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Transcript
Brett Swarts: [00:00:02] Learn to work harder on yourself than you do on your job. You work hard on your job, you’ll make a living. You work hard on yourself you’ll make a fortune.
Brett Swarts: [00:00:11] And the idea is to work on all areas of your life, your health, your finances, the character, your leadership development, time with your family, your spouse, and rather than just focusing on your job, which is good. Right. Which is typically just making a living.
Brett Swarts: [00:00:27] And the reason for this is so that you can be more valuable to your family, your community, and also earn more as you add more value to the marketplace.
[00:00:39] Welcome to the show. You are listening to the real estate lab podcast. In this lab, we decode the stories, secrets and skills of the most brilliant minds in real estate investing. Then turn that wisdom into practical advice and knowledge that we can use to boost our income. And now let’s turn it over to our host Vee.
Vee: [00:00:58] Hey, everybody. My name is Vee Khuu and welcome to the Real Estate Lab podcast, episode number 5. Our guest today is the founder of Capital Gains Tax Solution. He helped numerous of business professionals with a tool that is an alternative to the 1031 Exchange Strategy, which is a tax deferred strategy used by many real estate investors. His company uses another tool called deferred sales trust. This strategy is better than the 1031 strategy. In many ways and we will be discussing this in our episode today. Our guest has done numerous of these transactions, along with Delaware statutory trusts and 1031 exchanges. He had also close over 85 million dollars in commercial real estate transactions. Our guest today, Mr. Brett Swarts, is one of the most well rounded capital gains tax deferred expert. So be sure to check out his Web site at W W W dot capital gains tax solutions that come or you can reach his office at 9 1 6 8 6 2 9 8 6 8.
Vee: [00:02:11] And if you are interested in learning more about apartment syndication and multifamily investing, I wanted to personally invite you to join our free Facebook community. You can head on over to W W W Dot East was ventures that Cele slashed AIIMS to join.
Vee: [00:02:32] And now let’s turn it over to my conversation with Bretts Swarts.
Vee: [00:02:40] Welcome to another episode of their Real Estate Lab podcast. Our featured guest today is the founder of Capital Gains Tax Solution. Each year, he equips hundreds of business professionals with deferred sales trust tool to help their high net worth clients solve. Capital gains tax deferral limitations. His experience includes numerous of the first sales trust Delaware Statutory Trust 1031 exchanges. Eighty five million in closed commercial real estate brokers transaction. I think you will learn a lot today, especially on strategies about how to defer your capital gain tax or.
Vee: [00:03:26] Different ways you can use this strategy to help you before you came all the way into the time you die. Our special guest today, Mr. Brett Swarts. Welcome to the show, Brett. Hey Vee
Brett Swarts: [00:03:38] Thanks for having me. Appreciate the opportunity to be on with you. Thank you. Thank you.
Vee: [00:03:42] So I always start the show with asking the guys to share a little bit about themselves. And I want to ticket all the way back to the time. Let’s say you are 7 or 8 years old. What was it like growing up in your household?
Brett Swarts: [00:03:56] Yeah, I think so. When I was 7 and 8 years old, I was between two households. Parents were divorced. My dad was in the Bay Area. Mission San Jose Fremont, California. And when I spent more time with him, it was the entrepreneurial develop a real estate investor. And I helped him build houses. And so he was having me hammer nails in a move. Bricks did the grunt work, learned to say learn the sticks and bricks between the ages of 7 and 15 during the summertimes, especially the other times I was spent with my mom and we were I was playing sports, I was playing basketball, baseball, football and with friends and in going to church and living in Sacramento.
Brett Swarts: [00:04:38] Mainly it’s a place called Rocklin, California is where I spent the majority of my time. So it was split between both households, but it was both good, good parents and really good childhood.
Vee: [00:04:50] So your childhood majority of your time spent in California. And you’re still there right now. Correct.
[00:04:55] Correct. Yes. I live basically the same town I grew up in. It’s in Roseville, which is right next to Rocklin, which is in the Sacramento area of California.
Vee: [00:05:02] Ok.
Vee: [00:05:03] So you also I imagine you went to high school in that area also.
Brett Swarts: [00:05:07] I did. Yeah. I went to high school in Rocklin, which are often high school. And then I went on to college in Southern California and then back up into Northern California at William Jessup University.
Vee: [00:05:19] So what was you like back then?
Vee: [00:05:22] Who were you? You know, like just after high school and when you got into college, what were you like, pass?
Brett Swarts: [00:05:29] So I was, you know, was love sports. You know, I love playing on and working with teams. So I played basketball and football mainly in high school. And then I went away and played basketball in college as well.
[00:05:41] And I studied business, you know, still learning about who I was and what I was going to do. I knew I wanted you know, I knew I knew something that had to do with it could be competitive.
Brett Swarts: [00:05:52] I’ve always been very competitive and kind of driven. So, you know, still learning about who I was. I was able to take an internship at a great company called Marcus and Millichap where I learned investment real estate brokerage while I was still in college, which is what led me to the career choice of being a commercial real estate broker in the now and now into this company. But yeah, that was kind of the early 20s. It was really just focused on sports and obtaining my degrees and then moving on to the working career world.
Vee: [00:06:27] So how did a guy who was interested in sport ended up working at Marcus Millichap? Was it something that you pursue or is it just kind of fall in your lap?
Brett Swarts: [00:06:38] You know, I have a an older cousin. He was kind of like an older brother. He’s like five years older. He’s like a mentor of mine. And he he was actually working there. And he said, you might want to check this out might be a good fit. And so I just just when interviewed for for an internship when I was still a junior in college and it was able to to to win the internship and and just started to study in the investment real estate world. So kind of fell in my lap and a lot of ways of knowing somebody. And then once once I got into it, learning that I loved it and wanted to be in it full time.
Vee: [00:07:13] So you love real estate you were doing like I said earlier.
Vee: [00:07:17] Eighty five million plus in brokerage transaction that you closed. How did you go from there to being an expert on deferred sales trust? And can you tell us what deferred sales trust is?
Brett Swarts: [00:07:30] Great question. So I actually was at Marcus and Millichap. The marketplace really took a dive in 2008 and that’s really when I start really full time was kind of 0 7 and then everything kind of hit the fense and and things are really tough, especially in California. And so my manager at the time, he decided to bring in a gentleman to speak on this strategy that was an alternative to a 1031 exchange. This is around 2010, 2009. And so we were looking for creative solutions for clients who wanted to get out of debt and maybe didn’t want to be so heavy into real estate.
Brett Swarts: [00:08:03] And so he talked about this deferred sales trust as an alternative or a backup plan for a failed 1031 exchange. And really, the focus of Marcus Millichap, has always been to add value in any way we can to help move transactions forward and help our clients achieve their their investment, real estate goals. And so this became a focus of mine and where I started to just study the study, the structure. Strategy study the tax law and went on to receive training in my series twenty two and series sixty three licenses and obtain those licenses and started to educate clients on it. And as they gravitated towards it more and use it. We fast forward 10 years when the marketplace is kind of feeling like the 0 6 0 7 all over again. And it’s become apparent that some people want to get out of debt and they want to actually not have to 1031 and be done with the toilets, trash and liabilities.
Brett Swarts: [00:08:56] So at the center of it, it was how do we solve challenges and problem than add value and and everyone’s in with a changing of times. It’s the deferred sales trust is a great solution for that. So what is the deferred sales trust? Well, it’s just an installment sale Vee and your listeners might know about it as a seller carry back. The only difference is we’re using this third party trust to to jump in between an actual buyer and an actual seller who are ready to do a deal. And when you do that, you’re able to defer capital gains tax using this installment sale with the trust for for as long as you want and also be able to invest in stocks, bonds and mutual funds or hard money lending or back into commercial real estate, which is actually my favorite part of all of it. The ability to tell what we like to say is give optimal timing, you know, by when when you when you when you want to versus when you have to with the 1031 exchange rate. Yeah.
Vee: [00:09:56] 10:31 exchange. One thing I hate about it and I also went through one a few years ago was the time line to forty five days, 180 days close. It was tough to find properties that I can place the money in that short amount of time.
Brett Swarts: [00:10:12] Yeah, the pressure builds for clients. You know, they feel trapped. They feel rushed. They feel forced. There’s a lot of the feelings that we hear from our clients before they find find us and learn about how this can can save their failed 1031 exchange. And oftentimes, unfortunately, the seller knows the buyers in a 1031 and they use that against them. And generally speaking, they’re not very amenable on negotiations for four credits that might otherwise be appropriate. So overpaying for properties oftentimes. And so the other thing with the 1031 exchanges, we call the timing of the UN unfortunate timing when you get a good sale price for your property. You have 180 days to to sell that. And we think it’s a seller’s market right now for a lot of marketplaces. And we found that if it’s a seller’s market, you may not want to buy in that same marketplace. Right. Where you’re getting a high price because 180 days later you maybe buying in a higher price and you also typically have. You have to replace the debt. So so you may be taking on more debt and that can be a challenge. So we like to say, as our parents taught us to sell high and buy low, they can teach us to sell high and buy higher again. And the 1031 just doesn’t give that really give that option. But the deferred sales trust, on the other hand, you can sell high pay off all your debt, you know, put the money into the trust. And then when you find a deal tomorrow or day one needs one or even a couple of years from now, there’s no timing restriction whatsoever. There’s a caveat to that, though.
Brett Swarts: [00:11:43] Only about 80 percent of the funds can be set up to this LLC to buy a new property. The other 20 percent stay with the financial advisor. But again, if you could buy at a discount or buy when a deal makes sense. We love that.
Brett Swarts: [00:11:57] The second part about it is you get a new depreciation schedule and it 1031 to change. You have to when you when you part of the 1031 exchange rules is when you trade the depreciation schedule travels. So one of the main reasons to own real estate investment real estate is to offset the income with depreciation write off. But if you own apartments for over twenty seven and a half years or a commercial property for thirty nine, you deplete all of your depreciation. And at that point the income’s coming in with no no tax break from the depreciation. The deferred sales trust. The other hand, when you buy, it’s a brand new depreciation and the depreciation just doesn’t travel.
Brett Swarts: [00:12:35] So you get a whole another set of depreciation, which is really nice. So those are those are the main reasons people would consider deferred sales trust versus just a 1031.
Vee: [00:12:47] Ok, so you mentioned that the first sales trust, you have a brand new depreciation schedule. Right? If I just parked the money into the deferred sales trust.
Vee: [00:12:56] And I don’t buy anything else as at all. I just parked it there. And, you know, I assume you invest it somewhere with the Goldman Sachs of the world, Merrill Lynch, and you get a certain percentage gain every year.
Vee: [00:13:12] So how does the depreciation work at that point? You’ve I don’t ever buy any more property.
Brett Swarts: [00:13:17] Right. Good point. So you’re correct. It only works with and when you buy more investment real estate.
Brett Swarts: [00:13:24] Such as invest into a syndication, buy by the funds, be invested in other deals, so yeah, if it’s stocks, bonds, mutual funds, it’s just sitting there, then you’re right. There’s no depreciation.
Brett Swarts: [00:13:37] But when you find a deal again, let’s imagine there’s a million sitting in the trust. A hundred thousand dollars the next day can be sent to an LLC that you you form Vee and you’re the managing member of and that that you then buy into investment, real estate, syndication deals, multiple ones or just just just one of your own.
Brett Swarts: [00:13:59] And that right there gives you a brand depreciation schedule as as opposed to doing a 1031 into that same property. The schedule would have traveled. So. So that’s a good point of clarification.
Vee: [00:14:13] Ok. So and then a question I have is let let me just take a step back to see if I understand the structure for the trust correctly or not. What I see is you have an A side and a B side. The A side, myself as the seller, I’m selling the property to the deferred sales trust with an owner carried note at a certain percent, correct.
[00:14:37] Correct. OK. And then on a B side, the deferred sales trust will sell the property to the B side buyer where they get a new loan and then they pay cash to fund this trust. Correct. Exactly right. OK. So when when I set this up as the trust and you mentioned early, I can take 80 percent of the funding out to do to create a new LLC. And buy into something else. Is that a note that the trust is giving this new LLC or how does that work?
Brett Swarts: [00:15:13] That’s a J.V. partnership. So if it was if it was a loan, they would be taxable and it’d be considered constructive receipt and therefore you’d owe the tax. But if you just J.V. partnered with the trust, then it’s not it’s a non taxable event and you’re going to own that deal with the trust. So typically it’s a it’s it’s a 90 10 split. OK. OK. You in the trust, even though the trust puts up 100 percent of the down payment, but 90 percent goes to you, Vee personally and 10 percent of the trusts. Again, even though the trust puts about a percent of the down payments, that’s a really nice structure that’s very favorable to you. And also very tax efficient to get that that brand new depreciation schedule.
Vee: [00:15:56] So I can see this is almost like the inception. You you keep on doing this, right. You have a deferred sales trust number one giving you 80 percent to go out and buy a property in J.V. With this trust you in this new company, you have 90 percent of it and the trust has 10 percent.
Vee: [00:16:15] Then when you sell the second property. So you personally, are you liable for 90 percent of the gain?
Brett Swarts: [00:16:24] Correct. And so you can do two things with that. You can roll it into the trust or you can do a ten thirty one with that 90 percent. And then you just pay back the trust with its preferred return and the original investment it put in if you wanted to maintain 100 percent tax deferral. And by the way, most of our notes, they earn eight percent. And that’s what. And then they pay out about six and a half percent and their 10 year note terms. Ten years. But at the end of 10 years, you renew for 10. And then keep renewing for 10 for as long as you want. And then it can pass inside of your estate to your heirs. And your heirs continue to be in that position to just received the payments and or do what exactly you’re doing, buying and selling real estate. So the idea of the bigger picture is to sell.
Brett Swarts: [00:17:05] When you want to sell, get out of debt. When it’s smart to get out of debt and then wait for that right deal to come in place. And then if the right deal comes tomorrow or it’s in a different marketplace or a different product type with a different operator, you have the freedom with up to 80 percent of that funds to invest in those other deals and take on debt if you want to. By the way, it doesn’t have to be all cash. You can get debt and buy buy those deals. But we think it’s just it’s it’s smart to take on debt when prices make sense. It’s not so smart to take on debt when the prices are really high because that puts a lot of risk. And again, the 1031 is typically one entity trading for one entity. And all the risk is on you Vee, whereas the deferred sales trust, you can take 80 percent and put all the risk on the trust in you if you want to. But but you may want to dis diversify into a different product types. You could go into mobile home parks, you can go to senior housing, you go to multi-family, you can go into multiple geographical locations. So you’re diversifying your commercial real estate holdings. And then also the other percentage of it could be in stocks, bonds and mutual funds of your choosing as well. Very conservative allocations that are paying you a nice, nice return. But the key is you can be completely out of debt. And it’s also very flexible to go back into real estate if and when you want to and really we have to say at optimal timing, which is, I think the key to everything here, if you can buy right at the right timing and given enough time, if you see enough pitches, if imagine your baseball player, you’re gonna see that right pitch and then you can actually hit it. But if you’re faced with a lot of pressure to have to overpay. And oftentimes you’re going to swing at a wrong pitch and it could you could strike out. And that’s what we want to avoid.
Brett Swarts: [00:18:39] And also, by the way, the deferred sales trust for your listeners, it works for high end primary homes. We did a recent deal. Newport Beach has twenty six million dollar sale and we helped a couple deferred $6 million in capital gains tax beyond their exclusion and they needed to sell.
Brett Swarts: [00:18:54] And they lived there two of the last five years. So they had that 121 exclusion, which five hundred thousand is exempt. But beyond that, they owed $6 million. And so the 1031 does not solve that. The deferred sales trust does. And so we saved them all of that. And then again, once the funds are there, they can put in stocks, bonds, mutual funds or back into commercial real estate and live off the interest. It also works for the sale of businesses.
Brett Swarts: [00:19:16] So most businesses, the they don’t do 1031 exchanges or they just sell it. And so we do is we just say, look, do a deferred sales trust and and go back into real estate. And so that’s that’s also a big bonus. And this also works for collectibles or works for artwork or works for private stock or works for it can work for public stock. It works for any any LLC, LLC, S Corp, C Corp’s partnerships. So it’s very flexible for that.
Vee: [00:19:47] Is there any limitation for this strategy?
Brett Swarts: [00:19:49] You know, the only real limitation is where and how the funds are invested. So you can’t you can’t direct those 80 percent to a primary home that’s considered constructive receipt. You can’t live in the home that you’re investing in. So it can’t be a primary home. Also, the investments must be within the United States. It can’t be foreign investments and needs to be used to be basically nothing outside of the US and not a primary home. But everything else as long as it’s investment purpose it can do. It can invest into businesses it can invest in. It can do hard money lending. It can do commercial real estate, stocks, bonds, mutual funds. One of the downsides to it, which is important to note to your listeners, is a 1031 maintains the stepped up basis. And the stepped up basis is really not neat thing where you can essentially if and when you die, which we’re all going to die. But when we die, as it stands today, our heirs get a stepped up basis on our estate as and and that is good meaning they could they could sell and walk away tax free.
Brett Swarts: [00:20:49] The deferred sales trust does not do that. And it is actually an exit strategy that defers. And therefore, if and when they cash out of the trust of they’re going to pay capital gains tax. However, that being said, you know, many in Congress, they’re looking for ways to pay for this 22 trillion in debt. And they’re talking about taking away the 1031. They’re talking about taking away the stepped up basis or limiting it.
Brett Swarts: [00:21:15] So we don’t know if that will even be around by the time these.
Brett Swarts: [00:21:20] Changing and some of the bigger picture going on to the Dimension is that there’s 17 trillion dollars that’s going to pass from one generation to the next. And this is the largest wealth transfer in the history of the world. And this is by the baby boomers. OK. The baby boomers are the second largest generation in the history of the world, and they’re passing all this wealth. There’s about 77 million in the U.S. alone. And about every single day, about 10000 baby boomers turn 65. And they’re trying to figure out a way to get out of the toilets, out of the trash out and liability. I don’t have to manage employees how to get out of debt, but they’re faced with 30 to 50 percent of their game being wiped out by capital gains tax and depreciation recapture. So this is the biggest problem facing these baby boomers who want to retire, who want to enjoy, you know time, travel, liquidity and diversification. They’ve gone through 2008 and they don’t want to face that again. They’re 10 years older, 11 years older. And they’re saying, man, I want to get out of debt. I want to diversify. I don’t want to get stuck with a property in a location when the market shifts or get stuck with banks that won’t refinance my debt. And so most most either don’t sell 1031 exchange and maybe take on too much debt. But we want to give them another solution with the deferred sales trust.
Vee: [00:22:37] Okay, so.
Vee: [00:22:39] Is there a certain demographic that works better for this strategy that you see majority of your clients are in this age range, or does it work for well, for everyone?
Brett Swarts: [00:22:51] I think it works well for everyone. I think you have to define your why. So depending what stage of life you’re in, what does your WHY for investing in passive cash flow, real estate? And how are you going to make the best risk adjusted rate of return on your equity? And is it does it mean you want to diversify outs- outside of of just the properties you own? Right. Do you want to be more passive? You know what again at what stage of life are you in? Now, if you can find, by the way, you can find a nice 1031 deal with some value add opportunity. We that’s our favorite. We help people do 1031 exchanges too. We love that. I’m a commercial real estate broker by trade. I just think that market for a lot of places was three or five years ago and it’s just not today. Doesn’t mean you can’t find a deal. And by the way, go for it and have us as a backup plan just in case it fails. It doesn’t. We don’t charge anything for a backup plan. We only get paid if you close close with deferred sales trust. But we don’t want you to overpay. We don’t want you to take on what we call dumb debt.
Brett Swarts: [00:23:53] And don’t dumb, you know, smart debt takes on debt. When the marketplace is very, you know, a buyer’s market, when when there’s nice deals out there, low price per square foot, there’s lots of value add. And so we call that really smart debt take on smart debt. When when you can find a nice value add deal. Risky debt is the second part of the debt equation, which which basically stays in debt even though their price of their property has gone way up and they’re just like, you know, I’m not going to sell an overpay, but I’m going to stay where I’m at. And you’re risking that equity that you’ve built up and we called dumb debt is when you double down and take on even more and overpay for a property just because you’ve got a nice offer on your deal and you end up taking on more debt and put yourself at risk and a non value add deal with high, high LTV. And that’s the thing we really want to avoid right now is taking on dumb debt, because if the market shifts, you could be in a tough spot in the deferred sales trust is the solution for that.
Brett Swarts: [00:24:50] By the way, for your listeners, they’re probably wondering how do we know this thing’s legal? How do we know the funds are protected?
Brett Swarts: [00:24:55] So this is a twenty three year old track record with over thousands of closings, OK, close to 3000 closes and we have over 150 financial advising firms and thousands of financial advisors with us.
Brett Swarts: [00:25:07] We have CPA tax attorneys, national law firms. It’s been vetted by the IRS 14 times and each time has been a no change audit. So not one single issue with the trust. And by the way, the tax laws, IRC 453, which goes back to the 1920s, is a 90 year old tax law. So it’s it’s it’s tried and true, we’ve already blazed the trail. We’re not asking anybody to try something new in the sense of our track record. It may be new for your listeners because they never quite heard of an installment sale like this. But we do have we do have the track record of it to to share with you. And more than that, though, we see our role Vee as the guide. And we we we encourage each each each of our clients to bring in their own trusted advisers in a better way to look at us like I’m kind of like a nurse. And I take the pulse of the client and say, it might be a good fit for you. Before you get surgery, though, bring in your trusted advisor. Bringing your CPA tax attorney hasn’t talked with the CPA tax attorneys who created the structure. Those guys are the brain surgeons. And if it looks good, you don’t have surgery. Great. And that’ll that’ll work out, I think, well for you. So that’s that’s sort of the also a little more context for your listeners to go on.
Vee: [00:26:14] So it’s it sounds like this is a big operation and you have a lot of professional who are working in this team with you. What’s the deal size that makes sense for someone to come to you?
Brett Swarts: [00:26:26] Great question. Our average feels about 2.6 million and we’re deferring somewhere between 350 and 500, five hundred fifty thousand dollars in tax. The minimum is five hundred thousand dollars in proceeds. And for every one hundred thousand dollars in actual liability. So so let’s say, for example, you had a 10 million dollar sale the. And you only had one hundred thousand dollars in liability. We would say those ratios aren’t very good. Just pay the tax and walk away with nine point nine. But if you had a 10 million dollar sale and you had a $3 million tax would say, well, that’s a big one Vee, you don’t you don’t want to walk away with seven million, you know, put let’s have 10 million in the trust.
Brett Swarts: [00:27:05] We use the rule or the law of 72, the rule of 72, which states, if you can earn seven percent on any given amount and allow that amount to compound and build on top of itself, that amount will double.
Brett Swarts: [00:27:19] So let’s say you could earn 7 percent on 10 million over a 10 year period of time and you let that 7 percent compound in 10 years, that’ll be 20 million dollars.
Brett Swarts: [00:27:30] So it’s the law of compound interest.
Brett Swarts: [00:27:33] And so that’s where we look. We try to really look at that ROI. But generally speaking, every hundred thousand dollars of liability for every five hundred thousand dollars of actual proceeds into the trust. So for every one hundred and hundred thousand dollars of liability Vee, we want about five hundred thousand dollars in proceed.
Brett Swarts: [00:27:50] That’s generally the number they going make sure there’s ratios makes sense. So every hundred thousand that you’re actually going to pay to the government and state federal Obamacare, then in depreciation recapture, we want to have at least five hundred thousand of proceeds going in. And that’s that’s kind of the ratio.
Vee: [00:28:06] So 1 to 5 ratio, essentially. Yes. OK. So for someone who has saved single family home, is there a strategy for them to do something similar?
Brett Swarts: [00:28:19] So single family primary home or investment property? Right. So if you have listeners who let’s say they own 20 single family individual homes is very difficult to sell. Do a 1031 with those. Right. Right.
Brett Swarts: [00:28:31] They can sell each individual home and move them into the trust one by one, slowly. Right. Instead of selling them off to bulk to an investor.
Brett Swarts: [00:28:41] So that’s a really good advantage of of that. And then and once they’re all pulled together, you can pull 80 percent to go ahead and and buy into a big apartment complex or whatever.
Brett Swarts: [00:28:52] So that’s nice. And then I get in all sorts for primary home. So I’m doing a deal right now in Palo Alto. It’s a it’s a 14 million dollar primary home sale. The gentleman is selling for. He’s selling his basis is six million. And so be of his above his exclusion. He owes about 2.2 million in tax. And so we’re going to help him instead of walking away if about six million after he pays off debt. He’s going to walk away for he’s going to walk out with six. So he’s really happy about that.
Brett Swarts: [00:29:20] So a lot of these owners, they feel they feel real estate rich, but cash flow poor.
Brett Swarts: [00:29:26] So we’re going to help them be able to get some passive income and get in and get out of feeling trapped from from their property.
Vee: [00:29:35] Ok, so you mentioned passive income there. Let me ask you a little bit here. So for that, for the trust. Right. When you go out and say you want to buy a building by yourself, you take on debt. Is at a recourse loan or non-recourse loan?
Brett Swarts: [00:29:52] Yes. So when you’re in the trust. You’re in a form of brand new LLC, and you’re going to partner with your trusts and you’re gonna go buy a property the same way you would have today. They’re going to say, well, who are you Vee? What’s your background with your credit and who are your investors? Well, the investor happens to be the trust, and the trust is paying you an income off of the interest of the note.
Brett Swarts: [00:30:12] And so that’s going to be qualified as income as well. And so all of it’s going to collectively they’re going to underwrite you and your income streams to qualify for the debt on the next property. So, yeah, that’s the same way. The same way you would have in any other deal.
Vee: [00:30:28] Right. But then for commercial loans, typically you have a key principal person that has to qualify for the size of the loan. So in this case, your your trust would have to act in that capacity.
Brett Swarts: [00:30:42] So it’d be you. I mean, you’re the managing member of the LLC who happens to have partners. And by the way, you could have multiple you could have 10 partners. And then one of the partners is just your trust. It’s it’s very flexible there.
Brett Swarts: [00:30:55] So the bank’s going to say who’s personally guaranteeing this or is it a non-recourse loan?
Brett Swarts: [00:31:02] Right. Where there where there’s no personal guarantee. Every deal is different. But imagine it was a turnkey multifamily. Ninety five percent occupied. Your better property. You know, it’s called a six cap in Denver, right? Right. Awesome. They’re going to underwrite the property and they’re going to say, who’s the sponsor? Who’s buying it? Who’s the general partner? And who are the partners? Or is the cash coming from. Right. That’s going to look at everything as a whole. So but you’re the one buying the property. So I would say the managing members, the one buying the property, he happens to have silent partners.
Brett Swarts: [00:31:33] And every bank is going to be a little bit different with their with their criteria. But the trust should not affect. It should not be an adverse effect to get a loan, if that makes sense.
Vee: [00:31:43] Yes. Yes. So say you bring on you bring in partner and you do this syndication.
Vee: [00:31:50] You take it through a cycle from acquisition to disposition.
Vee: [00:31:55] Are you so you have partner? How does the partnership work with the trust being in there as well as yourself?
Brett Swarts: [00:32:03] Question So the trust is a silent partner and they’re going to get a preferred return. Generally we mirror the note. So we mirror an 8 percent preferred return for the money that they put in.
Brett Swarts: [00:32:14] Ok. And and then plus they get 10 percent upside. OK, 10 percent upside.
Brett Swarts: [00:32:22] So let’s just say he bought a property for a million dollars. OK. OK. And then you’re going to sell it for 3 million. You got a two million dollar profit. OK. OK. And let’s just say the trust for simplicity.
Brett Swarts: [00:32:34] Let’s just say it bought it all cash all put all a million from the trust. He gets no debt on the property. What happens when you sell? Well, the original million is going to go back to him, plus the 8 percent preferred return.
Brett Swarts: [00:32:47] And then whatever is left over of that other of that two million minus the 8 percent preferred return is going to be split 90, 10, 90 percent to Vee as the managing member and 10 percent to the trust.
Vee: [00:32:59] And then and then at that point, I can either do a 1031.
Brett Swarts: [00:33:02] No, I can go with your 9 trust. Yes. With your 90 percent you can or you can roll that into the trust is note number two. And now you have a bigger, bigger bigger amount to work with for a new 80 percent.
Brett Swarts: [00:33:17] Oh OK. So I don’t have to create another trust I can does rule it right into the.
Brett Swarts: [00:33:21] I want you to create one trusts and you have multiple notes. So if somebody had 15 apartment complexes and create one trust and they could slowly trade their apartment complexes into the trust.
Vee: [00:33:34] Ok. Then here comes and then a question. Is this deferred sales trust, is it different than Delaware Statutory Trust?
Brett Swarts: [00:33:43] Yes. So the Delaware statutory trust is just a mutual fund. Properties like mutual fund properties that you’re going to 1031 into. So you’re using a different tax code. OK. It’s IRC 1031. That is a 1031 exchange versus I.R.C. 453 which is a deferred sales trust and your separate tax, those with different rules. But a Delaware is also a DST sometimes this can be confused with a deferred sales trust. So basically a Delaware, you’re just moving in with the sponsor. You’re giving up all the control. They’re managing the property. Typically, 7 or 10 years holds typically around five percent. Return on your money for most of the deals that we see and typically pretty high fees. And and it’s it’s really kind of basic, a 100 percent passive, whereas the deferred sales trust, you can have a mix. You know, you could have and say there’s a million dollar deal. You could put a five hundred thousand into into your own deal. Then you have another 300 thousand of room to put into maybe a couple of syndication deals and then you have two hundred thousand that stays with the financial advisor in stocks, bonds or mutual fund. So you’re you’re diversified right outside of geographical locations, property types. And also you’re again, you’re not having replace any of that debt.
Vee: [00:35:01] Ok. So my next question is something that I did and I I’m interested in seeing how this could work for me. I did a 1031 exchange into a syndication where I am on title as tenant in common.
Vee: [00:35:19] Right.
[00:35:19] So from what you explain to me, so I understand that the depreciation schedule for my original property is basically I walked it over to this new one. So when I cash out of this next property, the syndication. Can I do deferred sales trust?
Brett Swarts: [00:35:37] Yes. A hundred percent. That’s a beautiful, beautiful part about it.
Brett Swarts: [00:35:41] So whether you’re a general partner, you have carried interest or you’re a limited partner and you’re just, you know, a tenant in common or a part of an LLC interest or whatever.
Brett Swarts: [00:35:50] We can take your position. Regardless of what anyone else does and put it into your own deferred sales trust. Now, imagine there’s 10 partners in each. They also wow Vee, this is a great idea. I want to do it with mine, too. Great. No problem. They can each have their own deferred sales trusts. Separate from everybody else’s with their own financial advisor. And none of the funds are co-mingle and they can all go their separate way. So very flexible and a great way to sever partnerships.
Vee: [00:36:22] Ok. Is there anything that people who participate in this should watch out for it?
Vee: [00:36:29] For instance, like in IRA or 401K, they have rules and regulations that you need to follow to the tee or else you’re going to incur some kind of penalty.
[00:36:38] Is there something like that for the first house trust? except for the primary home living there you know, the trustee has to be a third party unrelated trustee. That’s what I am. Right. I’m not related to that note holder. It can’t be a brother, sister, cousin. Those are the main things that you have to focus on. I have to be in it for business purpose. I must be able to make a profit. So those are all kind of a technical IRS stuff.
Brett Swarts: [00:37:02] The questions, most the question is, it sounds. This seems like it’s too good to be true. Why haven’t I heard of it? You know, I’m going to put myself at risk for the IRS and answers as all No. where we are. Our tax attorney stand 100 percent behind the structure. There’s not been one single issue and thousands of closings in twenty three years.
Brett Swarts: [00:37:21] You just got to get to know us in the first time you ride the bike. It’s a little bit awkward if you never rode the bike before the deferred sales trust bike. But once you ride it, it makes, you know, it really rides well and you’re gonna like it a lot. And again, back to the demographics. See, folks are getting older. They’re looking for a solution beyond the 1031. I just did a deal in Sacramento with an 18 unit apartment complex.
Brett Swarts: [00:37:44] The gentleman moved to a deferred sales trust. And his this is his quote. I said, why did you choose that? The deferred sales trust. He was looking at the Delaware. He was looking at the 1031. So why did you choose the deferred sales tax? He goes, well Brett, I had 18 problems. I was driving up from here in California to manage 18 units, collect rents. It was an it was not a nice part of town. I was just I’m turnings I’m close to 70 years old. I’m ready to retire. And he goes, I didn’t want to trade 18 problems for 36 problems and take on more debt. He was I also wanted liquidity, the ability to access the cash, you know, and be able to cash out and pay the tax if I want to or put it into commercial real estate at my own timing.
Brett Swarts: [00:38:21] And so those things solved what he was looking for, and he was really happy about that. So that’s the key is just figuring out empowering you with the tool and you decide how you want to use it. Maybe you want to do a half, 1031 and a half this.
Brett Swarts: [00:38:36] We can do that. It doesn’t have to be all or nothing. You can do a third, a third of a Delaware, a third of a deferred sales trust and a third of a 1031. It’s flexible for those for those reasons. It’s very flexible.
Brett Swarts: [00:38:48] So it doesn’t have to be all or nothing. Which is also a good point to mention here.
[00:38:53] Ok.
Vee: [00:38:53] So now that you have taught us about this tool and you said that there is the minimal limitation except for the primary resident, right? So why is it that someone why does someone need to come to you at capital gains tax solutions to do the deferred sales trust as opposed to let’s just say I go to my attorney or I go to my CPA and say, I’ll pay you to be my trustee and then just get this done.
Brett Swarts: [00:39:22] Great question. So it’s first of all, it’s a proprietary structure.
Brett Swarts: [00:39:26] And we do have other attorneys that we work with. And CPA is. And they join us is what happens. You can get surgery with somebody who’s never done a deferred sales trust. And you could you could you couldn’t call it a deferred sales trust and you could try to do do what we’re doing here. But A, they may not want to put yourself in those hands, but B. The structure itself is proprietary. They’re not going to know probably how to do it. And they’re going to want to connect with us. And again, we have thousands of professionals that just join us. And we have we have that. We have the 14 IRS audits and we have that twenty three year track record. So I would just say they just they’re not going to know how to do it. To be up, to be honest with you. And then, B, even if they tried it, you’re putting yourself at risk in case they make a mistake.
Brett Swarts: [00:40:15] And if they make mistake, then that’s you’re going to pay the tax, right. That’s that’s really what you want to. If I’m in your shoes, I want to be careful. The part about the trustees. So, yeah, I’m one of the exclusive trustees with with with with the estate planning team. And so with that, every case must have a third party trustee. So you’re welcome to bring another trustee in if you want to. And you could pay out of your pocket. But you also have to have to have an assigned trustee within within the program. So that’s they want to make sure that this is executed properly.
Brett Swarts: [00:40:47] And that’s part of the role of the trustee to make sure that the tax return is filed properly and that everyone is on everyone as a team is working together.
Vee: [00:40:55] So our question is answer partly I’m trying to play devil’s advocate here, because what I’m seeing is the structure is very similar to from the single family side. We sell a property to with an installment sale, our land contract or our own or finance owner carried back except for in this case, you are selling it to a trust which you can have someone, a third party person being the trustee for you.
Vee: [00:41:24] Of course, this does trustee has to know all the information on the rules and regulation that your company and yourself know you to qualify. But if someone doesn’t match your minimum threshold, I use it. You said earlier in a 5 to 1 ratio. I’m trying to think of a way that we can do it for the four people who were not your ideal customer.
Brett Swarts: [00:41:49] Yeah, well, I think the first great question being great points. I think the first thing to understand is why wouldn’t why wouldn’t somebody just do a regular installment sale? Why? Why do this deferred sales trust? Right. So in a traditional installment sale, you’re just counting on this buyer that may or may not be able to qualify for a loan.
Brett Swarts: [00:42:11] To own your property and only your your collateral is only tied to that fire in your property in one single location and one area and one product type, and it’s neither liquid nor is it diversified. And oftentimes it’s not investment grade property.
Brett Swarts: [00:42:29] The difference with ours is our investments are investment grade. They’re diversified and the collateral is in commercial real estate. Other deals, you know, multiple deals. And it gives you gets you a wayfrom from the traditional installment sale.
Brett Swarts: [00:42:45] As far as how small the deals are. Yeah. We just found with our fees. That’s why it’s got to be, you know, those numbers. It’s just if it’s too small, our fees eat up the ROI.
Brett Swarts: [00:42:55] It doesn’t make sense. We just tell you to pay the tax. So unfortunately, that’s just that’s just the nature of the structure and the fees and the cost of everything.
Vee: [00:43:06] Yeah. So what I see is the solution to this. What I see from what you just discussed is that if you’re not at that threshold, what you should do is do 1031. You keep on expanding, keep growing your business, your portfolio until you hit that threshold where it makes sense to go to your company and do it for ourselvesthe deferred sales trust.
Brett Swarts: [00:43:26] Trust that or what you do is you just pay the tax and don’t overpay and sit on the sidelines until you find a deal. That makes sense. Right? You don’t want to overpay, right? That’s the last thing you want to do.
Brett Swarts: [00:43:40] But yeah. But if you can find a deal and 1031 that then do that too.
Vee: [00:43:47] So what’s your fee.
Brett Swarts: [00:43:50] Yeah. How is the fees. Millions of dollars. We don’t charge that much. So we like to keep our fees as low as we possibly can. A traditional trustee fee which is by the way this is my role here as a trustee.
Brett Swarts: [00:43:59] It’s similar to one and one and a half percent. We only charge about 50 basis points to 1 percent depending on where the funds are invested.
[00:44:07] So if it’s with 100 percent financial advisor, it is 50 basis points, half of 1 percent on the proceeds on the count the account trust, trust value.
Brett Swarts: [00:44:18] If they go into real estate, it’s it’s it’s a hundred basis points or 1 percent. Now the other fees are the financial advisors. So depending on on where the funds are invested, it’s also another 50 to 100 basis points depending on where they’re at. So in the beginning, I said most of our notes earn 8 Vee and after fees they pay about six and a half. That’s kind of the cash flow an owner can expect. So imagine it was ten million dollars that you were selling and you had a three million dollar tax bill. We always say start with that. Vee, what is your fee? Your first phase 3 million to the IRS. You can pay that or let’s keep all 10 million in there. And let’s hopefully earn about eight. And after fees net you about six and a half percent. All right. So you’re gonna look at that ROI and see does that make sense? The only other fee is to the tax attorney. And that’s just a one time fee.
Brett Swarts: [00:45:11] And that happens at close of the trust. And that’s one point five percent on the first million. And then one point to five on anything above that. So, again, if it was a 10 million dollar deal, the first million would be one point five percent and the remaining nine million be one point to five percent. That includes audit defense for the life of the trust and that includes the legal and tax structure.
Brett Swarts: [00:45:32] And the communication with the CPA is to to file the tax return properly. So that’s yeah. That’s the those are the those are the fees.
Vee: [00:45:40] Ok. So your fee is a yearly fee and then the attorney fee is a one time fee at the close of the trust. Which mean you could drag it on to the time you die before you pay it or.
Brett Swarts: [00:45:56] Yeah. Most of our clients like to pay the tax. The second day to never, right. And the rule is seventy two, which again, hopefully you’re going to earn more than 7 percent after net of fees, everything on your full 10 million. Let’s use that number again and you’re going into real estate. You’re buying it at the right time and you’re diversifying and hopefully you’re making 10 to 12, 15 percent on the other side of real estate deals.
Brett Swarts: [00:46:17] You’re making about, you know, 8 percent and the financial advising role over a 10 year period. And you’re netting about six and a half. So all that together, you just keep living off the interest, right. And you just keep it deferred and you pass it on your kids. The same reason you do 1031 exchanges forever because you never want to dip into the principal and pay that pay. Boot is what it’s called. But by the way, along the way, if you want to cash out a portion of the deferred sales trust, you can do that, right?
Brett Swarts: [00:46:43] You can. You can do that. You may have a million in there with the financial advisor and you want to travel the world tomorrow. We call it trade plus three. The funds are liquid. You can just sell out of stocks and bonds send you one hundred thousand and then you’re going to pay tax on that hundred. Right. But at least it’s on the hundred and not on the full million. So it’s liquidity, which is very nice diversification and then hopefully earn enough to offset the fees and really defer the tax for as long as you want.
Vee: [00:47:12] So then I have another question for you. As for the what you describe is like ATM, right? You can draw the money out anytime you want. And I’m thinking this is the 20 percent that you have in the trust. The the other 80 percent you have it in real estate or something else that you cannot touch because it’s not it’s not there.
Brett Swarts: [00:47:33] Let me clarify there. I say if 80 percent went out, then that other 20 percent has to stay with a financial advisor. In that scenario, that 20 percent is non liquid. OK. Oh, ok. OK. Yeah. The only time. So imagine 100 percent of what the financial adviser. Then you can you can just cash out of everything tomorrow and pay the tax.
Brett Swarts: [00:47:52] But if you set up 80 percent to a non liquid asset like a commercial real estate deal, then that 20 percent is a reserve. It’s sitting with a financial advisor earning interest. Why? Because we want to make sure we can pay the note, right. We want a service. We make sure we service the debt. That’s also why we don’t well, we don’t allow 100 percent to go out either, because we want to make sure there’s enough room to actually pay you. Because that is the role of the trustee and of the deferred sales trust to pay you back the agreed upon amount of interest. Yes. Just to clarify that part, you’ve got to have the figure. But let’s say you put 50 percent to a deferred sales trust deal. I’m sorry, to a commercial real estate deal with the deferred sales trust. Then you have 30 percent. That’s liquid that. You’re right. Then you could just, you know, cash out of that 30 percent as long as you maintain that 20 percent amount. That’s still there as that makes sense.
Vee: [00:48:39] Yeah. So if you use 70 percent, you have 30 percent left. You can cash out 10 percent in the 20 in there. You got it. Awesome. And I learned a ton today. This is great stuff. Now, this is the portion that I call Rapid Fire Round. I asked the same five question of every guest before the end of the show. Perfect. Let’s go. What is the one special ability that you wish you had?
[00:49:05] I wish I had. Right, man. The bility. Like a superhero. Ability? Yeah.
[00:49:14] Ok, so to be able to heal people of any disease, you know, they had any kind of sickness or disease, which single habit gives you 80 percent of your result?
Brett Swarts: [00:49:30] Communicating and educating on podcast webinars, face to face meetings, anything that’s actually in front of the the ah preferred vendor or client.
Vee: [00:49:48] I feel like it’s more like you’re educating people on this topic. Not a lot of people understand what this is. And what you’re doing is giving tremendous value to the community. Thank you Vee. That’s very, very appreciative. That means a lot. What’s another profession other than your own that you think will be fun for you to attempt? Oh, I wish.
Brett Swarts: [00:50:09] I mean, I if I could pick any profession, I’d want to be I want to play in the NBA. I love basketball player, coach or coach. I want actually, it’s one of my dreams. I want to be a college basketball coach. High school basketball coach.
[00:50:21] There you go. I mean, you can do it right now if you have the time.
[00:50:23] Yeah. The challenge is I have five kids, so I got to coach them until they’re 18. And then, you know, Lord willing, I’ll be able to send them off to college and then be able to coach.
Vee: [00:50:32] There you go. And then go to their coach. Their college.
Brett Swarts: [00:50:34] Yeah. Yeah. Two for one deal.
Vee: [00:50:40] This next question I typically ask where is the investor and is how has investing in real estate helped fulfill your dream or your life goal?
Brett Swarts: [00:50:49] And another way to say would be what’s the most fulfilling part about real estate investing, right.
Brett Swarts: [00:50:55] So just the once you start having passive income that you’re not having to actively work for trade time for dollars. It’s just so powerful because it frees you up from pressure from your employer or pressure from doing another deal.
Brett Swarts: [00:51:10] It gives you that little extra amount to be able to give. And it it it’s truly amazing the ability to do it. Compound interest and invest on the investments that you have to have that freedom.
Brett Swarts: [00:51:23] And this is that we call freedom from capital gains taxes. But really. Well, what we’re what we’re about is the freedom to have a passive lifestyle so that you can spend more time doing what you enjoy doing or more time with your family or more time volunteering or giving back. And so I would say that that is the number one reason I love a love investment real estate.
Vee: [00:51:43] Last question, who do you think I should interview on the next episode of the Real Estate Lab podcast?
Brett Swarts: [00:51:50] Gus, you probably know all of them, but if you haven’t interviewed Michael Blank yet, if you have a few, Rod Khlief, ever interviewed Joe Fairless. You haven’t interviewed Buck Joffre. He’s fantastic. Yeah.
[00:52:04] Any of those ones are really, really good. I’d give you a list of more, too, if you’re looking for more. Is there anyone that you can give me an introduction to? Yeah. I don’t see why not. Absolutely. Email me and let’s let’s try it. I’m still trying to build my influence with everybody, but I’ve been on all of those shows. I just. Yeah, I saw your introduction from Michael Blank. He absolutely was tried. I’ll try to put you in front of Vee. Absolutely. That’s all the time we have for today’s show. Bret, thank you so much. You’ve been incredible. I really appreciate your time. And I know you’re extremely busy and you’re doing something that is really great for the community. And I wish you success. Thank you for the time. Thank you, Vee. My pleasure.
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