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SWP: 179 Solving Your Capital Tax Gain Problems to Help Your Bottom Line
Brett Swarts is the CEO of Capital Gains Tax Solutions. 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.
His experience includes: numerous Deferred Sales Trust, Delaware Statute Trust, 1031 exchanges and $85,000,000 in closed commercial real estate brokerage transactions.
Brett is an active commercial real estate broker and investor with experience and holdings in multifamily, senior housing, retail, medical office and mixed-use properties. He is also a licensed California real estate broker and holds series 22 and 63 licenses.
If you want to know the ins and outs of deferred sales trust, today’s episode is for you!
Insight of the Week:
Managing your buyer’s list: Maintaining relationships with your buyers
Spiritual Foundations:
1 Chronicles 16:10
Glory in his holy name; let the hearts of those who seek the LORD rejoice.
You have to receive before you can give
In this show, you’ll learn:
- Brett’s background
- His family
- The largest wealth transfer in history
- Tax deferral strategies
- The installment sale
- Unique thing about deferred sales trust
- The 1031 exchange
- What you can’t do in a deferred sales trust
- What happens if someone wants to end the trust and get their money
- Walkthrough of the fees
- Who deferred sales trust is for
Quotes
“Take care of yourself. Work on your relationship with God.” -Brett
“Past performance can’t be a prediction of future results.”
“At the heart of what we believe, we believe it’s more blessed to give than to receive.”
Profile: Brett Swarts
Capital Gains Tax Solutions: Deferred Sales Trust
Capital Gains Tax Solutions on Facebook
Capital Gains Tax Solutions on Youtube
Brett on BiggerPockets
Brett on LinkedIn
Thanks for Listening!
Transcription
Brian: Man, I have to stay so I was just listening to the latest recording and the interview that you just did for the Simple Wholesaling podcast and I have to say that Brett was like amazing on there. He just have a wealth of knowledge, just a lot of really good information, a lot of really good nuggets. Don’t you think he did a great job?
Brett: Well, Brian thank you so much. I enjoy your compliments. I’m just really thrilled. That just gives me butterflies.
Brian: No, I’m sorry. I made a mistake. Not you Brett. The Brett Swarts that you were interviewing. That Brett did a great job. You were okay.
Brett: Oh, just okay, huh?
Brian: Yeah.
Brett: This is the Simple Wholesaling Podcast episode 179.
Welcome to Simple Wholesaling. A Christian podcast that supplies simple, yet effective content for real estate investors and business entrepreneurs. Get advice, tips, and tricks so that you can stay true to your values and achieve your dreams with real estate investing you can trust. Now, introducing your host, Brett Snodgrass.
Brett: Welcome, welcome, welcome to all you Simple Wholesaling fans out there. This is episode 179 on the Simple Wholesaling podcast. I’m Brett Snodgrass your host of this podcast and my co-host is Brian Snider. What’s going on man?
Brian: What is up man? Good to talk to you on here today and I will say you are a little bit better than okay. You did a great job I mean man.
Brett: Thank you. I appreciate.
Brian: Both Bretts were fantastic on this interview. So, I’m excited for our audience to listen to this interview today. I thought it was a great interview. A lot of great knowledge and stuff. But yes, you did very well Brett.
Brett: Yeah and we actually had that conversation that it’s Brett spelled with two Ts the correct way and we had so much in common beyond that too. But yeah, that’s our guest, Brett Swarts of this podcast episode and it was just an amazing interview. He brings a little bit of a different type of feel to our audience and he really dives in on how to save money on your bottom line. And a lot of times we are always talking about how to make more money with assignment fees or you know, building a big business. We are talking about our gross profit, our top line, right? But he talks about how to make more money on your bottom line and how to save money through taxes and it’s not a 1031 Exchange, but he actually goes into a very amazing strategy that their company, Capital Gains Tax Solutions and he talks about how to save money on your capital gains tax through a very creative strategy and even talks about this one guy saving 6 million dollars on a capital gains tax. So, awesome interview and just a great wealth of knowledge of Brett Swarts. Before we get into that, how are you doing man? How was your week last week?
Brian: Doing well. It’s great. We are at CG (Collective Genius) our Mastermind and I spent about 4 hours on Saturday just like going through my notes like re-writing notes and really just taking a lot of stuff back for this week, I have just been reflecting on, praying on and excited to work with the team and yeah going with the stuff with you. I think we will have our meeting actually after this intro and I think it will be a long one.
Brett: Yeah, definitely. It was a great time. I always love doing that. Brian and I are both enthusiast so we always like to try different things. So, we found our self each evening going out to Clearwater Beach enjoying some fresh lobster or fresh fish and just looking at the sunset, not really in that way, not a romantic way but just in a way just to hangout man and it was just really, really cool to not only gain so much knowledge from a Mastermind Group but just to hang out with you too it was pretty cool.
Brian: Yeah. Good time. I think it’s important for business owners and their COOs or some of the high level people that they really bounce decisions off of, I think it’s important to get out of the office from time to time whether it’s just going out to dinner or taking a trip away, go on the cabin or whatever it maybe but I think it is important for kind of these people to have these conversations away from the office who can really just kinda relay with each other, talk with each other but then work on the business not necessarily in the business. I think it was definitely beneficial for us.
Brett: Definitely. And it’s also good just to have that reflection time, so you gain so much knowledge but a lot of times like come back from those Masterminds and I dig right back into business and I forget everything really fast, so I think it’s really important when you go to a seminar or a conference or a Mastermind Group and you are taking a lot of notes just to have a day in between to reflect, organize your thoughts and figure out how are you going to implement and I heard this one time too you learn so much, there’s probably 100 things that we can bring back but you can’t do it all, right? So, I would just take 2 or 3 of those items to implement now and throughout the rest of my way because usually you don’t have time to do it. So, prioritize, organize and take the best ones to implement your business.
Brian: Yeah. Definitely great advice. Great advice. So, if you have any great advice for us or you just like to reach out to us and let us know how you feel about the podcast, we love to hear from you on a review. So, jump on iTunes. Let us know what do you think about the show. Let us know if you would like to hear us talk about anything in particular. We just love to hear your feedbacks. So, jump on iTunes, leave us a review and we love to be able to read it on air. So, I wanna put another little plug in here tool. So, it’s something I would really encourage you guys to do if you like the show, if you wanna learn more about us or just wholesaling in general, if you have questions, you can definitely put this out there but we have a Wholesaling Made Simple Facebook group. So, I definitely recommend you guys jumping on there. It’s just a platform and we’re building it together, we are inviting a lot of people and getting more members on there but it’s just a platform where people can jump on there, put out some questions, we will answer back as well as other wholesalers throughout the nation are answering back as well. So, it’s a really nice place. You can get some great content and get some feedback from us and we would love to hear your feedback on there as well. So, jump on there. Join our Wholesaling Made Simple Facebook group.
Brett’s Insight of the Week
Now, simple tips and tricks that make real estate investing easier, faster and better. Brett’s Insight of the Week.
Brian: For Insight of the Week, we’re gonna talk about a little bit about just managing your buyer’s list. So, last week or actually a couple of weeks ago, last week we talked about the Collective Genius and what it meant to be in a Mastermind and stuff like that but before that we just talked about doing a little series on managing your buyer’s list. It’s not just an email list. It’s not just a contact list but it’s actually maintaining your relationships with those buyers. So, reaching out to them, talking to them on a regular basis, figuring out what they’re interested, if their buying criteria has changed at all but a little bit of more than just like knowing what they are looking for or where they are looking and all that kind of good stuff, it’s kinda developing that relationship with them. So, you can kind of every time you are talking to them, maybe you can throw out personal nuggets just to be able to relate to them in general, there’s a lit bit more and more. So, check on them from time to time, just on a regular basis whether it’s monthly, whether it’s weekly might be a little bit too much but some of your buyers might like for you just check in every now and then, whether it’s weekly, maybe it’s quarterly for some people. Know how they like to communicate. Some people like a phone call. Some people like a text. Some people like to do Facebook messenger. Some people like an email. So, kinda keep track on that too. When you’re developing that personal relationship with your buyers, you’re maintaining that just a criteria that they are looking for and stuff like that. Also pay attention to how they like to be communicated with, how often they like to be communicated with and then reach out to them from time to time. Don’t just email blasting them whenever you have a property. Kinda reach out to them some of those times in between as well. So, thanks a lot that’s our Insight of the Week.
Spiritual Foundations
Do you dream of a life that is purpose-driven and makes a difference? Spiritual Foundations.
Brett: For today’s Spiritual Foundations, we’re gonna dive into a topic that I listened to last week and it talks about you have to receive before you can give. And really what it’s talking about is that a lot of times especially us Christians, we are told to give, to serve, to do this or to do that, to serve in your church, and just keep giving to others, right? But the problem with that is if you keep giving and you keep giving up yourself and you’re not receiving anything, eventually you start running on empty, right? So, what God is talking about that is that every single day you have to receive, that’s why you have to get into the word of God, that’s why you have to pray, listen to worship music. How do you receive? How do you get into the presence of God and you have to fill yourself up? You have to let the Holy Spirit in to fill yourself up. So, when you’re full, you can give. And this is just really relating to me as I feel like I’m a generous and giving person especially with our team and with my family but I also have to take care of myself and then I have to receive what God is telling me. I have to get into his word, how is God speaking to me and I have to receive that before I can give. I’m not sure whoever is listening to this where you are at and I feel like we do get a lot of people that listen to our show that are Christians that love to serve, that love to give, but you should remember to take care of yourself, work on your own relationship with God and that’s not a selfish thing, it’s just because you have to fill yourself up in order to give. You have to put your oxygen mask on first before you can put the oxygen mask on your kids and I just think this really was speaking to me today and I don’t know Brian do you have anything to add to that?
Brian: I think it’ s a really good insight. It kinda leads back to I know a lot of people kinda have that mentality of making sure you take care of everybody else around you, you’re gonna make sure you’re taking care of yourself first too, so you are able to take care of everybody else around you. When you’re talking about, you know, kinda receiving before you give that kinda jump into my mind. So, I know that one of the most important things in my life is taking care of my wife and making sure she is all right. And also I have to be able to make sure I’m taking care of myself in order to take care for her and provide her and stuff. So, yeah great insights man.
Interview
Brett: Now, we’re gonna introduce the guest of today’s show, Brett Swarts. Brett is the CEO of Capital Gains Tax Solutions. 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. So, that was a big mouthful but in short, he helped business professionals that are going to sell a multimillion dollar house save on the taxes. Or if you’re gonna sell a business, he helps them save on the taxes or if you’re gonna sell an apartment building or just a property and you’re gonna make quite a bit of money and you’re gonna pay a lot of taxes on that money, Brett can help you solve that problem and it’s called the Deferred Sales Trust. So, he has a lot of knowledge, a lot of nuggets. This is a great interview and this is something that I have actually never heard of and I’ve heard of a lot with all of our guest on this show but he really takes us down and really describes in a way that I can’t do a justice. So, let’s get to our interview now with Brett Swarts.
And we are back with the guest of today’s podcast, Brett Swarts at Sacramento, California and Brett is gonna blow our mind with his ninja skills of going into tax savings in the real estate market. What’s going on Brett? How are you doing man?
Brett Swarts: You know Brett, I’m doing great and it was really a pleasure to be on your show and to look forward to adding some value today.
Brett: That’s right. I usually don’t have someone sitting across from me with the same name. So, it’s really—yeah, I always try to study the name before the show but I don’t have to this time and it’s awesome. So, you’re already an awesome person man.
Brett Swarts: It’s a beautiful thing, right? I have 5 kids and I’m trying to keep their name straight to simplify life, you know, there you go.
Brett: That’s right. Awesome. Hey, Brett before we get into all your skills and talking about tax savings, where did you come from man? How did you get into this and where did you start?
Brett Swarts: Yeah. So, I’m from Sacramento, California and my background is I grew up in the Bay Area, Mission San Jose, Fremont, California just about 20 minutes from Facebook headquarters now and I grew up with building houses with my dad, custom homes, room additions, ground up. You know, the MC Hammer days because I was an 80s kid and MC Hammer had a big house on top of the hill it’s like his big mansion and we didn’t built that one but my dad built houses just down the street and they’re also very big.
Brett: Is that one with the waterfall that he got?
Brett Swarts: Oh, that’s one with everything. Yeah, that’s the one, it’s just, you know, really iconic.
Brett: And you are wearing your Hammer pants down the street?
Brett Swarts: Oh, we were rocking the Hammer pants, you know, we were doing the MC Hammer dance and then the Michael Jackson was a big part of our beautiful life too. So, that’s where I learned the sticks and bricks of real estate and also kinda entrepreneurship. My dad owned rentals and did custom homes and was on his own business. I spent time with him there and then I spent the other time in Brooklyn, California where I played sports, I played football, basketball and baseball growing up and learned how to work as a team and I love competition. Fast forward, I went to college and I was able to take an internship in the company called Marcus & Millichap where I learned the financial side and the brokerage side of commercial real estate. In particular, apartment complexes and was with them for 5 years and then branched off to another company and then started my own brokerage about 4 years ago. Along that journey, I learned to really focus on how you add value to clients. How do you win business by bringing something that’s kinda solve their pain or their challenge that someone else isn’t doing? So, my manager at that time at Marcus & Millichap brought in a gentleman who spoke on the deferred sales trust and his name is Robert Binkele, he is my mentor and business partner now and taught us something beyond an alternative beyond the 1031 Exchange and so I have been studying that structure ever since and fast forward, I launched Capital Gains Tax Solutions a couple of years ago and we’re helping more and more people escape from feeling hostage to the 1031 Exchange. It also works for businesses too. Business owners and primary home owners and artwork and collectibles so that’s kind of a story for how we are here today.
Brett: That’s awesome man. Quite story and he had 5 kids along the way too.
Brett Swarts: Yeah. So, 5 kids currently, right? Yeah, 10 months to 9 years old and so yes we’ve been very busy. My wife is the real rock star. She is the stay-at-home mom focused on full time raising and keeping them alive.
Brett: That’s like the name of the game right now.
Brett Swarts: Support them as much as I can and be there too.
Brett: My son, he is 5, he had his first day at kindergarten yesterday so we took him to kindergarten, we’re really nervous about just all that brings because we are like I hope he is okay because he is a little shy and different a little bit and he ended up throwing up on the first day of kindergarten so we had to come in and pick him up at 2 PM. It’s like the worst day, not what I expected so you get everything you don’t expect with the children these days. So, that’s awesome man. Hey, thanks for just telling about you and your business. It sounds like we not only had the same names, I was a big basketball player too. So, a big sports guy. I learned about teams and got into real estate as well, flipped some houses, but this whole tax thing I have not conquered. And I’m gonna tell you right now, I have talked to more tax professionals, CPAs, tax strategist, my bookkeeper, CFO people in the last 6 months than I’ve ever talked to them before because I’ve built a great business for the last 12 years. I’ve been flipping houses. We do a lot of business and I can make some money. Our team can, right? But I always get hammered on the tax side of things. So, this has been a pain point in my journey how to save money on taxes. So, take us in that a little bit. What is this tax savings thing all about and where some of the pain points that you are seeing from entrepreneurs like myself?
Brett Swarts: Yes. Thanks Brett. Let’s start with the big audacious problem that is facing us, Americans in particular, the largest wealth transfer in history, so according to the American Bankers Association, there’s about 17 trillion dollars, it’s probably upwards of 20 trillion now since that survey was taken a few years ago that’s gonna pass from the baby boomer generation which is the second largest generation in history of the planet we know of to the millennials and this is happening in the next 17 to 20 years. And in fact there’s about 10,000 baby boomers every day who are turning 65 and on top of that there’s about 77 million in the US alone and they’ve made their wealth, they burn their wealth. They’ve invested in commercial real estate. They’ve invested in businesses. They’ve built businesses. They’ve lived in their primary homes for 10, 20, 30 years maybe, perhaps. They have artwork and collectibles and they don’t know how to sell and get it liquid and diversified to pay off their debt without getting hammered by the capital gains tax and what is that amount? Well, it’s about 30% to 50% of your gain depending on what state you live in and how much depreciation particular asset has been taken on that. So, they feel trapped. They feel absolutely trapped. They feel like they’re gonna get hammered which they are if they sell and don’t have a tax deferral strategy lined up. And yet they want to retire. They wanna retire from the toilets, the trash, the liability, they wanna trade it for time travel, liquidity and diversification. They want options. They want to enjoy their wealth. They don’t wanna necessarily work anymore but they also wanna get out of debt. They don’t wanna get hit with like in a way all over again. They’re 10 years, 11 years older than when the crisis hit and they’re looking for alternatives. So, that’s the big problem that’s going on and you coupled that with the other part of the perfect storm. There’s 22 trillion dollars of debt in growing with the US government so they’re looking for ways to maybe go away with the 1031 Exchange or limit the step up basis or collect more taxes to pay for this ever growing debt and then you coupled that with low inventory and prices are very, very high right now and we called the perfect storm facing anyone with the highly appreciated asset and folks aren’t sure what to do. So, I’ll pause there because you might have some questions or comments on that.
Brett: No. I definitely think that when you said the word trapped, I’ve definitely been there because, yeah, you have this asset that you think is worth a lot of money and you just feel trapped because you wanna sell it but you don’t want it all or a 3rd or 4th or 5th to get taken away. So, yeah, I think that’s great. So, you kinda describe baby boomers, they’re transferring, they’re turning 65 and they need to liquidate some of their assets but they don’t really want to get at all hammered with the taxes, right? So, what do you do? Typical person they meet with a estate planner that go through some of that, they probably tell them some traditional ways of how they can save on some taxes, you mentioned 1031 Exchange, that’s something that we’ve heard before. It’s a little bit more complicated that I haven’t actually personally done. But I have heard a lot of about it’s a great way to save on taxes but what’s your strategy there Brett? What do you want to talk to us about today?
Brett Swarts: Yeah. So, the government gives us tax deferral strategies to incentivize us to put money into the economy and keeping the economy to grow more business and more commerce. So, these incentives are there for a reason. They are legal loopholes to defer tax and one of them that your listeners are probably familiar with is the 1031 Exchange which allows you to trade investment property for like-kind investment property and as long as you follow certain rules, you can defer it and keep living off the cash flow and not have to pay the capital gains tax today but at some point if you sell out of that deal and take actual receipt of the gains, you’re gonna pay the tax. The other one they have too is something called the installment sell which your listeners probably know of and it’s actually a seller carryback, it’s better known as that. So, these are two major tax parts of the IRS code. One of them is IRC 1031 and the other one is IRC 453 which is an installment sell. So, the deferred sales trust is just an installment sale that allows you to eliminate the need for the 1031 Exchange. It works for the sale of primary homes. It works for the sale of short-term rentals. It works for commercial real estate. It works for businesses whereas the 1031 Exchange it only works for investment like-kind real estate and that also means you typically have to own it for at least a year or better to get the tax, long-term capital gains tax. The next thing that’s really unique about the deferred sales trust is you don’t have to put the money back into like-kind real estate. In fact, you can put it with your financial adviser of your choice or use one of our thousands of financial advisers that are strategic partners and preferred vendors across the US who can invest in stocks, bonds and mutual funds of their choosing. Now, I’m a real estate guy and I actually prefer real estate than stocks, bonds, mutual funds. So, the other unique part of the deferred sales trust is up to 80% of the funds can be put back in the syndication deals or back into the fix and flip or put into a lending business. As long as it is investment purpose or business purpose, you can put it into and here’s the best thing, you can do it whenever you want and so my story backs up to Marcus and Millichap when I was there helping people sell commercial real estate, they were always face with do I 1031 Exchange, do I overpay for a property, do I do in a short period of time and some of the exchanges would fail and they would end up paying the tax. Whereas the deferred sales trust, there’s no timing restrictions whatsoever. You could go back in tomorrow or day 1 of 81 or whenever you want. I think that’s the single best significant advantage because you can literally sell high, wait on the sidelines, where is the sidelines? Conservative bonds, conservative portfolio of stocks, mutual funds and then when the market shifts or when you find a deal, again up to 80% of the funds can be used to all tax deferred by investment real estate because it’s not a 1031 Exchange. We have no timing restrictions. The next thing about the 1031 has to do with the depreciation schedule. So, the 1031 Exchange you want depreciation to offset the income. Number one reason is that own investment real estate but eventually if you own long enough and you’ve done enough exchanges, you deplete that depreciation schedule which means you have to pay more in tax. So, when you do a 1031 Exchange, it travels with you which is not good. The deferred sales trust on the other hand it starts a brand new depreciation schedule when you purchase a deal with the trust. So, there’s a significant advantage there. I’ll probably pause because you probably have some questions there I know I just said a lot.
Brett: No, definitely. I like real life examples and it just kinda helps paint a picture for me and I know our listeners maybe can look at that too. So, let’s say that I have a house that I’ve lived in for 20 years, raised my family and I’m a baby boomer, I’ll turn 65 and I’m ready to downsize, get out of this 8,000 square foot large home on 5 acres and that’s worth about a million dollars and it’s free and clear. I’ve paid it all off. So, I wanna sell my home for a million dollars. So, a guy comes up, he’s gonna give me a million bucks for it but I know that hey I could get a hammer pretty fast. So, you talked about this deferred sales trust. So, take me into this example if I was talking to you what advice would you give me and take me through?
Brett Swarts: The first thing we would find out is if you have enough 121 exclusion which basically means if you lived there through the last 5 years Brett and you’re married you have a $500,000 basically tax free. So, if you bought it for $500,000 let’s just say and you sold it for a million there’s nothing there. You’re good. You just sell it Brett. You’re good to go. You don’t need any of our services. Let’s imagine you bought it for $200,000 and you’re selling for a million so you have that 500 exclusion which gets you to 700 but above that you have a $300,000 dollar. And that’s where we could potentially step in and say well Brett how much do you gonna pay on that? Let’s imagine that was 33% which is $100,000, on our scenario we could help defer that $100,000 by putting into the trust. By the way, I’ll give you an actual deal that actually closed and typically these work better when the liability is big enough. So, we did a deal in New Port Beach this is for a couple, they are getting a divorce, they need to sell and they owned a 26-million dollar home on the ocean. They lived there for years and years and years. Above their exclusion, they owed 6-million dollars in capital gains tax and as a reminder, a primary home does not qualify for 1031 Exchange. It only qualifies for the 121 exclusion. But that 121 exclusion of $500,000 quickly was gone. So, above that they owed 6 million. So instead of paying that 6 million, they moved all the proceeds into the trust and they’re all tax deferred right now and they’re living off the interest. By the way our notes are typically 10-year notes. After 10 years, you can renew for another 10 years and renew for another 10 years and pass on to your kids and they can keep it deferred for as long as they want to. It typically earned about 8% depending on the investments and depending on the risk tolerance. It could be somewhere between 6% and 8% and after fees, they’re netting about 6.5%. So, on this particular deal, they are earning an extra 6.5% on 6 million dollars that they would have paid to the IRS so that’s the power of the Deferred Sales Trust.
Brett: Yeah. I just wanna like dive into this so I can get the structure of a right. So, they sold their house, they’re gonna pay 6 million in tax but instead you guys helped them set up a deferred sales trust. Did they put their entire sale proceeds into that trust or was it only the amount that they’re gonna taxed?
Brett Swarts: The latter. The entire proceeds.
Brett: Entire proceeds.
Brett Swarts: So, we have to put all of it in there. Otherwise, it’s boom. Now, they could have put less and then they’ll just gonna pay on that amount that they received, they pay tax on that. So, it’s very flexible. In order to get 100% tax deferral, you can put 100% in there but if you wanna only put 90% in there and pay tax on the 10%, that’s fine. But yes, it’s definitely 100% proceeds for a 100% tax deferral.
Brett: All right. So, the money goes into this deferred sales trust, they got 26 million dollars in there and what’s next? I know you mentioned it already but in a 1031 Exchange, you’re looking for the next investment, you have a timeline on it but in this deferred sales trust, what are your options? Can you invest in anything that you want? Can you buy another house out of that like a rental home? Can you buy stocks? What are your options?
Brett Swarts: The better way to put is what can’t you do?
Brett: Okay.
Brett Swarts: You can’t put it into a primary home because that’s considered constructive receipt. So, to maintain the integrity of the trust, we have to have nonconstructive receipts. Same way a 1031 works. If Brett sells a property, I’m just talking about you, then you can send it to a QI company, 1031 qualified intermediary to maintain nonconstructive receipt. So, the same concept here is true as well and you can’t 1031 into a primary home. So, we just wanna maintain nonconstructive receipts by putting into trust. So, we can’t do primary home. The second thing is you can’t day trade with it. Meaning it can’t be put into your own E*TRADE account where you’re just trading the fines because that’s constructive receipt. It literally has to be a third party unrelated to you which that’s actually our company’s role. We are the trustee for this to maintain nonconstructive receipt and our role is to make sure we pay you back. But just imagine the money is there tomorrow and in your deal, let’s just say, the million dollars are sitting there, we helped you defer let’s say $400,000 in tax. And you find a perfect investment property, a deal you are ready to flip and it’s $300,000. Literally the next day, an LLCS can be formed in which Brett you’re the managing member of, and you’re gonna partner with your trust and the trust is gonna be a silent JV partner and we’re gonna structure this 80-20. Even though the trust is gonna put up 100% of the downpayment and you’re gonna go buy that deal and add value and the trust is gonna get a preferred return, we typically mirror the note about 8%. And let’s say you bought it for a million and you sold it for a million dollar gain, and you put $300,000 down so you got leverage which is great. So, what do you do? You put the original $300,000 back into the trust plus the preferred return of 8% on the $300,000 and then whatever is leftover is gonna be 80-20. 80% to Brett and the other 20% to the trust. Although it’s your money, it’s just going back into the trust of which it just can pay you back out right away, so the question is how do you wanna receive the money? When do you wanna receive the money or better question is when and how do you wanna pay the tax? And you may say Brett, I never wanna pay the tax, which is most of our clients are. They just continue to buy and sell properties in and out of the trust, whenever they want, no timing restrictions and by the way the other 80% that you earned on that millions dollars, you can also roll that into the trust too and keep that tax deferred as well.
Brett: It’s awesome. So, you guys and I have a self-directed IRA and has like a custodian so would you say it’s similar without all other restrictions that the self-directed IRA has that you guys are the custodians or the trustee I guess of the trust. Do you guys make financial decisions or is that more like the person says I’m gonna buy this house, you are like all right let’s do it. Here’s the structure and we will write the check or whatever, but do you guys say, nah, I don’t think that’s very good investment?
Brett Swarts: Yeah, great question. Who has control, right? And how are the investments determine? And let me answer that in a second, but the first part of your analogy is very correct. It’s kinda like we are custodian. It’s kinda like we are QI company. It’s kinda like something that’s third party unrelated that’s maintaining this tax deferral, right? It happens to be a trust, it’s a business trust that only does business with you, one entity, the funds only move with your signature by the way. You become the creditor, okay? So, what does that mean? It means like you’re the bank and as the bank, you’re loaning the money into the trust, you carry the note and based upon that, there are certain restrictions and there are certain rights that you hold such as how and where the funds gonna be invested? What’s the collateral secure to make sure I get paid back the funds that are mine, that are due to me, right? So, the way you do that if you fill out the risk tolerance questionnaire, if you’re married, you and your wife will do that before the trust closes and it’s a 2-page questionnaire and it just talks about what’s your investment risk? What’s your understanding of different asset types? What’s your income needs and different things? Based upon that, you get a score. And that score will determine the rate of return that’s gonna be projected. Now, again it’s never promised because, you know, past performance can’t be a prediction of future results. But that becomes the constitution. That risk tolerance questionnaire. If you come to us with a deal that is in Brazil, that’s a hotel deal, we’re gonna say, you know what Brett, that’s not part of your risk tolerance. That’s outside of the scope here. We need to just kinda stay within what’s here. But if you come with an investment real estate deal, a flip deal, where you have a track record of performance or you’re partnering with somebody who does, that’s great. In fact, we think those are the best investments. So, that’s gonna fit just great with your risk tolerance. We always gonna go back to back, take a peek at that and as long as it fits with those parameters, no problem. I can tell you this, we haven’t said no to investment real estate. We love investment real estate. It can also be hard money lending. It can be a start up for a business. Here’s the one caveat though, it’s only 80% of the funds, so imagine there was a million in there, we’re gonna keep a reserve of $200,000 with the financial adviser and the liquid diversified portfolio, the other $800,000 can be used to what we call outside business deal such as a fix and flip.
Brett: Okay. Awesome. Couple other rapid fire questions with this. So, this couple like sold their house, they got 26 million dollars in there and can they just put money in there sometimes? Would anybody ever wanna do that? Or does that have to come from the proceeds of investments?
Brett Swarts: Yes. We only have value if we are deferring tax, right? So, first question is and hopefully this answers the question, what are you selling for Brett and what’s your capital gains tax? Do you have any carryforward loss? Do you actually have a 1031 lined up? Great, go for it. By the way, we can save a failed 1031 Exchange, so we can be a backup plan for that in case it does fail. But the ROI is this, if you sell and do nothing, what are you gonna do? Okay. So that’s the first thing. We found that for every $100,000 of actual liability, there needs to be about $400,000 to $500,000 of proceeds into the trust. Remember too that we are getting out of debt. So, let’s imagine you were selling a 2-million dollar deal in this highly appreciated market and you had a million dollars of debt and in traditional 1031 you’re gonna have to buy something equal or greater value which means you have to basically maintain that debt or go into more debt. In ours, you’re selling that deal, you’re getting out of all the debt and you’re just parking the million. The key thing is how much tax would you have paid and let’s just say you paid $400,000 so that’s the ROI. We say, well, can we earn 7% on average on that $400,000 within a 10-year period and if it compounds it doubles, the law of compound interest. So, it’s a mathematical equation at that point but to circle back, for every $500,000 or so net proceeds into the trust, we want about at least $100,000 of tax deferral.
Brett: So, then the money just basically stays in there? Now if someone obviously wants to end the trust and get their money then what happens?
Brett Swarts: Yeah. So, you may have a loss on a deal by the way a couple of years from now for $500,000. Let’s say 3 or 4 years from now. You can say, you know, what we had a loss there. I’d like to cashout a portion of $500,000 of that gain and offset in that given year, so we call a tactician here and you can basically pay the tax when it’s efficient for you. So, that’s one way to do it. Do you have any losses to offset any given year or any losses coming up is the first question we would ask and the next thing we would say is, yeah, sure you wanna just cashout completely? That’s not a problem. You can cashout completely. You’re gonna pay the tax on that and as long as it is within liquid investments, this is liquidity part of it, we call it trade plus 3, so stocks, bonds, mutual funds basically within 4 business days you can have the check for whatever is left over there and then you’re gonna pay your taxes. But again most of our clients like to pay the taxes second day than never and they’re gonna keep it deferred but you certainly have that option to get out when you want to.
Brett: Interesting. So, this is just a great tax deferred strategy that kinda takes place so that the 1031 Exchange have time limits and you can grow you money so instead of that couple paying 6 million dollars in taxes right now, they get to keep that money, grow that money that was going towards the taxes and then someday that 26 million can grow to 30 million and if they wanna take it all out they could at that time. Now, what if they wanted to not ever take it out and their kids, they die, what happens then?
Brett Swarts: Yeah. So, it could be, with proper state planning, it’s a part of your living trust which means it’s just an asset inside the living trust of which your kids inherit if you wanted to be your kids and the income stream that is producing they can step in your shoes basically. So, it’s still deferred, they’re getting the income based upon the investments and they just keep it going. So, most of our clients like to pay the taxes second day than never and they should keep it going, keep it deferred and keep it within our family and our community to be able to give more, to be able to invest more versus paying the government, we define paying the government as losing. So, once you pay it’s gone forever, right? They are gonna waste it away real quick. But if we can keep it in our community and our family, it is deferred in a legal way by the way, it’s just a good time to cover and how these things all legal seems like it’s too good to be true, these are the most common questions. Remember it is based upon IRC 453 but it’s just an installment sale which goes back to the 1920s which is just a seller carryback. We are just creative on how we are adding this third party trust to do the seller carryback. Second, if anyone ever comes you with a brandnew tax strategy, you should ask a number of questions. First one was the IRS tax, the next one should be how long do you guys have been doing it? Over 23 years and who is we? Well, it’s collectively, the Kimball Law Firm at Kansas City, Missouri and the estate planning team which is the membership organization which has thousands of members, CPAs, tax attorneys, 1031 QIs, insurance professionals, commercial real estate brokers, financial advisers, business brokers, high-end luxury real estate agents, and collectively we educate on the tax deferral particularly using the deferred sales trust. The next question you should ask well how many actually been audited by the IRS? And the answer is 14. So, 14 no change IRS audits, the largest deal was for over 100 million dollars and it happened in California for big, big commercial real estate deal. So, it has been tested by the IRS, it’s been scrutinized by FINRA and the SEC. They’ve looked at it as well. So, it’s legal. We’ve already blazed the trail. We already have the scars to prove it with the audits. And the next question will be how do I know my funds are protected? Well, the funds only will be moved with the client’s signature and then also the tax attorney staying behind their work meaning they provide audit defense for the life of the trust meaning if you are ever audited, it’s no additional charge, it’s just part of the upfront fee that you pay to them. So, it’s just a little plug for the legality and hopefully some more comfort for your listeners who are listening to all of this.
Brett: Thanks so much Brett for, yeah, that answers so many different questions that I’m sure our listening audience has. If you guys are listening out there, please check out the show notes at our website at https://www.simplewholesaling.com/episode179/. We are talking to Brett Swarts and Brett let’s talk about fees. Is this something you wanna talk about? I don’t know, how much do you guys charge for this? What’s that look like?
Brett Swarts: Full transparency, we have it on our website all posted for our fees. We will walkthrough the fees, there are 3 sets of fees. First one is to the tax attorneys who will create the structure, that’s Kimball Law and it’s 1.5% on the first million and it’s 1.25% on anything above that. So, let’s imagine it was a 3-million dollar deal, the first million would be 1.5% and the next 2 million would be 1.25%. Now, if you do multiple once of this, multiple houses let’s say, since you get over that million dollar mark on any of the first deal or any number of deals then you’re gonna pay about 1.25%. We are doing a large deal, large business sale for some dentist right now. It’s actually a 50-million dollar sale and that one is gonna be a little bit lower. So, our fees do get a little bit of a break there once the numbers go pretty high. The next set of fees is to the trustee, that’s my company, Capital Gains Tax Solutions and we charge 50 basis points which is ½ of 1%. As long as they are just 100% with the financial adviser. So, if they are not doing any outside business deals for real estate, it’s just half of 1%. If they were to go into a real estate deal with some of the funds on the percentage of the funds that they go out that amount would double. It would go to 1%. Instead of 50 basis points, it would be 1%. The last set of fees is to the financial adviser and he is only charging based upon whatever amount is inside stocks, bonds, mutual funds. And they typically are somewhere between 50 basis points and 1%. So, kinda bring it all together here looking about 1.5% upfront on one-time fee and that includes the audit defense for the life of the trust and then collectively about 1 to 1.5 recurring and by the way those last two are recurring fees, right? They happen once a year at the anniversary of the trust and that’s where I said you earn 8 and most of our notes after earning 8, they net decline about 6.5%.
Brett: Got you. Got you. Awesome. This sounds really, really interesting and you know, you talk about selling businesses so this could be for big real estate deals, big business deals, and would you say Brett that this is really for big deals, right? This isn’t just for anybody. This is for people that, you know, it’s millions of dollars we are talking about? Would you say that so?
Brett Swarts: Yeah. So, let’s talk about it from two perspective, okay? So, first of all, yeah, the larger the deal the better. But I mean because there’s a bigger tax liability, right? Therefore our fees don’t eat up the tax savings. But the average deal is about 2.6 million and we are saving somewhere between 350 to 550 in tax, you know, it’s kind of that range. But we think it’s for anyone who has tax deferral opportunities, right? And they wanna save it. As long as it’s not too small. If it’s below 100,000 in liability then most of the time, we just say pay the tax. So, the ratio does have to make sense. But the next thing is for the commercial real estate syndicator. Maybe some of your listeners are syndicators and they’re trying to put deals together and they’re trying to attract high net worth. What better way to attract high net worth than baby boomers who are looking for good professionals who can invest in commercial real estate or business by what we call unlocking their wealth. Their wealth is tied to illiquid assets, commercial real estate, primary homes and businesses. These are all illiquid assets. In fact, 50% of America’s net worth Brett is in those three areas. Private equity which is businesses, commercial real estate and high end primary homes. That’s 50% of the total net worth of America. So, these baby boomers are looking for ways to unlock that and the deferred sales trust is a perfect solution and then they can invest it into commercial real estate deals or businesses, right? So, that’s the first thing for the syndicator as a way to attract and provide a solution. The other one is this, those syndicators also want to buy from perhaps the mom and pop who have low rents and there’s value to be added and they are willing to sell it at an okay price, a fair price, but they don’t wanna do another 1031. And this in fact we’ve seen our partners go out and win deals because everyone else is calling him and telling him do a 1031 Exchange. Look, I don’t wanna do another 1031 Exchange. We’ve done it for 20, 30, 40 years. I actually wanna be done with the toilets, the trash, the liability. I actually wanna be debt free. I actually want the liquidity to travel and to do whatever I want for my retirement years. So, it becomes a win-win for the buyer who is going to buy the deal. It becomes a win-win for the seller and then when the syndicator actually sells out of his deal, he can defer his carried interest. He can defer his carried interest which is awesome. Now for the business professional this is where I think my real passion is equipping the business professional. Who is the business professional? Well, as a podcast host like yourself, it’s the commercial real estate broker out there, it’s the financial adviser, it’s the high end luxury real estate agent and they’re looking for ways to differentiate themselves in this automation world where value is becoming diminished more and more with all of the commodities and what I mean is everyone knows about 1031 Exchange, right? For the most part. Everybody knows about getting on the front page of Google, advertising, marketing, social media stuff, that’s all kind of there, it’s a commodity. How are you gonna help somebody say 30% to 50% of their gain? How are you gonna give them a backup plan for a failed 1031 Exchange? How are you gonna give a new depreciation schedule? The other one we didn’t mention was the estate tax and we can actually help people move funds out of their taxable estate. So a recent deal was an 80 million dollar transaction for a gentleman who’s net worth 350 million dollars and he lives in Minnesota and the estate tax for your listeners who maybe don’t know about it basically it’s 40% on anything that’s above the exemptions. What are the exemptions? Well 11 million if you are single and 22 million if you are married. So, let’s just say Brett, you and your wife are worth 52 million dollars and the first 22 million is exempt. That 30 that is remaining would be hit with the 40% debt tax if your estate were to pass with those funds still inside your taxable estate. With deferred sales trust, we can solve that. We could sell your 30 million dollar apartment complex tomorrow let’s just say you had one and we can move it all outside the taxable estate. Therefore, we would save your kids the 12 million dollar estate tax. Nothing else can do that the way that we can do it all in one transaction. So, I know a lot of your listeners are gonna say it seems like it’s too good to be true. We just really encouraged you to get to know us, bring in your trusted advisers. Who are they? They are the CPAs and tax attorneys that you trust, that you know, your financial advisers and have them get to know us. Our role Brett really is just to guide. We’re kinda like the nurse and we will take the pulse and we will give you some education. But we say, hey, look before you get surgery, make sure you have your brain surgeons talk to our brain surgeons and make sure it’s a good fit for you, financially speaking and tax speaking as well. So, hopefully that make some sense and let me know if you have any questions.
Brett: I love it man. I think that you’ve just hit it, you run it all together and if you’re listening out there and you’re interested in what Brett is talking about, you can check all of the links in the show notes in our website at https://www.simplewholesaling.com/episode179/. And Brett it is about time to go into the section of the show that we like to call Going Deep.
Going Deep
Brett: And in this section, I’m just really, you know, we probably only got time for one question and before the show, you know, you mentioned your faith, you mentioned you’re a generous giving person, you’re raising family with a wife and 5 children, so kinda draw us into your faith and why you chose this path I guess is maybe the biggest because you could have done a lot of things, building houses with your dad and doing all this, but you chose this. Why?
Brett Swarts: Yeah. At the heart of what we believe, we believe it’s more blessed to give than receive and if we can help one more client or one more business professional helped their clients release equity in highly appreciated assets and pay off debt, they can give more too and they can spend time with matters most to them. And honestly that’s the why behind what I do. I wanna spend time as much as I can with my family, with passive income streams, being able to volunteer, to give back and to use the gifts that God has given me. So, yeah, my faith is behind that and we support organizations such as Agape International where they’re trying to end and eradicate sex slavery in Cambodia so any time that we can give more to causes like that and empower people or put people in the position to be able to do that, we feel we are serving our purpose to do more good in this world and to be leaders who help one another and yeah part of it I kinda fell into to be honest. I was in commercial real estate and it was just about listening. I’m always kind of tortoise versus the hare, I know I may talk fast on the podcast here and seem like I’ve had it figured out and some of that I do have figured out but it’s been a long journey and it’s been studying, it’s been having good mentors and it’s been refining this tax strategy that helps so many people. So, yeah, I’m just passionate about spreading the word, about empowering people with the strategy and then allowing them to use it how they feel it’s best for them.
Brett: That’s great. I’m the exact same way. I love to listen and I get some of the best ideas from guest on the show just like you Brett by the way. I always got this podcast like man this is so awesome and I started studying your website and all that. So, great stuff. Great nuggets and thank you so much for just your heart, everything that you’re doing and you’re giving back. That’s awesome, you know, the sex slavery industry, it’s just huge. It’s on my heart as well. So, so, cool man.
Touch of Randomness
It is time for a touch of randomness.
Brett: Well, hey, we’ve gotten in to some deep stuff and now it’s just time to end on a little bit of a lighter note. We always like to end on a fun touch of randomness section here so I have 3 random questions for you Brett, so are you ready?
Brett Swarts: I’m ready.
Brett: All right. Number one, so other than the name Brett, have you ever had another nickname growing up?
Brett Swarts: Yeah. The nickname is Swartsy, my last name is Swarts and all my buddies and coaches call me Swartsy and to my older brother too. He was a mentor of mine, 2 years older than me, best man on my wedding, best friend and we are always known as Swartsy and then the other one was May The Swarts Be With You. I got that one a lot. It’s kinda more of a tagline.
Brett: I like that one. That was a good one man. That’s awesome. All right, number two, when you were in the second grade and it was career day at school so take yourself back, it’s career day, okay? And they asked what you wanted to be when you grow up, did you say I wanted to be the CEO of Capital Gains Tax Solutions and specialize in deferred sales trust or did you say something else?
Brett Swarts: It was basketball. I was a Michael Jordan fan and I couldn’t enough of basketball every single day I could play on the weekends and even in college I mean I’m studying business, I also studied Bible in Theology and I got a Minor in Counseling Psychology and I didn’t know I was gonna be in consulting and education and sales and selling real estate. I didn’t know until my sophomore year, junior year, I started doing an internship and then fast forward no clue that I would be talking about tax and deferral and all of these other things, the strategy. Yeah, it’s definitely been a journey.
Brett: That’s awesome. All right, last question, so in your bio I hope this is correct, but in your bio it said something about you had about 63 licenses, is that right?
Brett Swarts: Oh, that’s a Series 63, so it’s like a Series 7.
Brett: Oh, Series 63. Okay.
Brett Swarts: So, financial advisers get their Series 7, Series 65, so I have a Series 63 and then Series 22. So, it would be like—and also I’m a commercial real estate broker too here in California, so those are my two I guess licenses.
Brett: All right. Which one is your favorite?
Brett Swarts: Oh gosh, my favorite is the commercial real estate license. That’s in my blood. I love helping people buy and sell apartment complexes and doing 1031s and doing the deferred sales trust. That is definitely my favorite. The other ones are very, very technical. A lot of regulation and also very challenging to pass.
Brett: Nice. Nice. Awesome. Well, hey, thank you again Brett for being on the show and just joining us. So much wisdom guys. So much wisdom. Just go back and re-listen to this show if you can. Check out the show notes at https://www.simplewholesaling.com/episode179/. And Brett I wanna give you one last opportunity. If one of our listening audiences wants to find out more information about you, your company, website, where they will go?
Brett Swarts: Yeah, so https://capitalgainstaxsolutions.com/ and they can look up Facebook, YouTube, BiggerPockets, LinkedIn. Those are the main areas to connect and also if you come and send me an email, I’ll provide a free webinar to literally walk you through this. It would be worth all of your 30 to 40 minutes to watch it so you can visually see how this all works and pause it and rewind it and play it again so that you can digest it better. So, I encouraged you to reach out to me and they can also set up no-cost consultation calls. By the way, we don’t charge anything unless you close the deal. Same thing with the tax attorneys. We only get paid if and when you close the deal. So really don’t be shy, reach out to us, connect with us, get educated and so we can help you create and preserve more wealth.
Brett: Great. You guys can check that out on our show notes again at https://www.simplewholesaling.com/episode179/ and I think that’s a wrap Swartsy. I appreciate it man.
Brett Swarts: Thanks Brett.
Do you have a primary home, business or investment real estate you are considering selling?
