Brett Swarts 0:00
There is a story that kind of changed it for me as the gentleman who sold a $20 million asset 2006. And he sold at the height of the market, and he looked around for a 1031 couldn’t find it, use the deferred sales trust for the first time. And he parked the money where stocks, bonds, mutual funds, conservative stuff, right? He’s not a big stock market person, but he was better than paying the tax. And he sat on the sidelines and five years later, that property that he had bought was foreclosed on. And the bank calls him back said, Hey, you know that property? So he says, Yeah, well, we just foreclosed on it. And we’re just curious, would you want to buy it back? He’s like, well, maybe what’s the price? So about 40% less than what you sold it for? He said, Sure. So he was able to reallocate the investments in the Deferred Sales Trust, and he’s able to buy that property back at 60 cents on the dollar. Okay, all tax deferred.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant, we’re here to learn from the experts.
J Darrin Gross 1:09
Welcome to Commercial Real Estate Pro Networks. CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Brett Swartz. Brad 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 create and develop a tax deferred transformational exit wealth plan using the Deferred Sales Trust, DST so they can create and preserve more wealth. Brett is the founder of the Capital Gains Tax Solutions, and the host of the Capital Gains Tax Solutions Podcast. Each year he equips hundreds of high net worth business professionals with the DST tool to help their high net worth clients solve capital gains tax deferral limitations. And in just a minute, we’re gonna speak with Brett about Deferred Sales Trust.
But first a quick reminder, if you like our show, CRE, PN Radio, there are a couple things you can do. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you’d like to see is our guests are Be sure to check out our YouTube channel. You can find us on youtube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Brett, welcome to CRE PN Radio.
Brett Swarts 3:00
Darrin, thank you for having me. I’m excited to be here.
J Darrin Gross 3:03
I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Brett Swarts 3:12
Absolutely thanks Darrin. Some originally from Northern California chemists in Mission San Jose Fremont area, and the Sacramento region. And I grew up in the real estate world, my dad building custom homes, my mom owning owning rentals. So I’ve always had a love for investment real estate, I continued that love into college where I took an internship at a company called Marcus and Millichap. And it was there that I cut my teeth and learned all about how to underwrite a property, how to sell a property, how to negotiate how to how to how to get financing on properties, and mostly multifamily was my specialty. But it wasn’t always easy. You know, I growing up, my wife, my mom, dad had a lot of wealth, then they got divorced. And I went from, you know, having, let’s say a lot of money to no money almost overnight, because let’s just say my dad didn’t pay as much child support as he could have right over the years. And so I struggled financially right with my mindset knowing that at some point, I don’t want to have to depend on a job or what person I want to be able to own cash flow producing real estate, and have that be able to build that amount of wealth. And so brokerage is a way to learn from the best for my clients, hear their stories, solve their problems earn enough so that we can get on what’s called the other side of the phone. And so that’s where I started out cold calling, you know, and learning the business. But it was oh six this was an interesting time when the marketplace was very high, very hot. And it went from a very hot high market people making a lot of money to the 2008 crash where I was making a little bit of money and then overnight next nothing and like a lot of commercial real estate brokers or owners during that time period. We had to figure out some Something else right and my something else happened to be what at the time my wife and I were barely married and and then baby on the way. And the answer was moving in with my brother who is small condo to cut expenses and getting a side job at a place called Cheesecake Factory. So by day I had made cold calls helping clients kind of kind of combat the banks and try to try to, you know, get creative ways to rent the rent their units out and renegotiate their taxes with the city and buy nicer cheesecake. And I did that for a two year period. And during that challenging time. I don’t know if you’ve ever been so scared and not sure what you’re going to do. Or that’s where I was at, like I didn’t know I was gonna do. I felt like a failure. You know, all the fears of my parents divorce and the financial things kind of came coming up. But I just kept persevering. My wife believed what we were doing to build wealth and the plan. And I love commercial real estate. It’s the one thing I knew. And I had amazing mentors who believed in me. So I kept pushing, kept pushing. And during this time a gentleman came in, he spoke about the thing called a deferred sales trust, which we’re going to talk about. And it was one of those moments that everything kind of changes. But it didn’t change right away, I started to talk about this, I started to try to educate people. And for those who don’t know what this is, we’ll talk about in a minute. But we thought we knew everything there. And like we thought we were the Navy SEALs of investment, real estate brokers, you know, the 1031, exchange, the tax deferral, we’re going to help people do all these things. But we didn’t know it. All right. And that’s what I found out at that day. But what went on to happen was we actually to apply this strategy, talk about it, my business started to grow. Fast forward, I retired for the Cheesecake Factory wife, and I have five kids. And she’s been able to stay home full time, which is one of our values for our kids and for her and for our marriage. And I’m here in Sacramento, and now I teach and train people how to do this.
J Darrin Gross 6:43
Wow. Well, that’s congratulations on your five kids and your family and, you know, getting or the commitment to see it through and to work hard and make it work. That’s impressive. So let’s start with with just the, you know, you mentioned the concept of a 1031 exchange, I think most people are familiar with the words may be familiar with a little bit of the dates that might be in play, but not always all the nuts and bolts. And I’m wondering, maybe that’s not a place to start, because if I understand, right, that’s kind of the, the the trigger for working with a Deferred Sales Trust,
Brett Swarts 7:27
you got it’s a great place to context because a deferred sales trust is kind of like a 1031 exchange. It’s kind of like an IRA. It’s kind of like a 401k. It’s kind of like a lot of things. And we like to call it the Netflix way of doing things versus the old blockbuster transactional way of doing things. So let’s define a 1031 exchange and why it’s like blockbuster, well, do you remember going to blockbuster on a random Friday night there maybe 10 years ago, and they’re still around, and you see that movie behind that cardboard, and you’re walking up to get that movie. But for some reason, someone’s two steps ahead of you. And you’re like, man, I missed it. Now it’s sold out, and you’re bummed out. But you get that second movie and you take it home. But within three days you forget to return it, then you got a penalty. And then you forgot to rewind and you got a penalty. And then you had to drive your car back and forth and sit in traffic. Well, that is the old way of doing things. That’s the 1031 exchange. And what we found out while I was going through all those struggles financially working at Cheesecake Factory, my clients are going against the banks, right. And the number one cause was they had overpaid for property and they had too much debt not and let the quiddity and they let the tax tail wag the investment dog. Right. And they knew they were doing it but they felt trapped because of the 30 to 50% in capital gains tax and depreciation recapture right and the Oh 4050607 market before everything kind of turned. So they knew they’re making poor decisions, but they felt they had no other way to get out except for just doing the 1031. And just buying and hoping and praying that the values would hold up. Well, that was the kind of ground zero of why we found out the 1031 is blockbuster because our parents taught us to sell high and buy low, not sell high and buy higher 180 days later, with little to no inventory, little to no value add opportunity and in more debt. Right. And unfortunately, the 1031 exchange does not work in every situation, right? There’s different tools for different different periods of life, financially or personally. And we’re at the 1031 exchange. A lot of our clients, their baby boomers, right? They’re in their 60s that are older and they’re looking at this and they’re going I’ve made my wealth, why do I need to take on all this debt, new rent laws, new, you know, new new rent control, new new toilets, trash liability, I don’t need all this stress in my life. I want to retire from this. But I also want to be able to pay off debt and get diversification. So interesting study, according to the American Bankers Association has about 17 to $20 trillion. It’s gonna pass from one generation to the next and the next 20 years. And this is known as the largest wealth transfer in the history of the planet. In fact, there’s about 77 million baby boomers turning 65 every day. I’m sorry. 77 million baby boomers in the US alone about 10,000 turning 65 every day. And they’re faced with toilet trash liability, large primary homes, investment properties, stock. Other assets that are highly appreciated cryptocurrency, and they’re looking at huge tax, and they don’t know how to get out. And again, the 1031 exchange is like blockbuster because it only works for investment property. We just closed a property in Palo Alto for a primary home seller who has wanted to downsize from his house, he had five kids, they’re all gone. And he’s like, I just want to retire, right? I want to downsize kids are all gone, I’m in this big house doesn’t qualify for a 1031. But he used that. So the 1031 only works for brushin property, doesn’t work for primary doesn’t work for stock doesn’t work for other things. But the biggest thing is time, because it forces you to make quick decisions. Whereas the Netflix version, the Deferred Sales Trust, you can now sell high and defer the tax on the sidelines for as long as you want. And there is a story that kind of changed it for me as the gentleman who sold a $20 million asset 2006. And he sold at the height of the market, and he looked around for a 1031 couldn’t find it, use the deferred sales trust for the first time. And he parked the money where stocks, bonds, mutual funds, conservative stuff, right? He’s not a big stock market person, but he was better than paying the tax. And he sat on the sidelines. And five years later, that property that he had bought was foreclosed on. And the bank calls him back said, Hey, you know that property? So he says, Yeah, well, we just foreclosed on it. And we’re just curious, would you want to buy it back? He’s like, well, maybe what’s the price? So about 40% less than what you sold it for? He said, Sure. So he was able to reallocate the investments in the deferred sales trust, and he’s able to buy that property back at 60 cents on the dollar. Okay, all tax deferred. And so when I heard that story, and understood the power of that, it changed everything. So that would be the first thing. It’s a way to get time back, to diversify, to get liquidity, and to wait for a deal hit you over the head versus overpaying for a property that, you know, probably doesn’t make much sense right now.
J Darrin Gross 12:08
That’s pretty powerful. because like you said that the 1031 exchange and the dates, and especially if you’re in a hot market, it’s one thing to be the seller, but if you’re trying to buy something, and you know, everybody’s chasing the market up, you know, you’re faced with that, that situation where, you know, hopefully you don’t overpay and that you’ve got enough time that if you know if need be you can weather the storm or get out. So you said something that that made sense to me. Because I think the other thing is that the part of the 1031 exchange that he replaced the equity and the debt. So if you if you leveraged into a property originally say 20% equity and 80% debt in an appreciated now you’re maybe in a 5050 if you’re lucky kind of thing, you still have to replace that that debt that you acquired, which basically requires that you go to a larger, more expensive property in order to successfully do a 1031 exchange. And like you said, just the stress and, you know, if you’re if you’re older and you’re wanting to get out of that some something that’s a little bit less stressful, a little bit less risky is is probably a good idea. 100%. So, so the the you introduce the topic, you know, the the the deferred sales trust. So let’s talk about those proceeds from the sale of the property. How is it that this, the mechanics of this that you you know, you have the property you sold it, you were seeking to do a 1031 exchange, but now you’ve decided, maybe I want to attend 31? exchange, I’m going to do deferred sales trust.
Brett Swarts 13:57
Yeah, first of all, understand it’s not it’s not a 1031. It’s not a Delaware Statutory Trust, don’t get these two confused, because dsts often get confused. The key thing that the foundational understanding of how this works is IRC 453, which is known as an installment sale, or seller carry back. So as the client, if you’re selling the deal, Darren, you’re going to lend the funds to the trust in exchange for a promissory note, you’re typically going to take 100% financing, you know, back, you’re going to be you’re going to take all you can give any down payment from the trust, you’re going to give all the finances of the trust. And when you do it like that you don’t you haven’t you haven’t received any cash payment, therefore, you’re in a tax deferral state, then we find the third party buyer, and that buyer actually buys it from the trust and infuses the cash into the trust. And that trust buys and sells for the same price. Therefore there’s no tax at the trust level. And since you sold it and you receive no downpayment, you’re in a deferral state. It’s not unlike an IRA or even a 1031. If you think about it, right. Think about how a 1031 works. You sell a property and say for 10 million, you have zero basis. And all the funds go to the Qualified Intermediary instead of going to you. Well, you haven’t received any of the funds yet. They’re the Qualified Intermediary, or even like an IRA works that way the IRA works is that the government says, Look, if you put money into this IRA, as long as you don’t touch it, don’t take distributions. It’s an a tax deferral state, it’s building and growing. So same thing with a trust, we form a trust. The difference is, you don’t own the trust, you lend to the trust. And then the trust will slowly pay you over time and installments, and you’ll pay the tax. So we just closed the deal on Alabama’s $2.6 million business sale. And he owed about 600,000 of tax, again, didn’t qualify for a 1031. But he’s a business, it did qualify for the deferred sales trust. So he moved it into the deferred sales trust, you know, sold it to the ultimate cash buyer, which was his partners that bought them out. And then he was able he is building 70 units in Tennessee right now all tax deferred ground up development. So it’s a really nice way to go on to that next thing. The key is as long as it’s in an investment, and as long as it’s out there, it’s in a tax deferral state until when, until the income starts producing on the trust and you start receiving payments when when you receive payments. Well, some of them receive it right away. Some clients, we just did a deal on $1.4 million primary home sale for a retired teacher. And she was on a fixed income, she lived in the house for 25 years. And she’s able to sell her house that she bought for about 200,000 for about 1.4 and defer all the capital gains tax. And now she’s gonna live off the interest payments of the trust over the next 1020 3040 years, pass it to her children who can continue it on as well. And so it becomes a nice vehicle to not only defer tax, but to live off the cash flow.
J Darrin Gross 16:41
Got it? So I understand the the transfer of the asset into the trust, who has a right and actually the trust, so you’re selling Okay, you’re selling it to the trust? Yeah, the trust then makes the sale to the buyer cash buyer. Yeah. The the proceeds then, of the sale go into the trust from the buyer to the because the the trust now the seller, right. You mentioned the the individual that either the one that bought back the property at a 40% discount, or the other one that’s building some apartments. In I’m assuming that the money within that trust in order to to do the investment, does it come out of the trust? Or can you grow the trust by doing that, that acquisition or that that build within the trust, where it’s just the the assets of the trust continue to grow?
Brett Swarts 17:40
Yeah, so it’s the latter. So you can you can do both you can you can take a distribution and pay the tax, and go do it by yourself. Or you can partner with the trustee, the trustees and make a return typically about 8% over 10 years. And the investment allocation can be a number of things, stocks, bonds, mutual funds, hard money lending, or real estate passive or active. And so we we do that in a in a in a way that allows them to do both by partnering with the trust to go do that all tax deferred, by the way, right. So that’s where most of our clients like to do just keep it growing, keep keep it earning, keep living off the interest.
J Darrin Gross 18:16
So in the so you fund that you continue to grow it, you take your distributions, you’ve talked about like different timelines, is there any limitation on the length of time that the trust I mean, as a trust me, I’ve always thought that the purpose of an estate trust was that the trust doesn’t die, which doesn’t trigger the tax being due therefore, it continued the the assets continue to be held, as opposed to having to be liquidated is that
Brett Swarts 18:46
No timing restriction. So typically, their 10 year terms, and every 10 years, you can renew for 10 years, renew, renew, renew, pass it to your kids, via your living trusts, what you own is the promissory note, right? That’s what you owe, and that’s what’s inside of your living trust. Okay, and then the kids can step in and start receiving payments from from the from the trust as well.
J Darrin Gross 19:06
Okay, and is it typical that the, the 10 year term is designed to draw down the the amount of the asset or amount amount of the sale or whatever to zero to where you’re basically just paying 1/10 of the tax annually?
Brett Swarts 19:23
Yeah, so we can structure the the payments back in principle an interest or just interest only payments. Many of our clients like the interest only portion of it the golden goose intact, and then and let that let the golden goose lay the golden eggs, right and just live off the interest. And so, but it can be structured, yeah. 1/10 of it over 10 years, or just interest payments and just renew it. It’s up. It’s, it’s up to you. And it’s adjustable to you might adjust it along the way you might say, you know, I started out thinking I needed this, but maybe that can we adjust it? Yeah, it’s amendable you can amend the promissory note. And upon amendment we can have it accelerate payments. decelerate payments, it’s flexible.
J Darrin Gross 20:02
Got it? So, when you fund the trust, who is in charge of making the investments? Or I mean, is this like, self directed IRA or is there there’s, there’s there need to be a an intermediary that that’s handling this or,
Brett Swarts 20:21
Yeah, let’s talk about how and where the funds are invested in how it’s determined. So before the funds go anywhere, as if you’re the client, the note holder, the taxpayer, you’re filling out a risk tolerance questionnaire. Okay, and if you’re married, so if your spouse has two page questionnaire, no wrong answers just tell us about your level of risk your income needs. And based upon that, you get a score based upon that score and interest rate is assigned based upon that interest rate. Investments are presented to you, right, so you have all the approval, the funds never go anywhere without your full approval, and no investments are ever made without your approval. Now, it also takes a second approval, which is this is part of my role, I’m the trustee of a third party, unrelated trustee, very important, not related to the taxpayer. Right. And by having that separation, it takes dual approval for any investments, and dual approval for any of the funds to move. And that keeps the protection and the integrity of the tax deferral. If there wasn’t that second approval, it would be taxable, right? Cuz you just be selling it to yourself, or you’d have what’s called unilateral control. And when you have unilateral control, it’s just taxable. So it’s a business entity that is set up to do business with you. And, and so it’s, it’s, we’re all working as a team. Now, we want what you want, right? And so the goal is, what kind of risk would you like, Where are you gonna put the investments? Where would you invest it at anyway? Anyways, and let’s try to mirror that. But it’s all based upon the risk tolerance. It’s all mathematical. Does that make sense?
J Darrin Gross 21:51
Yeah, I think so. I mean, you the third party? I mean, you’ve got to be the one that’s there’s got to be somebody in there that that’s approved. And I’m assuming that’s per the design of the statute or whatever the keeps it all. Yes. Keeps the integrity of it. Exactly. So, okay. And then with within that vehicle, are you limited to the types of assets? I mean, 1031, typically, is associated with real estate. But can you go buy stocks, bonds, Bitcoin?
Brett Swarts 22:23
The latter, right? So the investments can be secured against a number of assets, right. And so the the return on for the trust to pay back the interest can be secured against a number of assets, including liquid diversified investment grade securities, insurance products, mutual funds, right? hard money lending, passive real estate, active real estate, as long as you know, businesses, as long as it’s business purpose or economic substance, right. These are the key key terms here, right, that it’s for the greater good. And then this is why we believe the IRS really likes what we do. You know, and it’s a good thing for it’s everyone wins, because it’s stimulating people to sell assets at high prices, and infuse the money into the economy, which does what it creates more jobs and more tax revenue, which creates more taxes, it also gets a new property tax. Right. So for the property we just did in Southern California. She bought it for 200,000. Well, guess what? Her property taxes are pretty low, right? Well, she’s selling for 1.4 to a new buyer, guess what new property taxes? Guess what, that’s that listing agent gets a commission, they pay taxes, right? escrow, they pay taxes. All of that money goes into stocks, bonds, mutual funds, or real estate, which does what creates more jobs are doing an aetherium case. Right now. It’s a Bitcoin case. And they cryptocurrency case, they they have they bought aetherium for about $100,000. And it’s it’s increased in value to like 6 million in 2017. And then an increase in value to like 12 and a half million here recently, right? And they’re gonna sell it, and they’re gonna defer the tax. And it’s not just the numbers, it’s the transformation for them, they’re able to retire from working 5060 hour weeks, you know, have young kids they want to travel the world, he’s from another country, right? A lot of different things there that enabled them to do a lot of things. Because the deferred sales trust is doing what it’s going to defer about four or 5 million attacks, it’s going to extend the amount of time and the amount of money they can live off of by a really, really, really wide margin.
J Darrin Gross 24:30
Yeah, no, I that to me, you know, I am assuming the conversation my mother here the other day about, you know, the concept of a 401k as opposed to an investment, you know, and it’s like the I always thought that the plan was to have enough assets to live off the interest, your you know, that the investment would continue to grow, which I think is possible in real estate, at least to you know, create a sizable amount of equity and and live Botha returns that but, but I think most people are. That’s kind of maybe a thought. But it’s not really reality, when you get into like a 401k, where you basically have to liquidate your asset in order to, you know, abide by the tax laws, and just to live kind of thing. But in this situation, what I like what you’re, what you’re talking about is the ability to, you know, sell at a high price, keep the the asset, or the value of the asset working for you. pay the tax that’s owed, as you as you spend, or receive the proceeds, but not like in a big lump sum. So you can do a little bit of tax planning, if you need to be or need to. But let me ask you so So you mentioned we are we talked briefly about it, but the, you know, upon death errors, transfer that the trust mean, a trust, I’m assuming that that that can have can continue. And it’s, it’s not me, there’s not a need to liquidate it to satisfy any kind of tax law. Is that correct?
Brett Swarts 26:14
Yeah, that’s a good point. Right. So Biden’s proposing some big changes, right. One of them is the elimination of the stepped up basis, okay, I don’t know the odds of that going through, maybe you’re low, but it could, but imagine that you own all this piece of real estate or assets, you’re in the ownership side of things, and you thought you’re gonna get the step that basis for that’s no longer happening. And now, the tax is triggered upon death, this is part of the proposal, the kids would have to liquidate, to pay that tax, okay. On our side, never you’re not an owner, your lender. So you’ve lent the funds to the trust and the trust bought and sold for the same price. So it has no gain, right. And so upon the sale upon the clothes, or upon you passing the promissory note, pass it to your kids, and your kids can just step into your shoes and keep this thing going. So we solve that challenge there on on the stepped up basis, and they can keep it going for as long as they want. And as they receive cash payments, they’ll pay tax, but they could also pass it on to their kids, they just keep keep it going.
J Darrin Gross 27:15
Right now, I was thinking about that just to in preparation for this, that this may be a real, you know, if the the tax wins change as they, they there’s a lot of talk and a lot of effort invested in the talk. But I don’t know that there’s actually the will to totally change the tax laws. But even in that, in that era, of of a change, the fear can drive the market to do certain things. And I was thinking like, just to, you know, if you think you’re going to reap a benefit by in enacting a law, which you’re failing to recognize least what I’ve seen, I think what what most investors will look for, is the alternative that, you know, continues to allow them to have the benefit that they originally saw it for the investment that they got in like so, real estate, if you got in real estate, we’re expecting to be able to pass on your, your, your assets to your heirs, at a stepped up basis. This seems like this would be a an ultimate defense mechanism to avoid the potential of a law change that would potentially liquidate the you know, the assets that you’ve worked so hard to, to grow
Brett Swarts 28:37
100%, we think we’re really positioned perfectly for what’s called the three perfect storms, right? The demographic, baby boomer largest wealth transfer history, the planet happening, the economic highly appreciated assets, that could be subject to a big correction. And the third one being the political, you know, 20% to 40%, and capital gains tax rate elimination or reduction of the 1031 exchange, elimination of the stepped up basis, where we really we every one of those boxes, we check off and we’re a great alternative. The other one is the estate tax, right. So there’s some people listening perhaps they have a huge huge estate, and looking for ways to move funds outside of their taxable estate. The deferred sales trust can also do that, too, we have a proprietary version of it, where no matter what the size, we can move funds outside of the taxable estate. And that’s a nice way to save on 40% of that so you can learn more about that. The other one is income tax deferral. So maybe you can delay the payments of the trust, which could also lower your overall income tax in that given year. Now, when you receive payments later than you’ll pay tax, right? But that’s a nice, nice piece of this. Another one’s a brand new depreciation schedule. By partnering with the trust, you can get a brand new depreciation schedule and then as you roll payments out so they can wash out and they give a new year. So a lot lots of ways to to make this an investment right and a really a good solution for that transformation when you add them all together.
J Darrin Gross 29:57
Right. So I think I think if I understand something And I hadn’t really recognized in the past conversations I’ve had about the deferred sales trust is the the vehicle is this note. Basically, that’s the, the that’s really the way that you’re getting the the income, I mean, the the assets in there, but that, whether it be like the interest only payments, which I would assume that if people have a large enough nest egg, that would be kind of the, you know, the preferred way is to try and find something where they can receive interest only is that in my tracking on that,
Brett Swarts 30:31
Yeah, so if you’re passive, that’s exactly right. It’s just, if I’m, like, 100% passive, it’s just in real estate, or it’s in passive real estate, it’s in stocks, bonds, mutual funds, hard money lending, and it’s just producing interest, you’re living off the interest. However, the this the really place where this thing really flies is when you partner with the trust and you become active. Okay, so back to the scenario of my client in Alabama, right? He’s actively building those apartment complexes, right? So in partnership with the trust, and with the trust, it can be like a silent partner with you, and you can build or buy real estate. And then you get ownership in that LLC, that bought that real estate in partnership with the trust, and then that’s where you get some new depreciation. Okay. So it’s a really nice, elegant way to, to build wealth on the ownership side again, right? With the trust, that you lend money to. And so that’s, that’s the without that, then this is like this, not as not as exciting. But with that, it’s, it’s it’s absolutely a game changer.
J Darrin Gross 31:35
Yeah, that’s, that’s a, that’s huge. So in that example, where you’re you’re partnering with the trust to go out and build some property or build a property, and you see it to its conclusion and its cycles, you know, from from construction to operation to sale. The the proceeds from that sale, can you then sell to the same trust? Yes. Okay. And then essentially, keep growing that trust?
Brett Swarts 32:05
Rinse wash and repeat, right? So love that that’s buy low, sell high. That’s that’s where it makes sense. Build where it makes sense. Sell, roll it back in Wait, be patient dollar cost average back in No, you know, we’re safe harbor, right? Park your funds, pay off your debt. So we’re telling a lot of our clients sell high, pay off your debt, defer your tax, dollar cost average, diversify your investments, right, and then just wait for a deal to hit you over the head. And it might be a development deal, or might be a real estate deal that someone gets foreclosed on in a year or two or something, right. But, but don’t do the blockbuster, right, I saw the blood in the streets in Oh, eight in the crash, right? It was really sad to see people lose half or lose all of their wealth. Because they just wanted to just, they only knew they didn’t know it wasn’t their fault. Their CPA didn’t know about it. The 1031 exchange companies don’t want you to know about it. Most commercial real estate brokers companies don’t want you to know about this. They’re in the business of keeping you in the 1031. Race. And it’s a race for how big their Commission’s and how many deals they can do I get it. I’m a commercial real estate broker. And I started at Marcus and Millichap. And that was the that’s the mantra, right, and they’re a great company, they do a really amazing stuff. Nothing wrong with the 1031. But guess who’s really on hook for that deal. If you overpay, it’s you? Right? So in this scenario, we don’t want you to feel trapped, we don’t want you to feel like you have to do anything. We want you to have freedom.
J Darrin Gross 33:33
So let me ask you, you know, the, the investment. Some of the rules of investing are kind of I guess, the tax issues. Yeah. I know that like with with people with if they’re using their 401k there are some rules that they can’t, you know, engage in. One is lending to a family member, whether it be parent or child or kind of thing. Another is I unrelated debt income? I think there’s a UTI or something like that. That’s what that is. There’s a tax in the situation where you’re talking about, you know, partnering with the trust, and, you know, building something larger. Are there any tax concerns there from a from a strategy?
Brett Swarts 34:28
No, we don’t have those regulations. Are those rules, like the 401k or the IRAs?
J Darrin Gross 34:35
Okay, that’s great. That’s great. So let me ask you this. So the the ideal client, you’ve mentioned, obviously, the the people that, you know, either had 10 million or the school teacher that went from, you know, 200,000 to 1.4 million. I mean, you know, sizable chunk. What about the person that’s owned just a single family rental For a number of years, it’s appreciated. They get out but it’s not, you know, change your life money, it’s just something you don’t want to let go of the of the, you know, you don’t wanna pay the tax on it, because you’ve, you’ve held it long enough that you’ve depreciated it, and you’ve, you know, recapture all that fun stuff.
Brett Swarts 35:17
Got it. So our minimum deal is $1 million net proceeds and $1 million gain. Why? Because we found that unless the pain is big enough, which means the game needs to be big enough, which means the tax will be big enough to justify our fees, that it doesn’t make sense. So we want it to be a homerun for everybody involved. And we found that unless it’s $1 million gain, and at least $1 million net proceeds for any single transaction doesn’t make any sense. Okay. So if you just have that $300,000 house you bought for 50. And you’re like, man, I want to pay the 50 or 60,000. Sorry, it’s too small for us. It’s just not a great deal for anybody, because the fees will eat up the savings, what are the fees about 1.5% to set it up? And a 1.5% or so depending to 1.85% depending on the size of the deal. So you want to make sure that your that is big enough. Okay. Now, if you had two deals if you go well, Brad, I got to deal with 500 500. Yeah, we can make an exception for that. But otherwise, the answer’s no. It’s got to be those those two numbers that make sense.
J Darrin Gross 36:24
Yeah, exactly. That’s, that’s exactly what I was getting at. I was gonna ask you, I can’t remember anything. If it comes back to me, I’ll ask him here. But
So, so basically, the I mean, the some of it is if you’ve got a sizable chunk, and you’re looking for an alternative to paying the tax, this is a way to do that without having to get into another deal at the top of the market. And hope that it all works out. I mean, that’s that’s kind of what I’m what I’m hearing,
Brett Swarts 37:04
Eliminate the need for the 1031 exchange forever. Right? rarely ever have to feel like you’re trapped overpay. So the 1031 is easy to for tax, the deferred sales trust is used to give you back time, right to lower your stress to let you be location, financially, you know, business freedom, right? Freedom on allamah, a number of levels, not just capital gains tax freedom, so yep, that’s that’s exactly right. Dan, I think you got a good grasp on it.
J Darrin Gross 37:33
And let me ask you this, because when I was thinking about so as far as the the management of the asset of the trust, is that unique to your company? Or How’s that? Is that something I’m good my broker and say, hey, I want to do deferred sales trust, set me up?
Brett Swarts 37:50
Great question. So we partner with financial advisors across the nation. So we have 1000s of strategic alliances, encouraging commercial real estate brokers, luxury realtors, financial advisors. And so it’s very important that the order of this makes sense. So if you have a financial advisor, if your financial advisor, reach out to us sign our NDA get connected, right, get it all approved, and then and then bring it you can bring it to your clients. Right? That is, that’s just fine. So that would be the order you want to do that. Darrin, so, you know, have the financial advisor contact us and get connected with us.
J Darrin Gross 38:26
All right. Hey, Brett, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk, and determine what to do with risk. And there’s three strategies we typically look to, we first look to see if we can avoid the risk. If we can’t do that, then we look to see if there’s a way we can minimize the risk. And when avoidance and the ability to minimize the risk are not an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if the if they can look at their own situation could be their clients, the market investors, tenants, you know, however, we want to frame them the question, but if they can identify what they consider to be the biggest risk, and for clarification, I’m not looking for an insurance related answer per se. Risk is everywhere. You look. But if you’re willing, I’d like to ask you, Brett Swartz, what is the BIGGEST RISK?
Brett Swarts 39:34
Sure, so I’m gonna apply it to the Deferred Sales Trust cuz we didn’t actually touch on this, but I think this is really important. So it has to do with asset protection, right? So the more you own and the more you own in your own name and or that’s not an LLC or that doesn’t have proper insurance, the more you could be liable and have higher risk of somebody suing you and taking that asset okay. So by essence, owner’s ownership, and Rockefeller said it well he said own nothing control Everything right? And and the idea was asset protection. So how do you lower risk? Well, on the deferred sales trust, guess what, you become the lender. You don’t own the trust. So what you don’t own, they can’t take from you. Right by default. Now, could a creditor, you know, if they get a judgment against you? And could they potentially get the income off of the trust? Yeah, that’s that’s common. Right. But could they force the the the ownership, that’s not the person that they got the judgment against? to do anything there? No, because they don’t own it. So we do love that about the deferred sales trust, who does take and mitigate some of the risk? So I think part of the answer is the risk of just lots of ownership. Instructors are better not insured in a proper way that could be subject to judgments. If there’s a way to mitigate that, I think that’s that’s really good. And I think that’s probably the biggest risk I can think for this conversation here. That makes sense Darrin?
J Darrin Gross 41:02
No, absolutely. I you know, that whole eliminate your your risk by have no assets or you know, control at all, that’s, that’s always a great. A great way to view things
Brett Swarts 41:13
It’s no longer about cash flow, Darrin cash flow is important. See, Robert Kiyosaki talks about cash flow, right. It’s now about tax flow.
J Darrin Gross 41:22
Brett Swarts 41:23
Especially for the ultra wealthy, who baby boomers who have made it right. And now it’s preservation. It’s not necessarily creation, at least not in this marketplace, or more like we’ll pick a more conservative preserve preservation. That’s our that’s our philosophy. And let’s focus on tax flow. Because guess what taxes are going up? Right, taxes are going up. So what do you do? Well, let’s let’s let’s get to the deferred sales trust, let’s delay the income, let’s delay the capital gains, tax rates, defer it, let’s move it outside of the taxable estate, let’s move it outside of the potential risk of judgments of ownership. And then let’s sit in a safe harbor diversified liquid ready to go if and when the market shifts, and then you get aggressive again, and then you take on more debt, right? So it’s about smart debt versus dumb debt, right? Dumb debt doubles down and overpays for our property because they got to, they got to run around the hair on fire buying a 1031 Smart debt buys when the marketplace is crashed when everyone’s running for the sidelines and doesn’t want to doesn’t want to buy anything. Right? And then the deals are down you go into debt, now you leverage up so that’s, that’s kind of the thought that makes sense Darrin?
J Darrin Gross 42:36
No, always make sense. It’s always one of those things that’s easier to see in the rearview mirror rather than looking forward. But, you know, that’s still I mean, it is a matter of just preservation. If you know you’re getting out at a good number. And you’re not ready to do something. I don’t want to feel pressured. I think that’s it makes a lot of sense. To be a little more disciplined about it. So great. Hey, Brett, where can listeners go if they’d like to learn more or connect with you?
Unknown Speaker 43:01
Thanks, Darrin. They can go to Capital Gains Tax Solutions dot com. They can search that on YouTube as well and they can search on iTunes. We have a podcast YouTube channel that’s growing rapidly. We have guests like Darren all the time to talk about all the things we’re talking about here and more. So that’s capital gains, tax solutions, calm I also have a free ebook for you sell your real estate or business smarter, or cryptocurrency smarter. You can download that in the last thing I’ll leave for listeners if you’re a business professional luxury realtor, business broker, financial advisor, commercial real estate broker, syndicator insurance professional, you can go to expert tax secrets calm that’s expert tax secrets.com. And you can learn how to use the deferred sales trust to grow your business. Awesome.
J Darrin Gross 43:43
Well, Brett, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed our talk and learned a lot, and I look forward to doing it again soon.
Brett Swarts 43:53
Thanks, Darrin. My pleasure.
J Darrin Gross 43:55
All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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