There are so many ways to go about investing in real estate, so many methods you can incorporate into your practice, and having a stronger foundational knowledge of all these techniques can help you decide what works best for what you’re doing and what you want to do. One of these methods is called the Deferred Sales Trust, which, simply put, is a manufactured installment sale. Scott Carson is joined by Brett Swarts of the Capital Gains Tax Solutions Podcast. Together, they discuss the differences between 1031 Exchanges and Deferred Sales Trust. They also discuss how the DST can be a better fit for your long-term investment strategies.
Listen to the podcast here:
Why You Should Consider A Deferred Sales Trust With Brett Swarts
I’m excited to have this guest on here. He’s got some big things going on. I had him on my show before and I was blown away by what he is doing out there. I want to go through a little bit of housekeeping with you all out there. We’ve got a couple of big events coming up here. Note Night In America if this is your first time here with us, we are honored to have you. You can always go to WeCloseNotes.tv. That will take you to our YouTube channel for you to be able to watch over 1,000 of our videos on YouTube. Make sure if you’re going to YouTube, hit the subscribe button so you’re aware of everything we post up there, not only at Note Night In America episodes, but also our Note Closers Show. Note Night In America hit a milestone over 75,000 downloads from the one little show that we do a couple of times a month. As always you can go to WeCloseNotes.com to check out everything going on there.
We do have something cool going. I’ll be calling bank asset managers for four hours, calling a whole load, treating departments and we do it via Zoom. We’ll do live Q&A for those that are paid to be part of it. If you’ve already picked up a ticket to Note CAMP, you get a ticket. If you picked up a ticket to our virtual workshop, this is included. If not, and you want to read and ask questions. You can do that for $49 by going to CallingBanks.com. If you want to get a bang for your buck, sign up for one of the other two things and this will count in as an extra bonus for you. I have an email going out first thing to buy lists of the asset managers and we’ll be calling off with those that are clicked on the link is a double way. There’s another way to make that contact with them.
A couple of two big events you don’t want to miss out on our Virtual Note Buying Workshop, our three-day workshop is back the first time we’ve taught it in 2020. We’ve got some great stuff. The normal cost is $699 and we dropped it down to $599. Go to NoteBuyingForDummies.com or go to WeCloseNotes.com and check out the Virtual Workshop. If you sign up for that, you get a ticket to the next event. Otherwise, we’ve got Note CAMP 2020 which I’m honored. Our speaker is one of the keynotes on there as well. That’s a three-day online note convention. It’s $99 for a ticket. It will go up from there. Get your extra early bird price. Our special guest expert is going to be giving a lot of usage of what he’s sharing and what he does and his expertise out there. We are honored to have Brett Swarts from the Capital Gains Tax Solutions Podcast. This guy is a commercial realtor and an investor who’s doing some big and amazing things. Brett, we are honored to have you here on the show.
Scott, thank you so much and I am thrilled to be with you and add some value to your audience.
How’s everything going out there?
It’s great out here. We are grateful for every day that we have to count our blessings and we launched a huge podcast. You were a big part of that being in your Mass Media Mastermind and getting a chance to get the inspiration, knowledge, and wisdom to get everything together. It takes a whole team. We are excited for that launch.
I’m honored. I was listening to some episodes taking a little bit of a breather and you’ve got some great stuff on there. I’m going to give it over to you.
This presentation is titled, How I helped Dave to Finally Achieve Relief in Retirement When He Sold $7.6 Million Multifamily Building and Saved $1.1 Million in Capital Gains Tax Without Having To Do a 1031 Exchange. In fact, we saved his failed 1031 exchange. You can do that and we’re going to show you how. I am not a CPA nor your tax professional. Every single deal is a little bit different and your circumstances will vary widely. We strongly encourage you to seek independent legal and tax professional advice. Dave was in your position and he was looking at this deferred sales trust for the first time. Not to be confused with the Delaware Statutory Trust, this is another form of a 1031 exchange. He had never heard of this thing and he’s going, “What is this thing called a deferred sales trust?” First of all, deferred sales trust is a manufactured installment sale. If you’re in the note business along with Scott, you know it as a seller carryback or a land contract where you, as the seller of something, can become the bank or the lender and carry a paper in order to defer capital gains tax. We do a specialized installment sale. This is what Dave was learning about for the first time. This might resonate with you, he wanted to be able to sit on the sidelines to be able to time the real estate market.
We all know as real estate professionals and as owners of real estate that we make our money on the buy-side. Buying low and selling high. He said, “I don’t want to buy in this overpriced market. I want to buy it when it’s a buyer’s market. I’d rather wait on the sidelines and wait for something like a Corona crash, economic crisis or something where it’s more reasonable where I can find a deal rather than overpaying via a 1031 exchange to defer the tax.” Also, he’s a Baby Boomer and he wants to slow down a little bit too. He wants to retire from the toilets, trash, liability, and he wants to trade them for time, liquidity, travel, and diversification.
He’s part of what’s called the largest wealth transfer in the history of the planet, which is going on, which is this, according to the American Bankers Association, “About $17 trillion to $20 trillion will pass from one generation the Baby Boomers to the next generation and the next twenty years.” This is known as the largest wealth transfer in the history of the planet. There are about 77 million Baby Boomers in the US alone, and about 10,000 are turning 65 every single day. They’ve made this massive amount of wealth with businesses, commercial real estate, high-end primary homes, artwork, and collectibles.
They’re looking at all of these toilets, trash, and liability and they’re saying, “How do I get out of this without getting completely clobbered and hammered by the 30% to 50% in capital gains tax and/or how do I sell something and not have to overpay?” That’s what we’re going to cover in these three secrets to an optimal timing wealth plan. Dave, for example, he’s planning on sitting on the sidelines. He’s sitting with his funds at TD Ameritrade and waiting for the deals to come in. He’s completely diversified. He’s going to wait and be patient with this, which is what this allows you to do versus the 1031.
Who is this for? This is for anyone reading this, who has a highly appreciated business, investment real estate, primary home, or other assets that’s subject to capital gains tax. What other assets? It could be Bitcoin, it could be a carried interest. It could be captive insurance, and it could be artwork, collectibles. I’m doing a horse deal in Kentucky. If you ever watch the Kentucky Derby, those horses are worth a lot of money. If you buy that horse at $1 million and you sell them for $3 million, that’s a capital gains tax. You’re going to owe taxes on that. That could be somewhere between 30% and 50% of the gain. That’s a big chunk.
You need to be selling something worth at least $1 million, approximately net of all debt, and the asset needs to have a capital gain of more than $500,000. If you hit those parameters, it works. Maybe you’re a real estate professional, a financial advisor, a business broker, a commercial real estate operator, syndicator and you have your partners or clients who are dealing with these same challenges. What is the deferred sales trust? It’s a manufactured installment sale and we’re going to walk through how that all works. The key is why would you need one for your wealth plan? I want you to think about two things. The first one is Blockbuster. Do you remember the days when you went into Blockbuster?
I’m a 1980s kid and growing up Blockbuster on Friday and Saturday nights, either in video games or movies, was like the best thing. I had no idea Blockbuster was going to go out of business. We thought it was the best-kept thing. Netflix came around. I don’t know if you know this, but Netflix approached Blockbuster and said, “Will you buy our business for $50 million? We have this new thing.” They’re like, “We will make our own version of that. We’ve been doing this for a long time, thanks for the offer, but we’re good.” They didn’t. The old is gone and the new is here, Blockbuster is now bankrupt and Netflix is one of the largest media companies in the world.
There’s an old way of doing things and there’s a new way. We’d like to say the old way is doing the 1031 exchanges. The 1031 exchange, it only works for investment real estate. It doesn’t work for your high-end primary home. It doesn’t work for our business. It will work for carried interest, but it doesn’t work for artwork or collectibles. It doesn’t work for Bitcoin. It doesn’t work for horses. Anything that’s besides investment real estate, it doesn’t work for. Whereas the deferred sales trust, the new way it works for all of those asset classes, which is a great thing. The key thing I want you to think about is things have changed and how this wealth presentation might change your perspective on how you invest and how you time the real estate market.
For my goal for this masterclass is number one, I want at the end of this masterclass for you to say, “The only way for you to gain the most freedom from capital gains tax is through a deferred sales trust, optimal timing, and wealth plan.” Number two, “The only way to an optimal timing wealth plan is through Capital Gains Tax Solutions.” I’ll ask for your commitment that when you know that a deferred sales trust fits 1 and 2 and is the best way for you to move forward for a deal that you’re selling. You will go all in and you will commit to being educated and getting your CPA and financial advisor on board, and essentially grabbing hold of this tool and then using it when your deal comes up.
I want you to take the information and then get equipped with it and then go to your trusted advisor who you need their approval. Have it as your tool for when you go to sell as an option for deferring your tax. Although most of the time it’s your number one option, that’s for you to decide based upon what you see coming up here. As a short background, I started at a company called Marcus & Millichap. It’s one of the largest investment real estate brokerage firms in the nation. Specializing in investment real estate. We help people sell around $88 million in multifamily, retail office land, commercial real estate, syndications of over $100 million of senior housing mixed-use.
I’m a real estate investor, myself, commercial real estate by trade as a broker. I’ve closed countless 1031 exchanges. Delaware Statutory Trust, deferred sales trust also happened to have my Series 22 and 63. I speak all over the country, on podcasts and conferences. I educate everyone on capital gains tax deferral. I’ve been on some big shows including Scott’s show. He’s a part of the exclusive launch week and I put him on his own day to promote him versus the rest of the people. I’ve been on a bunch of other shows as well. You might recognize a few of these people.
That being said, this is one of my favorite ones, Seth Greene. He’s cool and he’s connected with Kevin Harrington. I was on their SharkPreneur podcast, which is great. Let’s start with my story. My first year in the business, this was not me. This was my cousin. I came out of college and we were all on the phones. We were all calling investors and we were trying to get them to do deals. I came in right at the end of ’06 when I started. I didn’t graduate from college to July of ’07, but I trained for about a year and got my license. I was jumping on phones, but it was challenging. I was new to the business. I also was newly married and I was a dad trying to provide for a family at home.
I had my new daughter at home and my wife and I was struggling financially. She wants to be a full-time mom and I wanted to be the dad who provided. We didn’t have a lot of money growing up. At least my dad did. My mom didn’t and my parents were divorced. It was a challenge always financially on my mom’s side. I knew financially I wanted to be that dad who provided and I wanted to make sure I had a margin for the family, but it was hard. I was competing against these big-time brokers and I was starting to get traction and success. They said in the business, “It’s going to take a little while to get going.”
Something happened right as I started to get some momentum and that was the 2008 crash. If you recall, things fell apart economically in that time period. I went from making a little bit of money to zero money fast. There were years where I made next to zero. Some years I made $20,000 and I’m trying to make it all work with my family, keep my dream alive. I have friends and family tell me, “Go and get a real job. What are you doing? You have a wife at home with a baby.” I did what every good entrepreneur does and I figured out a way to get side jobs and I worked nights and weekends at a restaurant.
You may know it, call as The Cheesecake Factory. It was my wife and I’s favorite restaurant. I worked in Sacramento, Roseville, California, helping people to serve cheesecakes. By day, I’d be on the phones and by night, I’d be serving cheesecake. There would be times where I’d have to dodge potential clients who are in the other part of the restaurant because I was calling them by day to try to sell their $1 million property but I was serving cheesecake at night. It was a humbling experience, but also a big part of my journey to persevere and define what I love. I fell in love with commercial real estate, helping people defer capital gains tax and solve their plans. My goal was to win. This was not me. I was not winning.
I found the deferred sales trust right at that ideal moment. In 2009, it wasn’t ideal for my clients because they had crashed but it was ideal for me to receive the information and that people didn’t have to overpay for a property. They didn’t have to go into a bunch of debt. They could have avoided a lot of the pain they went through. Not only was I going to struggle personally, but my clients, friends, and family, some of them lost everything because they felt they had to overpay with 1031. As a reminder at 1031 exchange is you buy a property and if you sell it, you can trade it to a light investment property as long as you identify within 45 days and then close within 180. That way, you defer the capital gains tax.
That’s all we knew before. We didn’t know about the deferred sales trust where you don’t have to do any of that. You can sell, put it in the trust and you can buy whenever you want to. Also, you don’t have to take on any debt. I learned all about this. The plan was to educate my clients and then led to educating more people, which we’re doing now. I was able to provide, and we have five kids. We had four girls, we had our baby boy and I was able to succeed. What I want to do is take these last ten years of the pain, the struggle, and the journey, and I discovered the hard way to do it.
How many of you want to learn the easy way to eliminate the need for the 1031 exchange and having more options? This is why you probably have been struggling because A, you didn’t know about it. It’s not your fault. Your CPA didn’t know about it either. The commercial real estate brokers you work with and the 1031 exchange companies you work with, they don’t want you to know about it either. They’re in the business of the 1031 exchange. They want you to sell and buy a bigger property and keep chasing that equal or greater value within those 180 days because every time they get paid.
Trust me, I know I was in that business and I’m not saying that 1031 is not useful. It is a great way to build wealth, but it has some restrictions. It has some challenges which are not always in your favor. If you tried to do a traditional 1031 exchange and you’ve ever felt pressured by having to overpay or you bought a property to defer the tax, the deferred sales trust is for you. We call that buying it non-optimal timing. Our parents taught us to sell high and buy low, not sell high and buy 180 days later from now. That’s the opposite of freedom. That’s restriction and pressure. What we want to do is give you the deferred sales trust tool so you can relieve all that pressure. You can have the freedom and liberty to buy if and when you want to and the asset type that you want. Hopefully, at a discount when it’s a buyer’s market.
Let’s talk about the 1031. What we enforce from the past years. You’ve got to hire a broker, 5% or 6% commission to sell your property. You’ve got to sell your property at additional closing costs. You’ve got to hire attorneys to review documents. You’ve got to hire 1031 qualified intermediary, probably got to hire another attorney to draft a new LLC document for the new property. You’ve got to identify those three properties in 45 days, 180 days to close. It creates pressure. You’ve got to obtain a loan, you’ve got to apply for a loan. You’ve got closing costs, you’ve got to buy a property, hopefully, you didn’t overpay. You’ve got to take on more debt than you want it to.
You’re feeling more pressure and an upfront cost, it could be hundreds of thousands of dollars per deal depending on the size of the deal. Plus, you only have six months to sell and buy a property. One of the things with the deferred sales trust is you never have to buy property ever again to defer the tax. You could put it all into stocks, bonds, and mutual funds, or you could put it into hard money lending with Scott and he could help run the money. It’s flexible and open. It doesn’t have to be you by yourself owning, operating, and managing all of the toilets, trash, and liability. It’s exhausting even just talking about it. That’s what we give you is a way out here.
It’s the endless amount of work that is dealing with owning real estate. You should have an option out and we believe this is what we give to you. I’m going to walk you through the three secrets on how to build an entire optimal timing wealth plan. Secret number one, selling and deferring hundreds of thousands to millions of dollars in capital gains tax. How to legally break free from capital gains tax and find the freedom to buy and sell your business or property without ever worrying about a 1031 exchange ever again? Secret number two, optimal timing, wealth plan cloning. How to clone a proven wealth plan with Capital Gains Tax Solutions in less than five hours and become a lender because this is what should be coming in this that does not give up control? I say, “Almost.”
Number three, my number one wealth-building hack. How do I get the trust of your deferred sales to work in your favor and become an investment rather than an expense? Secret number one is how to legally break free from capital gains tax and find the freedom to buy and sell your business or property without ever worrying about a 1031 exchange ever again. Meet Joe. Joe wants to sell his business, primary home, or commercial real estate, but he feels trapped. He’s trapped by that 30% to 50% in capital gains tax and he’s also trapped by the 1031 exchange or lack thereof option when he sells his assets.
Let’s talk about the 1031 because we’re focusing on commercial real estate. If he buys something, sometimes it hurts to overpay. He’s feeling pressured. He doesn’t want us to take on more responsibility, debt, tenants, trash, or everything. That’s when he gets the black eye and he feels frustrated and too often his story is a sad face story. He wants to retire, he wants to be out of debt, he wants to have a passive income stream but he has the 1031 to defer the tax so he feels trapped. He doesn’t want to have to repeat this process over and over again with the next property. That’s what he’s done for 20, 30, 40 years and this is all he knows and maybe this is all you know, but there is a better way.
You first of all have to determine your capital gains tax liability. What is your liability if you sell? We have a capital gains tax calculator on our website, CapitalGainsTaxSolutions.com where you can fill in twelve questions. You’ll get it instantaneously. More than that, you need you to determine your ideal wealth plan. You need to envision what your wealth plan looks like in 1, 5, 10 years. You need to look at your overall estate and how you want to pass your wealth to another legacy and how you want to spend your time and energy with all of this wealth? Most of our clients before they find us, they’ve already made their wealth.
They’ve already achieved great success. It’s about shifting that wealth in a way that gives them a passive lifestyle, diversification, out of debt that lowers their risk, and also gives them the time and energy to enjoy their wealth. I want you to envision your ideal wealth plan and what that looks like. I want you to write that down and look at that. That leads to step number two. I want you to look at, what tool is going to help you to get to your envision wealth plan? You look at the side by side comparison of the 1031 exchange or deferred sales trust. You put a line down the middle and you said, “If I do 1031, what does that mean? That means I’m owning real estate.”
You might like to do that and I like that too. Maybe that means you’re owning real estate by yourself, which oftentimes is the case. You’re dealing with the toilets, trash, and liability. You’re also not diversified. You’re in a single asset class or a single asset inside one place. Oftentimes a lot of clients are selling one, let’s say twenty-unit apartment complex and they’re buying a 50-unit. They went from 20 to 50 problems. They have to deal with all of that. Why not do it in the deferred sales trust and either A, not buy any real estate at all or take small amounts, maybe $500,000, and put it into syndication? Let’s imagine it was a $3 million deal. Our average deal is $2.9 million. We’re deferring some around $500,000 in tax, but you can take small portions of your equity and put it into multiple different ones.
You’re diversifying within commercial real estate. You do not have to deal with all the toilets, trash, and liability. You do also not have to have the debt in your name. You can buy your own properties if you want to through your trust. It’s like the self-directed IRA in that sense. You have all the options that the 1031 gives you, but also you have none of their restrictions. None of the timing restrictions and none of the debt replacement. You want to draw that down the middle and you want to look at side-by-side and what helps you to get there. Step number three, you want to talk with somebody who has successfully used the deferred sales trust and this is where we give you access to our clients who have closed it.
Thousands of closes over 24 years, fourteen no change IRS audits and you name it, it’s been closed. Dental practices, optometrists, veterinarians, car dealerships, multifamily property, and self-storage, we’re working on a Bitcoin case. We’ve done helicopters, private property, high-end cars, artwork, and collectibles. You want to talk with somebody who’s been in your shoes, who’s on commercial real estate or maybe was a veterinarian. We’ll connect you with those people and you can talk with them and get comfortable with that as well and see if it’s a good fit. Step number four is to sell your deal and fund the deferred sales trust. Where are the funds held? TD Ameritrade is one of the banks we use, the largest bank in the world, and you have 24/7 access to view the funds and the funds never move without your signature. They’re always protected and safe and only move with your signature.
Let’s circle back with Dave here. Dave was in your position and he wanted to be retired. He wanted to sit on the sidelines, have options, freedom, liquidity, and to be out of debt. He sold $7.6 million property and $3.1 million was sitting in with a 1031 qualified intermediary and COVID-19 hit. When it hit, he said, “I didn’t want to buy before because the prices were high. I’m completely freaked out. I don’t want to buy anything because, who knows where this market’s going?” For the first time, he used the deferred sales trust, and with the 1031 again, you have to replace equal or greater debt. $7.6 million is what he sold. He’s going to have to buy something for $7.6 million or greater. He was looking at $8 million and $9 million deals. Let me ask you a question. Do you want to go into debt and a highly appreciated uncertain market? The answer is no.
The 1031 forces you to do that, to get 100% tax deferral, you have to buy an equal or greater value. He owed about $4.5 million in debt. Instead of doing that, he got out of debt, he’s debt-free from all of his property. He put all the funds into the trust. One side of the deferred sales trust is, back to the envisioning of your ideal wealth plan. Do you want to be out of debt or in debt? I would say most of you would probably want to be out of debt, which I would agree. Be out of debt is a great time to be out of debt right now. Go into debt when it makes sense. He’s out of debt.
We’re going to use Dave’s deal as the sample. It was $7.6 million deal and we’re dealing with this number $1.1 million in tax. Dave does nothing. He was going to pay $1.1 million in tax. He had this apartment complex to sell. It was 128 units. He had a buyer all ready to go for $7.6 million. The idea of actual constructive receipt is the most important thing. When you receive the funds is when the tax is due. Imagine I was going to buy your $7.6 million property, let’s say it’s your deal. Let’s imagine you were free and clear. If I came to you and I gave you $1 million down payment and I asked you to carry a note for $6.6 million, how much actual receipt, Scott, did you receive?
I only received $1.1 million.
Whatever down payment I gave to you is what your actual receipt. The tax is triggered on that and the other $6.6 million you’d be carrying paper and you wouldn’t owe tax on that until I paid you back. Imagine, Scott, I gave you zero down payment. I said, “Scott, would you carryback a 100% financing?” If I gave you zero down payment and you carry a note for $7.6 million, how much actual receipt did you receive?
You carried 100% financing. In real life, you wouldn’t do that because I have no skin in the game. I may wreck your property, you’re not diversified. You might have to take it back. That’s why most people don’t do traditional seller carries honestly because they’re typically short in nature and too many other challenges. The law and the legal part makes sense that actual receipt hasn’t been received. That’s how we maintain a nonconstructive or actual receipt. If they were to give the buyer that $7.6 million, he would owe that $1.1 million in tax. We don’t want that money to go directly to him. He says, “No, I don’t want to do that.” Rather let’s sell it to this trust right before the closing of escrow. He’s going to sell it for $7.6 million and the trust is going to turn around immediately and sell it for $7.6 million. Scott, if the trust bought sold for the same price, how much gain does the trust have?
If they have zero gain, it has zero tax. They carried a note for $7.6 million and they received a zero down payment. Scott, if they receive a zero down payment, how much tax is triggered?
The funds get deposited into the trust, $7.6 million. They had debt on this property and ended up being $3.1 million. They’re going to pay off the note to the bank and this is going to be $3.1 million to keep it consistent with the deal. The point is, he’s in a deferral state. They did a 100% carryback. They did a land contract a 100% financing. The question is, why would they do that? Scott, any questions on what happened here?
It’s straight forward, you’re creating an entity that’s technically behind it for the same price you’re selling it for. It’s a separate entity that’s handling that for you for the most part initially.
It’s a single entity business trust that only does business with the client, but it buys it for the same price that you were selling it for it and immediately turns around and sells it to that buyer for the same price. It’s bought and sold for the same price it has a zero gain. Scott, since you did a 100% carryback or this person did, it has no tax that’s triggered. It’s in a deferral state. That is how it works. It’s that simple. It’s new to you and you’re like, “I don’t quite follow everything.” That’s okay. We’ll walk you through it. It’s just an installment sale and we add this third-party trust to make this work. The funds in the trust, TD Ameritrade, Bank of New York Mellon, and Charles Schwab, they only move with your signature. Once they’re in the trust, this is where the magic happens. First of all, they’re debt-free. He doesn’t have to replace anything, but he can buy whenever he wants. We call that optimal timing. He can also invest in hard money lending.
Are we talking about the trust that’s signing off on that?
This lender is the chairman of the bank. They are always approving or disapproving of the investments based upon the risk tolerance. Before anything moves, anything closes, the note holder fills out a risk tolerance questionnaire. They get a score based on that score, they’re determined a level of rate of return. Most of our notes are 8%. They’re over a ten-year period of time. You can renew for every ten years and pass on to your kids. It can go on forever. We structure interest only with the balloon payment at ten years. The interest-only payments will be ordinary income. The principal balance will be a capital gains tax.
As long as they don’t touch any of the capital gains tax, they’re going to pay ordinary income on the 8%. Remember, we’re saving that $1.1 million. In this scenario, instead of having $2 million after-tax, they have $3.1 million working for you. You want to think of it as an interest-free loan from the government. If the government says, “Scott, I’ll give you $1.1 million as a loan here, but you’ve got to put it all investment purposes. It’s got to be in business, hard money lending, stocks, bonds, and mutual funds.” Scott, as long as you don’t touch any of that principle of that full $3.1 million, you live off the interest. How long would you keep that note going for?
For a long time.
We call it the second day to never. There’s a reason the government does this. For those of you thinking, “No, this is too good to be true. It’s a study of macroeconomics.” Which states, if we can get the money moving and flowing, we’re incentivizing deals to go. In incentivizing, as long as the money’s invested into business purpose, more economic growth and more economic growth produces more jobs. More jobs produces more tax revenue. It’s the same reason they allow a 1031 exchange. It’s the reason they allow this IRC 453, the IRC tax code, which is the installment sale tax code that this is based upon. Tenure notes, you can renew whenever you want. You keep going. Here’s the cool thing.
Scott finds this apartment complex and this apartment complex, let’s imagine it was worth $5 million in 2020, but after COVID-19 and everything hit the fan, it’s worth $4 million. Had they done the 1031 exchange into this $5 million deal, they lost out on the opportunity costs. That $1 million discount. What we can do is fund this LLC. You have up to 80% of the $3.1 million that can go the next day into this LLC. Let’s use $2 million and you go and buy this $4 million deal at a discount. You put a 50% down payment. Not only did you buy it at a $1 million discount, which you’re happy about, but you also got what’s called a brand new depreciation schedule. The 1031 your depreciation schedule travels.
Depreciation is one of the number one reasons to own an investment real estate because the income that comes in gets offset by the depreciation. However, if you own long enough, you’ve done multiple 1031 exchanges, the depreciation schedule travels, which is not good. That means you have a lower depreciation schedule. The intent is to get a brand new depreciation schedule but you can’t do that with the 1031. The solution is the deferred sales trust. With the DST, what’s amazing is because we structured it in this way and it’s a brand new LLC, you do what’s called a JV partnership with the LLC. Scott, you’re the managing member of this. You’re back to owning real estate the same way you were before it drops you to this extra twist here. This $4 million is brand new depreciation schedule of which you could do cost segregation and this can offset this 8% that’s paying it plus any of the cashflow that this deal is producing. Any questions on that, Scott?
Nathan asked, “To utilize the DST strategy, is there a minimum floor for entry or cap on the amount of assets to be placed into a DST? Are there any limitations on types of assets that can be placed into it as well?”
The minimum is $500,000 of net proceeds, and we also need to make sure we’re deferring at least $100,000 of liability. That’s the first thing. If you have a one-off deal and it’s only $500,000 and $100,000 then you’re good. It’s below those numbers, and this is a liability, this is not gain. This is the actual check you’re writing to the State-Federal Depreciation Recapture and Obamacare, which is how we get somewhere between 30% and 50% depending on what state you’re in. If all of that is greater than $100,000, the actual check your writing and your net proceeds from the sale net of all closing costs is $500,000 or greater, then that’s our minimum.
What’s cool about the deferred sales trust though is you may have asset number one, real estate, and business. Let’s say you had some Bitcoin that hit the roost. Let’s say you had an artwork, you have one trust, and we call it multiple notes. It started at $3.1 million and then you added another $1 million. All of a sudden let’s say that $7.1 million and you’re consolidating all of these assets into this trust, and you’re paying off all your debt and you keep piling the money up. Let’s say there are some people we work with, they have twenty homes. How are you going to do a 1031 exchange with twenty homes? You’re going to have an investor. You have to pull them all together and the investor is going to buy it.
He’s going to want a 30% discount. Your intent would be to sell each home to an individual buyer who’s a homeowner, who can get FHA financing and put 3% down and buy this property. You’re going to get a 20% to 30% increase in that. The challenge is, you can’t do a 1031 because you can’t time all of those together. The intent is deferred so you feel trapped, what do you do? You slowly roll each house as you sell them. You have total freedom to sell slowly, one at a time and you keep consolidating into the trust. Eventually, you get this big pile of money and what can you do? Go and buy that apartment complex or buy whatever.
Wayne asks the question, “Can you recap? If you sell it to the DST, doesn’t that trigger capital gains tax? I must be missing something.”
Let’s say it’s a $3.1 million asset. Instead of receiving the cash, they’re going to receive a note. They’re going to do 100% financing. They had a seller carryback and they carried for the trust. They lend the money to the trust. Instead of the cash buyer paying them, no. We’re going to have the cash buyer put the funds into the trust. The funds are sitting right here. To give it a 100% seller carryback. If someone came to you, Scott, and said, “I want to buy your property.” You had a zero basis and you owned it free and clear and you go, “I’ll carryback a 100% paper.” You didn’t receive any money therefore the tax is not triggered. It’s in a deferral state.
It’s the same way at 1031 work. What do you do? They want to do a 1031, they say, “Don’t send the funds to the buyer, and send the funds to the 1031 company to maintain non-constructive receipt.” What happens? You take that and you buy the property over here. You sell that property and you move the funds back into the QI company. What do you do? You buy another property. The key is, this $3.1 million is never going into your personal hands. We’re like a 1031 company. You can call it your own personal deferred sales trust, 1031 company. It’s like you’re parking in there but none of the restrictions and none of the 1031. 1031 is IRC 1031, the tax code. We’re IRC 453. They’re both tax deferral strategies. They’re separate tax codes and they have separate rules.
Another question is, “Is this something we can set up right before closing or is there a timeframe? What do we have to have set up before we’re closing?”
It depends. Let’s talk about a commercial real estate property. You’re okay as long as you go with the QI company that will allow you both options. You need to get with us. You need to connect with our 1031 companies and you need to make sure that you have the deferred sales trust language early. A, we’ve done deals but we need to make sure that all contingencies are not removed or B, you’re with a qualified intermediary. We’ll give you both options. Not everyone’s the same. Make sure you give it to us. That’s part of it. If you’re not selling commercial real estate, you’re selling a business, a primary home, artwork or collectibles, then we need to be in there before the close of escrow. We need to be in there early. We need to put the language in there. Reach out to us and we can walk through your specifics, but the answer is to be there early.
Who does this work for? It works for the business owner, the primary homeowner, car dealerships, tech entrepreneurs, dentists, veterinarians, optometrists, collectibles, artwork and investment real estate. That works for the real estate developer. The funds can be used to develop real estate. It works for the commercial real estate, syndicator, the operator. It works for carried interest. This works for all types of high net worth clients. These are a couple of guys. This is Steve, John and they sold their multifamily property. I represented them and I sold this property for them. It’s $270,000 per unit. Scott, is that a crazy price for a flat roof 1960s, Downtown Midtown property in Sacramento? It’s pretty high, right?
I would say it’s high, but that’s California, who knows?
It was about a 4.3 cap on these maxed out rents and they made a great sale. What happened to it? It was challenging. John had a family emergency so he had a bailout on the 1031 exchange. Steve was left looking at a 1031 exchange that was a 4.3 cap and taking on a bunch of debt and this is before Corona crash. He’s going, “I can’t make sense of this deal.” The same, Steve’s failed 1031, and John was able to go his separate way and do his own deal because the deferred sales trust saved them. This is another business sale. This guy is a transactional attorney and he’s in Las Vegas, Nevada. He’s smart. He did the deferred sales trust for the sale of his business. These people are asking tough questions. They did the due diligence and they did the deals.
This is a Google executive. She sold her high-end primary home in Cupertino, about three miles from Apple. She had this huge house and the primary home does not work for a 1031. She sold her $3.1 million house and went from owning this big property with all of this debt and she didn’t need the house. All her kids are gone and she’s sitting on his house and she’s like, “If I sell it, I get hit with about $400,000 in tax. I can’t use a 1031.” She felt trapped. She got out of debt, she paid off her debt of $1 million. She deferred all of her tax. The cool thing is she took what we call a primary home. It is a liability to us because it’s not cashflow producing. She took a liability and she moved all the equity into cashflowing producing assets.
She’s happy. There are a few other closes. These are some big ones that have closed and then some other ones that are under contract. People that we work with are looking for transformation, not just a transaction. By transformation, we mean complete debt freedom and completely tax-deferred. We mean your wealth being diversified, your wealth also being liquid. Liquidity is important and we think in this crisis that we’re going through and it puts you in a strong position. No more toilets, no more trash, no more liability. Time to enjoy your wealth and then the opportunity to grow your wealth because maybe you’re saying like, “I’m not older, I don’t want to retire. I’m not a Baby Boomer.”
That’s fine. Look at it as an opportunity to grow your wealth by timing the real estate market. If you knew this back in ’08 or even before Corona, imagine you knew this in ’05, ’06, what would you have done? Even if you didn’t know about this, you would have sold everything in ’05 and ’06. You would have paid all of your capital gains tax and you would have sat on the sidelines and bought real estate at $0.20, $0.30, $0.40, $0.50 on the dollar without this. What we’re saying is you can do the best of both worlds.
This is why we believe it’s the number one way for you to grow your wealth because we know when it’s a buyer’s market, Scott. We know when it’s a seller’s market and real estate is, it’s like a big ship. The ship takes a while to turn and the stock market can turn on a dime but the real estate, we’re like, “No, boys.” We’re looking out and we see it’s some big things ahead. It may take 6, 12, 24 months, but we know it’s shifting. We know it went from a seller’s market and it’s coming quickly to a buyer’s market. This is where we give you transformation and your wealth plan.
We’ve got a question from Todd Silver on the example you gave from the Google executive who had the $1 million mortgages in the house. He asked, “What happens with the debt on the property?”
It pays it off at the bank. That close of escrow, it’s the closing costs. As long as your mortgage is not above your basis, there’s no issue here at all. If the mortgage was above the basis, we call that boot. Her scenario, her mortgage wasn’t above her basis, she paid off the debt. The note is the difference between that.
He goes, “Where did the $1 million come from?” They financed, she sold her house.
The buyer bought the full amount. What we would ask the buyer to do is to bring all cash or get a loan. It’s like, “We’re not going to finance you. Bring the full $3.1 million.” They bring the full $3.1 million to the deal, but instead of buying it from her, they’re going to buy it from the trust who buys it right before close. It closes it and sells it and then $3.1 million goes into the trust minus the debt. Pay off the debt over there. The remainder is about $1.8 million or $1.9 million that went into the trust. The key is the cash is coming from a buyer. We’ve got to find a buyer over there. We’re going to ask them to cash us out. Either all-cash, bring a loan. We don’t care how you bring the money, just bring it all to that closing.
The $2.1 million is sitting in the DST waiting or whatever she wants to do with it at that point.
How do we know this thing is legal and how do you know your funds are protected? Those are some of the most important questions you should ask if anybody who’s bringing you a brand new tax deferral strategy such as the deferred sales trust or anybody else. The first thing is the track record. There are thousands of closes and also fourteen no change, successful audits. Scott, if you and I got audited, what are the odds that the IRS wouldn’t find one little thing to change? You have to find something. We missed the receipt, something here, it was an extra $500 here or whatever. They’re going to find something on an audit. We were to change it. No big deal. We’re going to pay the difference.
The IRS is looking for any holes in this thing. The biggest deal is a $125 million deal in San Diego. No change audits. Not one single issue. They looked at it and said, “You guys are doing an installment sale. You’re being creative with this third-party trustee, which is our role with a third-party unrelated trustee. The unrelated party can’t be a family member in it for business purposes. Yes. The funds are invested for business purposes. Yes. Continue as you are, not one change in 24 years. You want to make sure that whoever you decide to burn the ships and go with a tax deferral strategy at A, they have the tracker to back it up. B, they’ve had actual clients on deals that they’ve closed. Have an IRS audit.
You don’t want to try someone who’s been around for a couple of years and hasn’t been tested by the IRS. If their answer is, “We’ve never been tested with the IRS.” That’s not good. You want them to go through the FIRE with the IRS. Step number two is, “What happens if I do get audited?” Whoever who’s going to defend you, not only they had the successful wins against the IRS, but they’re going to provide the audit defense and they’re going to pay for it. As a part of the onetime fee to the tax attorneys, they have what’s called lifetime audit defense. They also indemnify you as the client. They stand behind their work. Step number three, you want to make sure the funds are protected. We set it up with a large bank account, and it’s called Direct Access Control Agreement, it’s known as the DACA account. The funds only move with your signature. If you sold your property, Scott, and paid millions of tax and you walked into this bank and put the funds in there, do the funds move without your signature?
Scott, if you sell and used the deferred sales trust and defer millions of dollars in capital gains tax, do the funds move without your signature?
It’s the same exact protections. We have DACA in place, which is great. That’s very safe. We’re moving to secret number two, deferred sales trust, optimal timing, and wealth plan. How to clone, approve, and wealth plan with Capital Gains Tax Solutions? It’s not just the transaction, it’s the team that you work with to execute the business plan. Scott, you buy an apartment complex and you’re in Texas and you buy it in Ohio. Scott’s not going to be there every day. He’s going to have to find a team to execute the business plan that he bought on this great $4 million deal that used to be worth $5 million.
You can even make sure you’re working with experts who you can clone who’ve already have a proven track record where you can clone the wealth plans of their clients, modify, adjust and customize it to you. We’ve already done all that work. We’ve had the thousands of closes and our tax attorney is brilliant. The financial advisor we work with is brilliant. If you want to use your own financial advisor, bring them in, we have thousands of financial advisors across the US. They sign up with us, they do a fee split and it works out great. Let’s walk through all that, sell, fund and invest. Scott, when can you sell, fund and invest with the deferred sales trust?
At any time.
That is the plan. Sell high, buy low. We keep it super simple. Scott, you have some notes to invest in it 8%, 9%, 10%, 12%, 15% let’s put some over there because it’s not a good time to be an owner, but it’s a good time to lend. Mobile home park investment, that’s a better part of the country. Let’s do that. Any time sell, fund and invest, and then vice versa. If it’s in real estate, we’re going to have to sell out of that real estate deal and then put it back into the trust. This is the plan and we keep it simple and you may find a deal tomorrow, the next day. We’re here for you too, to help you vet these deals. If you need trusted operators, we have those too that we’ve already vetted.
We only recommend and invest with people that we invest with personally. It’s up to you. You can do all the deals yourself. You may say, “I don’t want to do a deal to anyone else. I’ll do it all by myself.” No problem. Do it all yourself. You can do that too. Step number one, you need to map out your wealth plan. You’re going to envision it first and then you’re going to map it out. Me, Rod, and your trusted financial advisor. It could be your trusted advisors. It could also be the financial advisors that we provide. We’re going to map it out simply, what is your risk tolerance and where is this allocation going to go?
Let’s all sit down in the room for a Zoom call with your CPA, your financial advisor, and let’s map it all out. Step number two is, you’re going to sell the asset. You’re going to sell the property and it’s pretty simple. Step three, you’re going to fund the trust. You have 24/7 access to view the funds. Step four, enjoy your wealth and give more. This is the achievement. As an overview, they’re ten-year notes. It’s an installment note. You can renew every 10 years for 10 years. It’s 8% earning target meeting net of fees, Scott. Net of financial advising, trustee, the bank account fees, and tax return fees, our fees are typically 1.5% on an annual recurring basis, but we’re helping to out-earn those fees.
Ideally, we earn 9.5%, 10%. I can’t guarantee it over a ten-year period of time. You net a target rate of 8%, which is good. On cashflow like a year-to-year basis, most of our clients will go 6.5%. They want to keep that principle intact. I talked about not wanting to pay the tax second and never. We keep the capital gains tax all deferred and you pay ordinary income tax on the interest that you’re receiving. Most people want to keep a little gap between the 8% and 6.5% to make sure we’re not dipping into the principal. You said, “Brett, what if I need more?” No problem. “What if I need 10% or 12%?” No problem.
This means you’re going to dip into principal a little bit along the way and if you do, you’ll pay some tax, which is no problem either. It’s up to you, it’s your money. How do you want to structure the note? It could be amortizing over 30, 20, 10 or 5 years. It could be interest-only and then a ten-year note, whatever you want. Also, you can adjust it along the way. Scott, you might start out saying, “Brett, I don’t need any. Let’s keep it deferred. Let’s keep it compound and then in a couple of years, let’s start pulling off of it.” You can do that too. Renew for as long as you want. Cash-out whenever you want, just pay the tax and then also pass it on to your kids. It passes inside of your living trust and your kids can inherit your position and they step into your shoes or you can give it to charity.
We’re not like a CRP. We’re not forcing charity. You can put 10%, 20%, 30%, 40% and direct the payments to a charity, and then you can adjust along the way too. We give you some more freedom and options there. It’s up to you. What did we used to have to do? Stay in our primary home, feel trapped in this big old home that has all this equity, and maybe do a reverse mortgage or try to rent it out for two years and do all this stuff. We do not sell our business because we couldn’t define a tax deferral strategy that worked. Overpay for a 1031 property. More time, energy, toilets, trash, tenants, employees and liability.
We used to have to become the lender do a traditional seller carryback for a single buyer. This goes to the part of, “Brett, why don’t I just do a regular seller carryback? Why do I need to pay these fees and do this thing?” What is a traditional seller carryback? If you do 100% financing, first of all, you’re not going to do that because that person has no skin in the game and your collateral is tied to that person in the asset. You’re not diversified. That person is not an investment grade. Your asset is not an investment grade. Your eggs are all in one basket. You may have to foreclose and take that back.
Traditional installment sales are short in nature, 3 to 5 years with no prepayment penalties, and then you’re paying the tax, anyway. There’s zero advantage to doing a traditional seller carryback versus the deferred sales trust, which has, you go on forever, and you can completely diversify. You’re not counting on that property ever again or taking that business back. You can put it in investment-grade securities. You have the ability to have liquidity. That’s why it’s better than the traditional installment sale. You can also stay in debt and do a 1031 but it also takes up more time and energy or pay the tax. Nobody wants to do that. A new way, a better way and it is the deferred sales trust. With all that being said, I’ve been a big introduction to the deferred sales trust. Who here thinks the deferred sales trust is awesome, amazing, mind-blowing? It’s still too good to be true. Your brain is still exploding. If everything I’ve said is true so far, Scott, do you think this thing is amazing or what?
That’s why I have you on here. I’m expecting us to see a bunch of deals coming across the board. In another way of looking at it too, is thinking about people that are scared to sell or don’t want to sell their house because they’re afraid of the capital gains tax. I’m marketing to self-storage owners that have owned their property for a while. They’ve got some equity, even a little bit of a downturn, they’re like, “I don’t want to pay the taxes.” This is a great way to educate them to find a way to help them solve their biggest problems on an asset you may be looking at buying.
They can capture that value at the height of the market. The market goes in swings. Why not capture the value, get out on the sidelines, diversify, and wait for that deal to come? Buy it low again. Ride that wave up. Capture that value rather than sitting in these big market swings and your single asset class, location, and product type. Get out of debt, get liquid.
Wayne never heard of an alternative to the 1031 exchange. Todd is asking the question, “Since when did a 1031 exchange start having a reputation overpay for an asset? I’ve gotten done with one and it was listed for $4 million worth $4.3 million and produced $3.6 million.” Do you want to talk about that a little bit, Brett?
Every seller’s market, buyer’s market is different. Back in my story, in 2008 I saw friends and clients lose everything because in ’05, ’06, ’07 they had overpaid for 1031 properties to defer the tax, for the market to fall apart. Is that going to happen? I don’t think so. I don’t think COVID-19 is going to be an ’08 crisis all over again. You wouldn’t want to make these decisions based upon fear. However, we’re going to walk through how this deferred sales trust is going to be an investment, not an expense here in secret number three. You have to ask yourself, “Is this a seller’s market? Is this a buyer’s market? Do I want to be in right now? Where do I think the market’s going to be in 3, 6, 12 months? Do I think it’s going to be more of a buyer’s market? Do I think there are going to be more opportunities?”
I would venture to say that you asked 90% of the commercial real estate world and they all answered those in the affirmative for, “Wait and see, there are going to be more opportunities. Deals are going to be lower priced.” That’s up to you. If you could find a deal, by all means, do a 1031 and you don’t mind the management, toilets, trash, liability and debt, any of that, go for it if the cap rates make sense. Here in California, we had seen deals at four cap. You’re borrowing at 4% and the rents are through the roof and there’s not a lot of value-add. There’s a lot of forced appreciation. You’re competing against all these buyers.
Another way to put it would be this way, I would say, if it wasn’t for deferring the capital gains tax, imagine it was not there. Imagine you didn’t have to do a 1031, would you buy that same property based upon the intrinsic value, location, value add opportunity and the cashflow? If the answer is yes, then, by all means, buy it. Don’t let the tax determine whether or not you buy a deal. Let the intrinsic value of the real estate, the opportunity, and the business plan determine that. That is completely up to you. We are a backup plan for a fail in 1031. We don’t take up any of the three spots.
The worst-case scenario is you go out and we don’t charge anything for that either. We only charge if and when you close the deal. At least you have it as an option. You’re working with the QI company is giving that backup. I got a call, a gentleman who is $2.6 million in the QI Company. He needs to buy something for $4.6 million or greater. All three of his properties that he had identified for his QI, all of them failed. He’s left sitting there and going, “What do I do?” We’re going to save his failed 1031. That’s at least, but if you can find a deal, “I’d love an investment in real estate.” Go for it.
Secret number three, how to get your deferred sales trust to work in your favor and become an investment and not an expense? This is what I call the wealth-building hack. I said another way to put it would be, how to get the deferred sales trust to work in your favor and be better than a 1031? First of all, in step number one, net income tax advantage. We knew a side by side comparison. Imagine, Scott, you make $400,000 a year and $200,000 of that income is from your investment property. That investment property is producing that cashflow and it’s putting you into a higher tax bracket. If you look at these tax brackets here, it’s pushing you, let’s say you’re married filing jointly into the 35% tax bracket or even 32%.
If you were to sell that investment property and do a 1031, your cashflow may be the same or close to it. You’re staying in the same tax bracket. Scott, you may tell me, “Brett, I needed about $150,000 but I don’t need the $400,000.” The intent would be to lower your income tax bracket and wait to receive that income when it makes sense. What can we do? We can sell that asset. Instead of doing the 1031, we can move it into the deferred sales trust. The cashflow that it’s producing, we could structure the notes as-is no interest payments. It could be interest-only, but it could also be nothing, no interest, and then a balloon payment. We can do that. For 2, 3, 4 years, no payments at all. That extra $200,000 of that asset was producing, it’s compounding on top of the trust. Your income drops down to the 24% bracket.
You’re saying based on your analogy there is, I’m making over $400,000 and paying 32% if I said, “Reduce it in a year, that might make my income fall to say $320,000, I could still take up to $75,000, $80,000 there to avoid paying a higher tax bracket when I needed to pull it from the DST.”
You call it tax engineering, you need it when and if it makes sense for you. You even may move from California to Texas or California and Nevada or New York to Florida. You relocate and you establish residency there and then you start pulling it in. It’s your money. How would you like to receive it? The 1031 there is to give you that option. This does. This is how it becomes an investment rather than an expense. Why would you do it over the 1031? Let’s draw that line down the middle. Let’s figure out what your income is, let’s create this wealth plan. Let’s see if you can take advantage of the net income tax advantage.
A sample, $420,000 an income, $200,000 from my business goes into the DST. Instead of keeping that business, you sell it and then you allow that $200,000 to compound on top of itself. Your tax bracket drops to $240,000 and you save $70,000 in tax. Let’s say you retire in 3, 4, or 5 years and your other $240,000 that you were earning goes to zero. Let’s start pulling all the trust. In the meantime, it has built up. It’s like a 401(k) in that sense. I’m putting it into a tax vehicle until a later date, but we have none of the penalties. If you pull it early, of course, you’ll pay the tax on whatever you receive in the given year. We have none of like the 10% penalty the 401(k) has.
Step number two, why this is an investment rather than an expense? For any of your ultra-high net worth individuals who are reading this, we’re talking about worth more than $23 million or $22 million married and about $11.58 million single. You’re probably challenged with what’s called the estate tax. It’s also known as the death tax. Let’s do a scenario. Let’s imagine Scott for the year is worth $52 million and you’re married, imagine all of it inside your taxable estate now. That first $22 million is exempt. It’s $23.16 million, but it went up for 2020. These are 2019 numbers. That $30 million that’s above and beyond that $22 million is going to be hit with a 40% death tax if you do not move it outside your taxable estate.
You say, “Brett, I have a stepped-up basis. I can 1031 and die and get the stepped-up basis.” That’s one of the biggest misconceptions. The capital gains tax is not the estate tax. Capital gains tax is capital gains tax. True, you could hold onto a property, get a stepped-up basis, and then you die. Your kids get that. They can walk away capital gains tax-free, but it has nothing to do with the estate tax. We’re going to draw this line right down the middle for your wealth plan. We’re going to say, “Keep going with your 1031 exchange plan,” and what’s that going to mean for you? If you do this thing, it’s going to meet a $12 million estate tax.
The intent is to get it outside the taxable estate. The challenge is you can’t get it out fast enough and/or you run out of gifting. Most high net worth individuals before they find us, they go, “We’ve done gifting, we’ve done family limited partnerships, but we can’t get it out fast enough.” In other words, they run out of exemptions per year. The solution is the deferred sales trust. In a single transaction, we call it the DST Plus, we can sell. Let’s imagine a $30 million deal and move all of the funds, all of the equity outside of your tax will stay in one single day. We’re doing any deal in San Francisco, the couple is worth $126 million. They moved $26 million outside the taxable estate. They have a $100 million left in the taxable estate, and they’re selling a $20 million business.
They have a zero basis on that business. Not only did they say, “We’re Baby Boomers, we want to retire from all this, but second, we’re owing $8 million in liability. We can’t get this thing out fast enough of our state and we have another $7 million capital gains tax.” Not only are we going to defer the capital gains tax, but in one single deal, one transaction, we’re going to move all of that $8 million outside of their taxable estate. This right here is the best-kept secret for the deferred sales trust as it pertains to ultra-high net worth individuals. Moving on to step number three, the seamless partnership separation. In a 1031 exchange, it’s challenging to separate a partnership. Why?
Typically, the whole entity must move. What does that mean? Scott, me and five others, we’re in a deal and we bought it in an LLC and we owned it. If we sell the way the exchange laws are set up, the whole entity must move. If one of us tries to drop out or one of us gets out, the whole thing fails. There have been some dropping swaps and there are some creative ways, but most of the people that I worked with, they shy away from those things and it’s becoming more and more restrictive. Maybe the partner doesn’t want to do it.
Maybe the part says, “Scott, I don’t want another exchange. I want to get out.” The other three partners are like, “We want to keep going.” They’re fighting over selling or buying and tax. The deferred sales trust allows you to do, if there were five partners and two people wanted to pay the tax, they can pay the tax. If one person wants to do a 1031, they can do a 1031. The other two want to do a deferred sales trust, they can do a deferred sales trust. It’s a seamless partnership separation. In other words, we don’t have to follow the 1031 guidelines. It’s powerful, helpful because they’re saving a bunch of tax.
This is the biggest one. I’ve got to go back to it. Invest in real estate. It’s the advantage of no timing, purchase at a discount and then you combine the new depreciation schedule. I mentioned that with the cost segregation and that’s another part of the ROI where you look at, if I trade and do a 1031, my depreciation schedule travels. I don’t have as much depreciation. If you bought that same deal with your deferred sales trust, it’s a brand new depreciation schedule. Commercial real estate is 39 years. Part of the buildings is 27 and a half years. If you’re fully depreciated or close to it, look at the deferred sales trust to get a brand new depreciation schedule and then use cost-seg on top of that to wipe out all of the income that the asset is producing as well as the trust that’s producing.
You might say, “I’d rather be debt-free and I want to invest with multiple commercial real estate syndicators. I don’t want any of the debt in my name. I don’t want any of the headaches. I don’t want any of the toilets, trash and liability, but I love investing in real estate.” Let’s do that. If it’s a $10 million trust, $8 million can go out to commercial real estate deals. You can choose your top eight, the other $2 million will stay liquid, diversified, investment, grade securities, and the 1031 exchange alternative or rescue.
I want you to meet another client of mine named Peter. His biggest quote was, “Brett, I had eighteen units and it was eighteen problems and I didn’t want to trade eighteen problems for 36 problems. I was tired of the toilets, trash and liability. I almost lost everything in 2008. I had all this debt and I’m driving 2 and 3 hours, 2 and 3 days a week from Marin, California to Sacramento.” He’s banging on doors trying to collect rents. He’s trying to hire a property manager. He’s tired of it all and he’s like, “It was a lucrative investment, but it took them a lot of my time and energy, a lot of headaches.”
For his scenario, he sold for $1.8 million. He paid off about $500,000 in debt and he deferred $550,000 in taxes, and he goes, “I’ve never had so much time and energy, Brett. I’m happy I found this. I looked at Delaware Statutory Trust but I had no liquidity. I had no control. I may want to get back in the game when the deals make sense, but not right now.” At 8%, it’s an extra $44,000 per year. It’s not just the external motivation of capital gains tax deferral, it’s the internal motivation of being able to have freedom time, energy, to not have to worry about rent control, toilets, trash and liability.
He goes back into real estate if and when he wants to, which is his plan as well. He’s a longtime real estate broker himself. He has been in the business for 35 years and this is the first time he ever used the deferred sales trust. We covered the three secrets. We covered selling and deferring hundreds of thousands to millions of dollars in capital gains tax, how to legally break free from the capital gains tax, and find the freedom to buy and sell your business or property without ever worrying about a 1031 exchange ever again.
Secret number two, how to clone a proven wealth plan in less than five hours? You can get on with us and your CPA and map this out. Also, not have to depend on a single income source and diversify your income streams. How to get the deferred sales trust and your wealth plan to start working in your favor and become an investment rather than an expense? If you asked yourself this question, “If I just modeled, what would work?” If you set a call with your trusted CPA and attorney and with Capital Gains Tax Solutions and the attorneys here that we use to confirm this is legal and works, do you think you can do that, Scott?
If you sat down with Rod, the financial advisor, but your financial advisor or the financial advisors that we have to offer and mapped out where the funds can be invested and where the risk could be accounted for, do you think you could do that?
If you sat down with me, Brett Swarts, we’d do a Zoom call or if it’s a big deal wherever you guys are located and mapped out how the DST is an investment and not an expense for you, do you think you could do that, Scott?
Yes. I’m sure some of the people on here for the first time.
It’s all this coming at you. It’s so much information. You’re trying to digest it and you’re like, “My brain is exploding. When will he ever stop?” I want to make you an offer so you can see if I can help you achieve this. First of all, I want to give you instant access to all the media and trading. I want you to take this at your own pace. We’re launching the Capital Gains Tax Solutions Academy. We have all the podcast, we have The Escape Feeling Trapped Guide. I want you to get all of that. I want you to listen to it. I want you to get educated.
I want you to kick the tires, everything. Go to all these places, all these top people who have interviewed me and asked me tough questions. The first biggest thing is education. I’m going to give you access to all of that and all the training. Plus, here’s what you’re going to get if use the deferred sales trust with us, we call it the White Club CPA Tax Attorney Access. Bring your trusted CPA and we hope to get their education and blessing, but also realize that they’re like the general practitioner. A lot of CPA we work with, they’re great, they’re smart, but they’re in their own niche. Our niche is tax deferral.
We’re the brain surgeon where they’re more like the general family practitioner, but we want to get their blessing. When you bring them, they’re not going to know about it and they’re going to be skeptical and that’s okay. We’ll educate them along the way but it doesn’t mean we haven’t done thousands of brain surgeries and none of our patients have died and none of our patients have gone to jail. That’s something to consider. Bring your tax attorneys and you and make sure they engage and get on a call with us and do the hard work of testing this thing out and not just saying, “I don’t know about it and I’m scared,” or “I’m embarrassed because I don’t know. No, because I’ve never heard of it.” Get them on with us and make sure we get comfortable.
Nine out of ten CPAs and tax attorneys ended up joining us. Once they see it and get to know us, they’re like, “This is great. It only gets to work for my client.” I give the blessing, but I’m going to roll it out to all my other clients. That’s the first thing you get. The second thing, transparent 24/7 access to view the account in real-time online updates like in TD Ameritrade online. You also get the DACA sum less bank account. Escrow has all the funds all the time and ensures the funds are protected and only move with your signature. You also get the White Club Seamless Transaction Coordination, where I’m like a commercial real estate broker who has sold over $100 million-plus, $200 million in commercial real estate.
I am going to help transact and work with your commercial real estate broker with escrow, with the lender, whoever, along with the tax attorneys and CPA. You’re also going to get the professional banker direct access, customer support. He picks up a cell phone. You can talk to him directly. A professionally prepared tax return service for your deferred sales trust with a 55-year-old CPA firm. We also have access to professionally managed value-add commercial real estate syndications with sponsors with a proven track record, mobile home parks, senior housing, retail, industrial, multifamily, and some of the top wealth advisors in America, IRS audit defense, and lifetime identification.
All of these things for you, estate planning if you need it. Who does this work for? Primary homeowner, business owner, car dealerships, tech entrepreneur, business owners, anyone who is selling artworks and collectibles. Also, anyone who does any real estate, anyone dealing with highly appreciated LLC, S corp, C corp partnership, highly appreciated assets, Bitcoin, and horses, you name it, it works for them. You can see why people may pay us $100,000 and set up a deferred sales trust for them. You can see why the Google executive like Peter, their longtime real estate broker. Glenn, the transactional attorney or Dave and Steve, they’re paying us a lot. I know this sounds too good to be true or too good to trust, but don’t worry. We have a reference list, client testimonials, and you can call them directly and talk with them.
Number two, bring your trusted advisor to talk with us and get to know us. This is a zero cost on our side. We do not charge you a thing and less than if you do the deal. At this point, there’s nothing you’d have to pay by doing the homework and getting educated and bringing the people to hear it, to test all this out. If you did the deal, I’m throwing a number out, we think the total value is $125,000 it depends on the size of your deal and what this stuff means to you. It could be priceless, but you can get started for 1.5% closing costs and an annual fee of 1.5%. You simply have to call and email me and start your deferred sales trust. What does that mean? The closing costs 1.5% of the purchase price and then there’s an annual recurring fee, which includes all of what I talked about, the financial advising fee, the trustee fee, that bank account is $1,500 or more.
There are a couple more and $1,000 tax-return. Our goal is net of all fees besides the onetime closing cost fee would be to net you 8%. Here’s a breakdown of a sample of a $10 million sale. You could pay 40% in tax. I imagine you have zero basis, Scott. It’d be $6 million net or you do the deferred sales trust and this includes the first year fees as well. You can net about $9.7 million. That’s an extra $3.7 million more to live off of or to build more wealth. One hundred percent no costs unless you choose to use the deferred sales trust and your deal closes. You can do the homework and the calls, you get it all going and then for some reason if the deal falls apart or you decide not to use it, no problem. We wish you well you decided to go for your 1031. We only get paid if you close it on the trust. Thank you so much for your time.
It’s good stuff there, Brett, because you’re making people money out of something they’d be paying taxes on. That’s a beautiful thing. It’s not only if it’s closing for the most part. You might want to pull up your contact or your email for people to reach out to as well Plus, you’ve got a lot of information also in the podcast.
The thing too is you’ve got, “Let’s jump on the phone if you think this is going to fit.” This doesn’t work for anything if it is not looking to defer at least $500,000.
The gain is over $500,000 and the liability is $100,000. If I can also plug the podcast too, if they like that, they could review and subscribe. We’ve got this 24-hour period where we’re looking to boost the rankings.
Please do. One of the great things to Brett is, I’ve got a feeling you and I’ve talked about this before, where we see history replacing it, rehappening, repeating itself as it did a few years back. There will be a lot of opportunities out there, whether it’s flipping or taking properties down for all regions to find for the market to come back up and sell off again on a regular basis. You need to be aware of the things that are available for you. That’s why we brought Brett on here to talk about this. Keep that in mind when you see opportunities you’re getting here, people are like, “I can’t take the hit. I don’t have that aspect of it.” Here’s a way for you to find and having an advisor to make something happen.
There’s a tip to that too if you’re trying to buy it from a seller, figure out what their pain point is. If they’re older, they don’t want to do a 1031. They would want to retire from this, but they don’t know how to. This becomes a solution for them. Figuring out, “What are you trying to do? What pressure are you trying to get? What’s a fair deal, but what are you trying to solve? Why are you selling? What’s the motivation for selling?” Find a solution that fits their motivation that answers their challenges. If everyone you’re calling to tries to buy deals is saying, “I’ll just 1031.” They heard that from everyone else. They would have already done that if they had found a deal. When you can bring me something that it’s not the Delaware Statutory Trust because they’re going to think DST, you can say it’s a deferred sales trust. It can be truly a solution for what they’re looking for and then all of a sudden they’ll sell you the deal. It’s a good way to have it as a buyer as well as the seller.
Brett, I want to say thank you for coming on. I’m honored to have you. Congratulations on the podcast. Thank you for sharing your insights on this. I’m excited about this because it’s a vehicle for you if you’re selling something, to be able to put your money into notes, whereas in a traditional 1031 exchange, you can’t put that money into the debt structures. You can’t put it in a note. Think about it. As you’re out seeing deals and take some stuff that comes across your table, email, or whatever like that, here’s a tool for you that can be valuable for you. Wayne asks an additional question, “What’s your typical split with a financial advisor? Is that part of your fear?”
We try to keep them 1.5% all-in for the recurring fees. That would include the financial advising and trustee fee. There’s a $1,500 DACA account free, it’s the bank account fee and there’s $1,000 or so tax return fee, but at the end of the ten-year note, we’re trying to net 8%. The net of those fees, which we think is good. Hopefully, 9.5%, 10% is what we earned over ten years and then you end up getting 8%. You can renew for another ten years and keep it going.
That’s the only part that you want to hold in there. It’s not the part that you’re going out investing and it’s another thing.
Immediately you can take 80% of it and invest. The way we structure that as an 80/20 split, where 80% goes to you and 20% of the trust, even though the trust puts up 100% of the down payment. It’s a unique way we do that. If you were investing in notes, it would be the return onto the trust itself because you’re not getting an added appreciation. It’s favorable to you. We try and make the fees, expense, and the upside favorable to you as we can and be commercially and reasonable with the IRS for the audits.
Laura Blunk is a great example. She’s working on a large portfolio. Nonperforming or performing notes, nonperforming depends on where they’re at in the market being. She was to look to try to sell that off on a flip or DSC that would be valuable for you. She’s picking it up at $53,000 and trying to sell it at $80,000 because it’s the performing. That’s a big hit in the capital gains versus being able to put a DST in place to help make it happen.
We’ve worked for short-term and long-term capital gains, so the 1030 ones only long-term. We can defer taxes on the sale of a whole note. You ran a business, you bought this and you sold it and that business was that particular part of it. LLC, S corps, C corps, however you structure individual living trusts. Yep, it works.
Brett, thank you again so much for coming out. I look forward to hanging with you and talking to you some more in the near future and some deals.
Thank you, everybody. It’s my pleasure.
Make sure you go out there, guys. Subscribe to the Capital Gains Tax Solutions Podcast. Listen to the episodes. Help us out with Brett on that launch as well to make sure to leave a review and subscribe there to help us drive his podcast up for him. Thanks. I appreciate it. I’ll see you later, Brett.
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About Brett Swarts
Brett Swarts 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.
Brett 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.
Mr. Swarts is passionate about educating people in Capital Gains Tax Deferral with a Deferred Sales Trust, how to divest from a business or real estate, and gain freedom from feeling hostage to a 1031 exchange, then invest back in to a new business venture or investment real estate at any time [all capital gains tax deferred] which he calls optimal timing.
His experience includes numerous Deferred Sales Trusts, Delaware Statutory Trusts, 1031 exchanges and $88,000,000 in closed commercial real estate brokerage transactions. He’s an active commercial real estate broker and investor with brokerage experience and ownership in multifamily, senior housing, retail, medical office, and mixed-use properties. He is a licensed California Real Estate Broker who holds Series 22 and 63 licenses.
Brett was formerly an associate at the largest Commercial Real Estate Brokerage firm in the country, has his own Multifamily Brokerage Company now, and has years of experience and hands-on training from some of the best in the business.
Brett lives in Roseville California, with his wife, Melanie and their 5 children.
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