes into the trust? Or can I do owner finance to somebody if they bring some money for a down payment?

You have the $10 million property you’re selling and you have the buyer who has $10 million. He can come with cash or he can come with a loan. It doesn’t matter but he has the full $10 million. He’s ready to transact and you’re about to do the deal. The escrow’s about to close. Remember, you put the language in there so you’re already prepared for this. What happens? The trust jumps in right in between right before the closing of escrow. What does it do? It buys your position by giving you zero down payment and you carried back the full $10 million, bought your property. Immediately, it turns around and sells it to that cash buyer for $10 million. If the trust bought it for $10 million and sold it for $10 million, how much gain does the trust have, Scott?

Zero.

If you received a zero down payment and you carried back to note, how much tax is triggered?

Zero.

You got it. The buyer takes title the same way he would have. It doesn’t affect him at all. He’s gone. He takes the property, the title and he’s gone. Where are the funds? The funds are sitting at some of the largest banks in the world like Charles Schwab, TD Ameritrade, Bank of New York Mellon. Where are they invested? Scott, where would you like to invest it? “I like a mixture of this and that.” Let’s map that out. It’s a sign of the rate of returns typically around eight. “Brett, I have all of these note deals I want to find immediately.” Scott, $8 million of that $10 million, you form that brand new LLC. The $8 million gets wired to that bank and that LLC, you’re off doing the thing you’ve always done before, which is one of the biggest misconceptions about this thing is, “I lose control. I have to put it all into this.”

You can technically save that $2 million because it has to stay in stocks, bonds, and mutual funds. You could technically say that for that, but for this other $8 million, you’re often running the same thing you would have done. You’re buying whenever you want. That other $2 million is still earning interest and are most of the financial advisors we work with can earn about 8% over a ten-year period of time. It’s a reserve account. It’s like saying, “Scott, I’ll loan you this $10 million, but you need to keep $2 million at our bank. It’s still your money, but we want to make sure that you can service the note.” Who are you servicing? It’s the tax return, the trustee fee, the financial advising fee.

That’s where you go. You’re often running, you go adding tons of value to those properties and you sell and you face another taxable event. What do you do? Move all the original amount back into there. Plus, you have a second note that goes into your same trust. Let’s say there’s $13 million in there. Imagine you have 25 single-family homes spread across two different states and you’re like, “That 1031 is a nightmare.” Let’s form one trust and let’s slowly sell one property at a time and keep building up this total value. What do you do? Let’s say you get all up to $5 million, 80% can go buy one big property if you want to.

It’s flexible and the key is, “What do you want, Scott? It’s your money. How would you like to receive it? How do we together build this wealth plan that creates optimal timing, that gives you diversification, that gets you out of debt if you want to be out of debt and gets you liquidity if you want liquidity so that you can create and preserve more wealth?” Most commercial real estate brokers won’t tell you about this. Here’s why they want to keep you in the 1031 race. They want you to sell the $1 million property for the $3 million and the $3 million for the $6 million and the $6 million for the $12 million.

Why? They get these huge commissions. I still do 1031 exchanges. I get paid more if I do 1031 then if I do a deferred sales trust, I’ve been there. I’m still there. Here’s the difference. I walk in and I say, “Mr. Client, what do you want to do? You can do 1031. Here are the pros and cons and I’m going to go out and look for a property or you can do a deferred sales trust. Here are the pros and cons. What would you like to do?” Let them make the decision. Sometimes it’s both, “I like to take some chips off the table and I’d like to do some 1031.” We call that a buyer fractured 1031. We can do both.

For those that don’t know, can you explain what a QI is?

It’s Qualified Intermediary. That’s a 1031 exchange, qualified intermediary. They hold the funds. We’re like a QI in the sense that we help you maintain what’s called nonactual receipt. The funds go to the deferred sales trust never commingled anyone else. Single entity trust or they can go to a qualified intermediary. Both of them maintain the taxpayer from taking actual receipts, which would trigger the tax.

I don’t want people to think it was a qualified investment. With you having so much experience, stuff like that, where do you see the opportunity coming here or what opportunities are you seeing in the real estate market that you’re salivating or looking at? You’re seeing it from both sides of the equation.

For someone who has zero basis or next to no basis, one of the number one reasons to own investment real estate is for the depreciation that you can offset against the cashflow. Twenty-seven and a half years for multifamily, 39 for commercial, you own long enough and do enough 1031 Exchanges, your depreciation goes to zero. At that point, you need to buy something much bigger or even bigger to get more depreciation, which is difficult. The number one is those who can sell high. Put in the deferred sales trust, then use those funds to buy a new property. You get a brand-new depreciation schedule. The math on this explodes. That’s the number one opportunity for investment relative.

To buy one, it makes sense. You know that you’re the expert. You’ve been in real estate, you see the deals. We don’t want to take that away. We want to enhance that whenever you find that deal, that can be tomorrow, that can be day one, anyone, if we five years. You may want to diversify into multiple places. I like to senior housing, that’s my favorite with the Baby Boomers and all of the health challenges. The demographics are amazing there. Multifamily is overpriced. I’m cautious about that. I love the mobile home parks. That’s a good value play for the cash-on-cash return. Those are my three favorites. If I had to put an order, it would be probably senior housing, mobile home parks, and multifamily because I know multifamily. That’s my bread and butter.

The key would be the geographical locations with a proven operator. I have five kids, when I invest, I’m a passive investor and then I educate everyone on the deferred sales trust and I broker deals. I also raise funds for operators too. That being said, my scenario is I don’t have time and energy to be running these deals. I partner with those who are buying them and I raised the capital and such because I want optimal time with my kids and my family. I can’t have too much on my plate. It all depends on what your lifestyle is. We can do the financial part. You have to pick your lifestyle. Let’s schedule it. Let’s map out that plan and then let’s all execute that together. Those would be the biggest opportunities that I see.

What is the best way for people to reach out to you, to connect with you and see if they’re a fit for what they’ve got going on their life with you?

Let me mention another one before I get to that one. This is the estate tax. This might be the one that most excited about for any readers who are ultra-high-net-worth, what does that mean? That means you’re married and you’re worth more than $22 million or you’re single and you’re worth more than $11 million. Although in 2025, those are set to expire. Most of a lot of people think they’re going to go back down to the $11 million married and $5 million single, collectively. That being said, anything inside your taxable estate, it’s going to be hit, what’s called it the 40% debt tax. Let’s walk through a scenario. Let’s imagine you’re worth $52 million and you’re married. The first $22 million is exempt, you’re good there, but that next $30 million, if it’s inside your taxable estate, it’s going to be hit with what’s called a debt tax.

40% of that is $12 million that is due within six months of your passing. What do you do? The intent is to get outside of your taxable state. The problem is it takes too long to do it. You do these FLPs and you do these gifting things, but you run out of the amount per year and you can’t get it out fast enough. You throw your hands up and you say, “Maybe I’ll buy some life insurance or maybe I’ll do this.” Most can’t get it out fast enough. The solution is the deferred sales trust and the deferred sales trust can save on one single deal and move all of the funds outside the taxable estate. It has to be a sale. You’d have to have a buyer. Let’s imagine you had a $52 million buyer for $52 million assets on that sale.

All $52 million would move outside the taxable estate for all the capital gains tax. Not only would you save that $12 million we talked about before, but all of the growth from here until the time you passed will be outside your taxable estate. We’re talking about the generational wealth of which you can use to fund charitable causes, your grandkids’ college education, whatever. It’s your trust. You can put it in your living trust. That is the amazing part. That’s at the heart of what we’re about. We’re not only helping people and families get freedom from capital gains taxes, but also have freedom for their funds and liquidity for their funds so they can fund charitable causes for those most in need. We encourage you and we think single-handedly there’s nothing like this that does this.

 

There’s the CRT. It stands for Charitable Remainder Trust, but you have to give 100% of it away to charity. Ours were like to CRT, no Cs required. You don’t have to put 100%. Most of our clients are charitable, they’re not 100% charitable. We want to map this out and show you what you can do with that and whatever you’re passionate about, let’s do that. Rather than paying the tax, not doing estate planning, not taking action, not having a plan and giving it to a government, which I don’t think it’s any secret. Both sides are going to waste it away in about ten seconds. That $23 trillion in debt is wasting our tax dollars away every second. Let’s keep it in our communities.

Let’s keep it for funding charitable causes so that we cannot spread more good works around the world and that’s what we’re about. That being said, you can find us at CapitalGainsTaxSolutions.com. You can schedule a one-on-one consultation with me. You can search me on LinkedIn, Brett Swarts. You can also search for us on YouTube. We send out 3 to 5-minute videos a couple of times a week. We also have a free guide. If you go to my website, you can click and you’ll get a free guide. It’s called The Escape Feeling Trapped by Capital Gains Taxes. That’ll give you a good introduction to everything. That’s the best way to connect with us.

I’ve been educated and I’ve got a couple of referral sources for you from spending some time with you. Hopefully, you’ve learned some things. There’s so much great knowledge on there with what Brett said, check him out. Reach out to them. If you fall into the categories he described or if he knows somebody, make the introduction. Don’t wait until it’s too late to take action. Go out, do some great things out there. Reach out to your people, your friends. We look forward to seeing you all at the top.

 Important Links:

• Capital Gains Tax Solutions
• Capital Gains Tax Solutions Podcast
• Brett Swarts – LinkedIn
• YouTube – Capital Gains Tax Solutions
• http://CapitalGainsTaxSolutions.com/

About Brett Swarts

Brett Swarts is the Founder of Capital Gains Tax Solutions and host of the capital gains tax solutions podcast. Each year, he equips hundreds of business professionals with the Deferred Sales Trust tool to help their high net worth clients solve capital gains tax deferral limitations.

Brett is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers on the west coast. His audiences are challenged to lean into multiple capital gains tax deferral strategies, create and develop a tax-deferred passive cash flow optimal timing wealth plan of their own, and execute on this plan so they can create and preserve more wealth.

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