GI135: The Benefits of the Deferred Sales Trust with Brett Swarts
Brett Swarts knew he wanted to work in real estate at a young age. He grew up with a single mom, poor, but had a large vision in mind. When he got married, he took the leap to find solutions for his clients that really work. In comes the deferred sales trust as an alternative to a 1031, and it can be used even in the event of a failed 1031.
The main advantage according to Brett is that you don’t have to pay capital gains on a sale. Instead, you are lending the money to this trust, where it can be put to use in the economy. In this sense, it is a big win for the government too because the money starts to circulate. This is why the IRS is on board with this solution and it’s 100% legal. However, there is only really one law firm that does this deferred sales tax the way that Brett Swarts does. It’s no wonder that signing an NDA is part of the agreement. Brett Swarts explains that if you want to take money out of the sales trust, all you have to do is pay the income tax on it. The DST is usually for ten years but it can be renewed. It can even be inherited in families.
Since Brett Swarts lost everything in 2008, he understands the need for a novel solution in selling property that doesn’t involve being hit with the double whammy of capital gains tax as well as income tax.
There really is a lot of information about the deferred sales trust in this podcast. Even Brett Swarts says you might hear the information and be overwhelmed. The government is bringing in new regulations, but so far, this system for the deferred sales trust works for avoiding previously inevitable taxes on sales.
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Transcript:
Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.
Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Brett Swarts. Brett assists high-net-worth clients by solving their capital gains tax issues. His experience includes numerous Deferred Sales Trusts, Delaware Statutory Trusts, 1031 exchanges and $190 million in closed commercial real estate brokerage and Deferred Sales Trust transactions. So thank you so much for being on the show, Brett.
Brett:
Charles, thanks for having me pleasure to be here.
Charles:
So give us a little bit about your background, both personally and professionally prior to us starting your current firm.
Brett:
Yeah, so I, I grew up in Northern California, the bay area and Sacramento, and I grew up learning about business and real estate from a young age. My dad and mom, they owned real estate, they developed real estate. And so I had a chance to learn the sticks and bricks behind all things, real estate. And it was in the, it was during the 1980s, right? It was MC hammer days. In fact, MC hammer had this huge house on the hill. We’d always look at, as we drove to the job site and my brother and I would, you know, drive the Bobcat with my dad and hammer nails, move bricks, and kind of just learned a lot about that. So I knew real estate was gonna be in my, in my world moving forward. And so fast forward, I went to college, studied business, as well as played some basketball on scholarship, which is a big passion of mine personally, and then had a chance to take an internship at a company called Marcus and Millichap.
Brett:
And so I started to learn the investment underwriting, the cashflow, the negotiations, the way to structure deals and, and add value and then started to learn, learn. But it wasn’t always easy, right? Because in the very beginning I was brand new in the business and the, the days of, of real estate with my dad and my mom, everything took a big shift. You know, they got divorced when I was young. So I went from like being with a lot of wealth to like no wealth overnight because my dad didn’t really let’s say pay the child support as he should have. Right. So my mom, and so I live with my mom most of the time, but I knew at a young age that I wanted to have a lot of margin within my, for finances and I wanted to be successful. So that was the focus.
Brett:
So Marcus and mil chap was the way, you know, big commercial real estate agent making a lot of money, right. Learned how to, how to underwrite and buy deals. And I’m working and it’s 2006 and the marketplace is going red hot, right? It’s it’s, it’s on fire. Things are going great. I start to learn a little bit, learn a little bit, start to grow, start to get my business just going, cuz it’s a hundred percent sink or swim business, right? There’s no benefits, no commission, but I went from making a little bit of money. It’s like nothing overnight, an oh eight crash hit. And I looked around going, oh my gosh, what are we gonna do? Go get a real job or continue on. But I was learning and growing so much that I just wanted to keep, keep keep it going. So I did whatever I good entrepreneur or commercial real estate broker does when you’re faced with a very tough thing.
Brett:
And the tough thing was this. I was now married baby at home. And so I’m going to my wife and I’m like, honey, like I can either, you know, kinda give up on this initial career dream or or we can live with my brother and I can get a side job in hustle. So that’s what I did. She’s like, well, let’s keep this thing going. So I moved with my brother into small condo and with our first baby daughter and I started working at cheesecake factor at nights and weekends. And so by day I’d make cold calls, but I was going through this financial challenge myself. So were except on a different level, right? They were fighting with the banks. Renegotiating had too much debt, not enough liquidity, not enough diversification. And so, and by night I’d worked, she’s like factory to keep my, keep the lights on.
Brett:
So I’d negotiating with banks, helping them out. Along this journey. My manager brings in a gentleman to speak with a deferred sales trust and that’s where everything changed. At that point. I had something that could solve the problems for my clients that they didn’t have a couple years ago, right? Because they for felt forced by this 10 31 exchange to overpay for property in a very low inventory marketplace. Right. Take on too much debt. So I started to apply this strategy, talk to it with people, my listings and my deals started to grow. My influence started to grow fast forward 10 years later, I was able to retire from the chief ski, right? My wife, we have five kids. We’ve been, she’s been the whole stay home full time with our kids. It’s been her passion and I’ve been very successful in real estate and, and this deferred sales trust world.
Charles:
Awesome. That’s a fantastic story and fantastic background. So give us a little bit about what your firm capital gains tax solutions does. And are you focusing well? Yeah. Loves know. Yeah.
Brett:
Yeah. So most high net worth individuals who own cryptocurrency primary homes, investment real estate have a failed 10 31 exchange or a primary home. They struggle with capital gains tax and is somewhere between 30 and 50% of their gain depending on the depreciation recapture and what state they’re in. Oh, by the way, Biden might is proposing to double at potentially from 20 to 40% and take away or limit the 10 31 exchange. So we use a deferred sales trust, which eliminates the need for the 10 31 exchange forever. It works for cryptocurrency. It works for stock. It works for primary homes. Also our clients can create and preserve more wealth. And as a part of that vision, we train and coach commercial real estate operator, syndicators, financial advisors, business brokers, right. Luxury realtors on how to use this tool to grow their business. So it’s, it’s, it’s kind of dual. We have people who call us direct and then we’ll find you know, them a, a solid real estate professional or we have the actual business professional call us direct come and help alongside it with their clients.
Charles:
Interesting. So seeing an investor comes to you, wanting to sell a highly appreciated illiquid asset, like real estate, what kind of tax deferral options options does that investor and visual have? And I always had an issue with the 10 31 because you get really put into a box and so explain kind of what you would what you would tell them and what you would kind of propose for a situation similar to that
Brett:
Great question. So we called the 10 31 exchange the blockbuster way of doing things. <Laugh>, it’s kinda like, it’s like the shotgun wedding, right? You get engaged in 45 and you get married in 180. Like sometimes you, the marriage can work out great. Right. Especially if it’s a value add forced depreciation opportunity. Right. Fantastic high fives all the way around the challenge becomes when there’s low inventory, <laugh> every prices are through the roof and you know, it’s a seller’s market. Right. And all this crazy California or New York money is chasing these few deals that actually have any kind of meat on the bone. Right. So the first thing is timing, right? So I just ask ’em like, what is your vision for your wealth, right. And what is your vision for your, your time, your energy and the timing of the marketplace and as real estate professionals and owners ourselves, and probably a lot of your listeners, we know when it’s a seller’s market, we know when it’s a buyer’s market, mm-hmm <affirmative> right now you can find a deal in every single marketplace, but I always start there.
Brett:
And then I also start with the personal reasons to sell and the financial reasons to sell. Right? So I really dig into the motivation, understand their wealth and their vision, their plan, what’s going on with a lot of our clients and, and majority who call us they’re baby boomers, right? They’re in their they’re in their sixties. Right. And they, they, they have made their wealth. They’re more in a preservation mode. They want to retire from the toilets, trash liability. They wanna sell their business. They don’t want go through this oh eight cycle again, where they almost lost or half some lost all, and they don’t wanna have to fight out. So we’re in the possessions of saying, we wanna create a safe Harbor with this deferred sales trust. Right. So first establishing what the challenges are, what their vision is. And then literally just drawing a line on a piece of paper and saying, what tool will help you get to where you want to be.
Brett:
Right. And so then we talk about how blockbuster, right? If you remember going on a Friday night, you wanna get that movie, you know, Charles. Right. And you see it, it’s behind that cardboard. Right. And you’re walking up and you’re like, oh, excited. But then somebody, two steps ahead of you grabs that thing. You’re like, oh my gosh, like what? I missed it. So you’re bummed, but you get your second movie, you have to return it within three days. You didn’t rewind it. You get a little penalty. You get, well, that’s like the 10 31, like that puts you in a very small hole, right. Where you have to, you know, kind of really, really figure out a way to close that deal or do that thing. Well, there’s thing called Netflix, it’s pretty seamless. It’s like the deferred sales trust. There’s no timing restrictions, right?
Brett:
There are some ongoing fees, but you can buy and sell real estate whenever you want active or passive, you can put it, you can, the funds can be invested into the stock market, right? It’s it’s not just like investment, like kind real estate in that’s short period of time. So that’s the number one thing is timing. And we just believe sell high, buy low. And the best story for that is a gentleman in Minnesota. He sold a property for 20 million. In 2006, they called this the Monday morning quarterback. He sold it at the peak and he, this guy’s worth a couple hundred million bucks, really smart. And he’s done 10 31 exchanges. He thought that was the only way blockbuster way to do things. But he’s looking around going, I’m not gonna overpay. I’m gonna do this Netflix thing. I’m gonna give, I’m gonna try this new thing out.
Brett:
I’ll put it in the trust. So he puts it in the trust. He parks the funds and stocks, bonds, mutual funds, very conservative stuff. Not a lot of, not a lot of risk, but kind of to the safe Harbor. Okay. He waits five years go by the bank, calls him and says, Hey, we just foreclosed on that property. Just curious, do you wanna buy it back? Well, maybe what’s the price 60 cents on the dollar. So they can, they, they sold it back to him at the 40% discount via his trust, all tax deferred. Okay. He has not paid a dollar in tax. He bought that back as an active investor with a brand new depreciation schedule. And I heard that story and understood how it worked. I said, this is the commercial real estate game changer, right? Yeah. We can sell high and buy low. So I’ll pause there, but that’s, that’s probably the way I would, I would approach this.
Charles:
Yeah, that’s awesome. And it also goes to show people like we’re such in hot markets right now in 2021, someone has a foresight of knowing, wow, this is extremely hot. Now wait a few years or a couple years or whatever it is for it to cool off a little bit, because I think when everybody’s in the mode of buying, buying, buying, they don’t see that. But that’s fantastic. I mean, that guy used it and he really was able to utilize all the tax benefits. So let’s talk about the process of using a DST. So someone says, this is for me they have this property million dollars, let’s say that they have a gain in it or whatever. What, what is the process for you and with them to get it set up?
Brett:
Yeah. Great question. So step one is making sure the timing of the sale is not too far down the road, right? And so mm-hmm, <affirmative>, we will review your purchase and sale agreement. We’ll review the LOI, we’ll review the, the, the timing of it. And really the key key determination is have all contingencies been removed. And as long as they haven’t been removed, we can set up the trust, takes a couple days to set it up. We work on a conditional basis, meaning we will set everything up. Talk with you, get through all of your questions, CPA, everybody. For some reason, the deal doesn’t close or some reason you don’t wanna use the trust. You don’t owe us anything. So that’s a nice, nice piece of that. Mm-Hmm <affirmative> but basically we do all of the tax planning and preparation front. We form the trust, get it all ready to go.
Brett:
A that’s that’s the first step. Okay. If you’re with the 10 31 exchange qualified intermediary, we work with them to, and we form the trust and then we can we can also again, save a failed 10 31 exchange. So we will clarify that timing of the sale. The second thing will clarify if you actually qualify, what, what, how do you qualify? You need to at least a million dollar gain in at least a million dollars of net proceeds for any one transaction, whether that be a single stock, whether that be crypto currency, a single coin, whether that be an investment real estate, primary home, as long as you hit the at parameter. You’re good. Now, if you say Brett, well, I’ve got two at 500. Do I qualify? That’s fine too. But it’s not something where we’re, we’re, we’re doing you know too many small deals.
Brett:
It’s gotta be large enough. Yeah. So if you qualify for those two things we do a 30 minute consultation. You answer 12 questions. Then we, we get with the tax attorney, they review the, the, the information. And then we literally set up the accounts of the trust. And we work with your either mergers and acquisition attorneys or your qualified intermedia or your real estate broker escrow. And we handle all of the transaction in the background. And the funds go to the trust instead of going to you, therefore they’re in a tax referral state mm-hmm <affirmative>. So that’s kind of the big picture. The second part of that is how aware the funds invested. Well, you decide based upon your risk tolerance. So you fill out a risk tolerance, questionnaire, and allocation is presented to you, and then you approve or disapprove of that.
Brett:
So every, everything is mathematical. We’re not guessing here, nothing moves without your signature or your approval. Also, the next question goes, well, how do I know the thing is protect? It, it’s protect it. Cuz we use third party banks, large banks that provide long term escrows. My role is like the offensive coordinator, if you will. Right? And so I’m, I’m, I’m the trustee of this. It’s just important to understand. You gotta have a third party trustee and I help to a navigate all of the parties B make sure that the note is paying you back based upon the terms and then three making sure that the tax return is filed and the, and the, and the correct way. So as the client, the nice part about it is you just get a 10 99, right? Yeah. So you sell became the bank, no more toilet, trash liability, if you don’t want to be active anymore.
Brett:
Right. no more, no more headaches with your business. Right. You get to move. We just did a deal Palo Alto for a client. They sold an 8.3 million primary home and he couldn’t qualify for a 10 31 on a primary. Right. But he could on the deferred sales trust. So he sold, deferred the tax and moved outta state. And now he’s just retired. Right. And so he’s just, he put it in stocks, bonds, mutual funds, some of the biggest companies in the world. And now he’s just living off of the interest payments of the trust. So hopefully that answers the question, but maybe you have some more on it, which is fine too.
Charles:
Yeah. How does the asset protection go with this? I know you’re not attorney, but I imagine you’ve had people with million dollar gains plus ask you about this. Someone sells an apartment complex million dollar gain. Let’s say another property that they have gets involved with litigation a year down the road or whatever. How does that how does that go? I mean, how are they protected with that? Is there any production? Yeah. So
Brett:
Rockefeller has a a famous scene. He said, oh, nothing control everything. Right. And this idea had to do with asset protection. So when you are an owner of something and especially if it’s not in an LLC, or if it’s, if it’s just in your individual name, right. That you are more li you’re more, you have a higher risk of being liable and, and people taking that, or be able to get to that. And this scenario, remember as the trust, you are loaning the money to the trust. So you’re not owning the trust. Okay. Cause if you were just selling it to the trust yourself, you’re selling it to yourself, it’s taxable. So therefore, as a lender, right, you had this layer of asset protection, which basically states that someone might be able to. So they get a judgment, get the income off of the trust, but they can’t force you to sell what you don’t own. Right. They can’t take what you don’t own. So yes, there’s some, and there’s some foundational asset protection built in, you are lending to the trust and became the bank. And you’re not the owner of the trust. Does that make sense? Yeah, it does.
Charles:
And say, I have, you know, I have two properties, you know, one on main street, LLC, Oak street, LLC. I sell main street, LLC. I got a million dollar gain in it. You set up, we do a DST three years later, I do Oak street, LLC. That one sold now, am I putting that into the same DST? So it keeps it easy for me to keep track of. I don’t need like a separate one. Okay.
Brett:
Yes. Although there is two DSTs just to let you know, but typically most people will just put it all into one. They’ll just roll. They’ll make, sell some cryptocurrency. They might sell a primary home. They might, you know, save a, fail 10 31 and investment property and just keep rolling in into one big, we call it the mothership DST, right? The one Netflix. Right. So it’s sitting there tax deferred, liquid debts, paid off diversified. And then collectively these are all individual notes, right? So each note is set on the asset that was sold and it’s set to pay you back based upon the terms, typically 8% over a 10 year period of time, net of the recurring fees is typically what it is. Our fees are about one and a half to set it up one time fee and about one and a half recurring mm-hmm <affirmative> so that is what they could expect. The does that answer to the question?
Charles:
Yeah, it does. So that was the other thing I had about the cost on it. So one and a half, and that’s obviously just on your gain, that is not gonna be, cause the property’s already go
Brett:
On assets, price. I’ll give you an example. So, so there’s so one is based upon the actual gross sales price and the one is based upon the AUM. So the first one, the legal fee, which includes audit defense, lifetime audit defense, by the way, you might curious about the track record. Thousands of closes billions under management 25 year track record. It’s been audited over a dozen times with the IRS, all node chain, IRS audits has a private letter ruling national law firms have reviewed this. We have thousands of business professionals, so it’s, it’s a hundred percent legal. It works every single time. It has a perfect track record. Okay. Get that outta the way. So, but there’s only one law firm that does this literally in the entire nation. It does this the way we do it. And it has our track record.
Brett:
Right. There’s been some copycats here and there, but you gotta be really careful with all those, the places that don’t have to me, a, a perfect track record. Right. Mm-hmm <affirmative> so so you pay 1.5% of the gross sales price to the tax attorneys, my business partners. Okay. So you pay that. So if it’s a million bucks, you pay 15 grand at the close of escrow, but let’s say you would’ve paid $400,000 of tax. You had a zero basis, right? So you paid 15,000 at the close that covers lifetime federal or state audit defense. So if you ever were audited, they were, they will provide no additional charge for your deferred sales trust, no charge. Right. Which is great. Okay. let’s say you had no debt on the property. So now there’s about $985,000 in the truck you paid the legal fee, you know, assuming you also paid your broker commissions or whatever, right.
Brett:
You paid off some, you had, maybe you had debt, whatever hits the account. It’s about 1.5%. Mm-Hmm <affirmative> depending on how, where the funds are invested depending on the size of the deal. Okay. So that’s generally our fees. We do work with some financial advisors and sometimes that can be a little bit higher on their end, right? Could be as high as 1.8, 5%, depending on the size of the deal. But generally speaking, that’s, that’s the number. Now the goal is to outearn 8% or earn 8% net of recurring fees over the 10 year term. So our goal is to earn about nine and a half to 10 to cover those fees to net you 8% compounding. Right? And so that’s where the, you go, well, what’s the ROI here? Well, this is part of why we need to have a big enough gain and a big enough proceed in order to, to have enough pain in the, in the tax, in order to actually pay for our services.
Brett:
Right? So I’ll give you an example. We just did a deal in in Alabama, it was a $2.6 million sale for a business didn’t qualify for a 10 31. He had a $600,000 liability. He’s in his mid forties. He’s making a lot of income. He’s just ready to move on from his other two partners or his other two partners buy him out. And now he, he uses the deferred sales trust. Not only to defer the tax, but his next venture was building apartment buildings. So now he’s partnering with the trust to build 70 units in Tennessee, all tax deferred, right? And he’s like, this is sweet. Now he has very, very, very high income. So he’s not only deferring the capital gains tax, but he’s also deferring his income. Wow. This is interesting. Right. And he’s also getting a new depreciation schedule. So a lot of people, when they look at this, they go, well, if I’m only deferring tax, that’s the only way in my ROI.
Brett:
No, no. The next ROI is you’re deferring income tax. Oh wow. Like an IRA. Yeah. Like kinda like an IRA. And then the next layer is I’m getting a new depreciation schedule. So you start layering these things a on top of each other and your ROI. It’s no longer an expense of that one and a half to 1.85. It’s now an investment because you’re saving on income tax. You’re obviously deferring capital gains tax. And then you’re getting a new depreciation schedule, which enables you to offset cash flow. So this is kinda like DST ninja, you know, 2.0, right. But this is what we’re we do every day. We’re tax, you know, we help people plan for their taxes to further their tax and then create more wealth. What
Charles:
Is there a timeframe? So someone puts money into this. Is there a timeframe they have to have it out in five, 10 years or
Brett:
No. Great question. So typically these are structured at 10 year notes. Okay. And every 10 years you can renew for 10 years and renew 10 years, and then it can pass to your heirs via your living trust. And your kids can step into your shoes and keep this thing going, keep it going. It does not, by the way, give you a stepped up basis. Cause remember you give up ownership, right? You give up ownership. However Biden is proposing to take away. This stepped up basis. Mm-Hmm now this becomes the solution, because guess what? If you don’t own the asset that it’s gonna get the stepped up basis, you’re not gonna get the up basis. You lent it right to the trust. And the trust is continuing on. Guess what? We just eliminated the need for the stepped up basis. So this is where the deferred sales trust is a solution to that.
Brett:
Yeah, and the kids can keep it going for as long as they want and they can also pay the tax when they take it out. How is the tax paid? Well, if it’s interest payments, they’ll pay ordinary income tax on that. Right? Most of our clients will structure the notes of interest. Only payments somewhere between five, six or 7%. And they’ll leave a little cushion between that eight because they don’t wanna dip into the goose. That’s laying the golden egg and it with it’s the goose, the goose is the original principle, right? And so they’ll pay, they’ll get a 10 99 on that, you know, those, those little eggs. And then on the principle, they’ll keep it intact. And as they keep it intact, it keeps growing and working. And which people say, why would the IRS allow this? Like, this seems like it’s too good to be true.
Brett:
Seems like this is, you know, this. They wouldn’t like it. Well, we were really believe that it’s a win-win for everybody. And here’s why and I’ll give you, I’ll give you an actual deal. We just did a deal. It’s a, it was a 7.9 million sale for a, an individual she’s in her seventies. And she’s it’s on the beach in Santa Cruz, even on the property for 25 years, it’s like zero basis. Okay. And she bought it for like 9 85 us where the property taxes are, you know, pretty close to what she originally purchased it for. Right. Well guess what happens when the new purchase is 7.9 million? Well, they get new property taxes. Well, that’s a big gain there, right? Guess where the commission goes? Well, the commission, the, they have to pick taxes on that for the listing agent. Right. And the buyer, and guess where all that money gets to get infused into the economy.
Brett:
Right? Because she, he puts it in stocks, bonds, mutual funds, real estate, which does what it creates more jobs, which does what brings in more tax revenues. So actually we believe the IRS is the one who’s the biggest winner here. Right. Cuz otherwise she might not ever sell the property. In fact, she wouldn’t have sold it if it wasn’t for this solution. Right? Yeah. Yeah. So she, she, so then it happens. Nobody wins, right? There’s no new property taxes. There’s a new, new amount of money infusing to the economy. I was telling you about one of the crypto currency one. This is actually really curly. Cool. So they bought Ethereum. This is a couple out of the bay area for a hundred thousand dollars. And they’re gonna it’s it’s, it’s increased to 12 and a half million dollars. Wow. Ethereum, right. This Bitcoin, right. Crypto currency <affirmative> and they work.
Brett:
Here’s the thing though. They work 50, 60 hour weeks, two kids. Right. He’s been in Silicon valley for 20 years in the corporate world. Right. He’s tired of the corporate stuff a bit and he’s ready to retire. Spend more time with the family. So the deferred sales trust, not only ya to sell and defer somewhere around $5 million of capital gains tax live, right. Huge amount. He can sell it, all, defer all and then he can buy apartment buildings, right. Get cash flow. And that can literally walk away from having to ever work again for anyone else. Right. Oh. So do you see, so I’ll pause there. See if any questions Charles.
Charles:
Yeah. I just have one more question before we’re seeing how we can integrate this into our investment strategies, but fail 10 31 exchanges. And how does that work in regards to, you said, you mentioned before someone reaches out to you when they have a PSA Purchas sale agreement signed or a LOI letter of intent sign, which would be previous to that. When like for a fail 10 31, how does that work and how can you save it?
Brett:
Yeah. So great point here. Remember there’s only really two windows to use the deferred sales trust. The first window has to be before the buyer removes all contingencies in a P ESA or, or or or a whatever other contract you have grid to sell something. Okay. Or if you even selling cryptocurrency or something else, you may not even have that. It’s just a transfer. We need to set up the trust prior to that, get everything in order. Okay. And now gotta have that there for every asset besides investment real estate. Why? Because every asset besides investment real estate does not qualify for our 10 31 exchange. Okay. So get with us early, go, go, go to our website, get with us early. Figure that out with us. Okay. Now let’s imagine it’s investment real estate and you’ve sold or you’re listening to this right now and you’re in a 10 31 exchange.
Brett:
You’re like, oh my gosh, Brad, I’m past my 45 day identification or I’m right up against the gun or I’m about my day one 70. I only have 10 days left. It’s all gonna just fail here. Can we form a trust? Yes. Even though it wasn’t a part of the PSA. Yes. And can we send the funds to the trust? At day 180 1, a day 46? The answer is yes. And yes. Okay. So the simple thing is the funds need to go to the trust versus going to you personally. Cause when it goes to you personally, it’s taxable. So we work with exchange accom that provide both options, which by the way, I would encourage you to never work with an exchange Combinator ever again, unless they give you this option. Okay. You gotta say, Hey, do you give a deferred sales trust as well as a 10 31 option?
Brett:
Are you gonna accommodate with what I’m trying to do? And if the answer is no, then say, okay, great. I’ll go work with someone else. Right. So I don’t ever send it to anyone else. And why would someone say no? Well, they don’t know about it. And, and a lot of these <inaudible> companies, they don’t want us as competition. Right. So they don’t want their out promoting, you know? Yeah. We give you this option. Well maybe I won’t even use that at close. I won’t use your services. I’ll just them at close. Right. So that’s the problem with the 10 31 change companies. They don’t want you to know about us, but the ones that do that we work with you wanna work with them. So that’s, that’s also something to, to, to, to, to keep in mind any questions there Charles? No,
Charles:
No, that’s perfect. Thank you very much for clarifying that. So we have listeners on the show that are past investors and operate. Is it possible for past investors to sell a highly appreciated piece of real estate, for example, and then passively invest into a syndication and you know, what is the process for that? Obviously we know the beginning process of it that they’re going to start there when they’re selling it. But how does that process work when they’re talking to the operator and structuring that
Brett:
The answer is yes. Okay. So the deferred sales trust works for LPs GPS. And then once the funds are there, it can be put into other syndication deals, passively or actively stocks, bonds, mutual funds, hard money lending, ground up development, business ventures. Mm-Hmm <affirmative> okay. So it’s, it’s very flexible. Okay. And how it works is each individual can have their own DST. Right. So we just, we’re doing a deal actually in Idaho and it’s two brothers and they’re buying land and it’s like, it’s lumber and they’re selling off pieces of it. And they’re both partners in this LLC. Well, we set up two DSTs, one for him and one for him, you know, two brothers. Okay. And their portions go to each of their prospective. Dsts not commingled it’s completely separate. Wow. So, so it, we don’t have to have the whole whole entity moving.
Brett:
We also just did one for an apartment syndicator for a 20 million apartment complex in Las Vegas. He also had a partner, it was two GPS and the rest were LPs. And when they sold that 20 million, each of them had their own DST. They liked it so much that they sold another 16 million apartment complex in Phoenix and the same thing they used, they used their portion move into their DSTs and then once the funds are there, they bought a deal. I think it’s in Texas. Now they use a big portion of that to fund that next deal, all tax deferred, by the way. So the answer is yes, yes. And yes, call us, talk to us, get with us you know, sign our NDAs. And and we can, we can accomplish that for you. <Affirmative>
Charles:
You mentioned earlier about Biden’s tax and all that kind of stuff. I don’t really wanna get down that rabbit hole too much, but is the DSTs as you hear, and as you understand, are they on the table for being edited, let’s say or changed from the plan that he’s been talking about?
Brett:
Yeah. So everything’s in proposal state right now. Yeah. And it’s in important to understand that sometimes there’s really extreme parts of this negotiation. They go to the extreme to try to meet somewhere in the middle. However they have the house in the Senate and it’s and the presidency, right. The Democrats do. So it’s something to take very seriously. And we are hoping and praying that it doesn’t go to the, to the extreme that that’s proposing. Okay. so I don’t know, I’m not a politician. I don’t know how likelihood these things are gonna go or not gonna go. However we do think that 10 31 is in danger more than it’s ever been. Right. Cause that’s kind of been, they’ve been trying to take away the 10 31 for years. Yeah. Right. So that one is, seems like it, it, it could be more likely to I ever before the stepped up basis.
Brett:
Like, I don’t think I’ve ever heard that before. That’s kind of, you that’s really kind of out there if they’re gonna take that away. So I would think if I had to peg it, that’s less likely to go. The other thing to consider though is beyond all of this is the capital gain tax rate from 20 to 40. Yeah. That’s serious. Right. So yeah. Will it go all the way to 40? I don’t know. Maybe not. Maybe. So maybe it only goes, I heard 28. I’ve heard, I heard a lot of stuff, right? Yeah. I heard a lot of stuff. So that being said, I want you to consider something that we do know that’s happening and it has to do with the estate tax. I okay. So right now, any high net worth individual listening to this one of your challenges, if you’re worth more than 22 million married or 12 million single is what’s called the estate death tax.
Brett:
Okay. It’s separate than capital gains tax has nothing to do with the stepped-up basis. Okay. It has nothing to do with a capital gains tax deferral has everything with what your is valued at, at the, a time of your passing and anything above and beyond that that’s inside of your taxable. Estate’s gonna be hit with a 40% death tax. So let’s just say Charles you’re worth 52 million. Let’s say you’re married. Let’s say all 52 millions inside your taxable estate. Let’s say you die tomorrow. Right. and, and your wife, you married dies tomorrow. Now. You’re like, man, your kids are like, yeah, we got the stepped up basis. Like we’re good. No, no, no, no. Hold on that 22 million is exempt, but that other 30 million is subject to 40%. So that’s a 12 million check that they have to write within six months of that passing.
Brett:
So those exemptions are set to cut in half instead of 22 million. It’s gonna drop to 12 single. Okay. Which means what your check went from 12 million to about 24 million. Wow. Okay. Approximately now Biden is proposing potentially to move that even lower to like 7 million married and three and a half million single. And then again, another crazy one was like only about a million or 2 million married. So meaning yeah. If it’s inside your taxable state and you’re listening to this right now, that’s the big elephant in the room, right? It’s no longer about cash Charles. It’s about tax flow cuz as taxes go higher. And as this wealth redistribution that that the, a lot of the politicians want to do happens or does happen, it’s about tax flow and as much, or are more important than cash flow. Okay. Because where and how this stuff gets taxed or, or redistributed or taken out can decimate your net worth for your family.
Brett:
So here’s the solution we love it’s of course the deferred sales trust. Okay. It works for any size deal. Okay. And it’s it can move the funds outside the taxable state. Okay. So go to capital gain tax lu.com. We can walk you through that. And it’s, it’s in one deal, one transaction, you have to sell something, right. If just moving it to an LLC, but you don’t have to give it all the way to charity. Right. Which is the other part you don’t have to buy, you don’t have to buy life insurance to offset this stuff. Right. You don’t have to do any family limited partnerships and run outta gifting. It is a way that we could do it in one day, win one transaction. So I’ll, I’ll just leave it with that, Charles. So that makes sense. Yeah.
Charles:
No, it makes perfect sense. As we’re wrapping up here what are common mistakes you see real estate investors make in regards to taxes,
Brett:
Not planning and not preparing, they’re mixing the sale of the asset with the exit plan and they’re, they’re over they’re they’re getting, getting a mix together all in one decision making. Right. And therefore it’s like having multiple glasses on for the first time. You know, as you’re hearing this for the first time, it’s like, it’s kind of foggy, right? Cause you’re like, whoa, he’s talking fast. He’s saying a lot of things. He sound really interesting, but I gotta hear it again. I gotta hear it again. I gotta slow down. Eventually. It’s like, you’re taking off of these glasses and or maybe you’re even putting on these glasses, you can see it. Clearly the challenge becomes when, so and sells a highly appreciated asset that maybe they haven’t sold in a long time or it’s their first time they have a, they have something over their vision.
Brett:
That’s emotionally, it’s like, I’m so tied to this deal. Like it’s it’s happening. Right. It’s finally gonna happen. And then if you add on top of that, this tax referral strategy with these new people, you’ve never met. And you’re like, whoa, they’re saying these really big things. It can become kind of emotionally overwhelming. Right. So what we like to say is why don’t you separate the two, right? Pre plan, your exit plan, your tax deferral strategy. Look at the deferred sales trust. Now, before you’re even in negotiations before you’re even listing. Right. Get that. Okay. I can do a 10 31. I can do a Delaware. I can do a CRT. I can do a deferred sales trust. I can do an opportunity zone. Like check that thing off, then go sell the asset mm-hmm <affirmative> and then execute on what, which one works for you. So that was, that’s the biggest mistake. I see people making. They’re not pre-planning and again, we don’t charge a dime. There’s no charge just your time and your energy. That’s important too, but we’re gonna take all the pressure off you and we’re gonna help you walk through those scenarios and I’m telling you it can help, you know, really relieve a lot of that stress. Oh,
Charles:
Awesome. And then what do you think are the main factors that have contributed to your success, Brett?
Brett:
Yeah. So first of all been blessed by a lot of people and who, who coached, trained and, and built into me from youth pastors to, you know, coaches football, basketball, my parents you know, my brother, a lot of good mentors. And God’s blessed me with a lot of great people in my life and, and has helped me to to, to grow. And, but the second part of that was learning to work harder on myself than I do on my job. Right. So if you work hard on your job, you’ll make a living, you work hard on yourself and make a fortune. And this is a quote by Jim Roan and it’s about personal development and leadership beyond just, you know, getting that degree or closing that first deal or, or, you know, me that first million dollars or, you know, that those things are all ex you know temporary, external things, right.
Brett:
But the internal and the the things that are eternal, right? The things that you work on the inside, right? Your, your faith, your leadership, your perseverance, your character, right? You work harder on yourself, developing those things. Those are the things that make a difference for your life and for your family and for the Foer around you, because you become more, I believe of who we were created to be. I think we’ve all been given certain gifts and when we can maximize the as gifts, right. And, and build into that potential, that we’ve all been given certain gifts, certain strengths, and we can make an impact for others. That’s what, where fulfillment comes in, right. Whether it be for your family, for, for your, for your, your colleagues, for your community. Right. And so yeah, that, that would be my biggest I think way that I’ve been able to, to grow and make a different. Awesome.
Charles:
So how can our listeners learn more about you and capital gains tax solutions?
Brett:
Yeah. Thanks. You can go to capital gains tax solutions.com. You can Tricia on YouTube or on iTunes. We have a podcast. We had Charles on the show as well. You can search for his episode. And then if you’re a business professional and you’re looking to use the deferred sales trust as a way to help yourself and your car, you can go to expert tax secrets.com, that’s expert tax secrets.com. And the last way is we’re having a book that’s gonna be releasing in about three months or so. So look for that book. It’s called capital gains tax solutions, unlocking a transformational wealth plan for yourself or your clients. And we have folks like Kevin Harrington from shark tank. It’ll be one of the chapters on there. And a number of others that are very, very successful, smart people smarter than me who are talking about all things that we just talked about today.
Charles:
Awesome. Brett, well, thank you so much for educating myself and also our listeners on all these fantastic ways of deferring taxes and look forward to connecting with you in the near future. Thank you so much for coming on. Thanks, Charles.
Brett:
My pleasure.
Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30-minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.
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About Brett Swarts
Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers on the west coast. His audiences are challenged to create and develop a tax-deferred transformational exit wealth plan using The Deferred Sales Trust™ (“DST”) so they can create and preserve more wealth. Brett is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast. Each year, he equips hundreds of high-net-worth business professionals with the DST tool to help their high-net-worth clients solve capital gains tax deferral limitations.
Mr. Swarts is passionate about educating high net worth individuals in capital gains tax deferral with a Deferred Sales Trust, how to divest from a business, cryptocurrency, highly appreciated stock, primary residence or investment real estate to gain freedom from feeling hostage to capital gains tax or a 1031 exchange, then invest back into a new business venture or investment real estate at any time [all capital gains tax deferred] which he calls optimal timing.
His experience includes numerous Deferred Sales Trusts, Delaware Statutory Trusts, 1031 exchanges and $190,000,000 in closed commercial real estate brokerage and Deferred Sales Trust transactions. He’s an active commercial real estate broker and investor with brokerage experience and ownership in multifamily, senior housing, retail, medical office, and mixed-use properties. He is a licensed California Real Estate Broker who has held series 22 and 63 licenses.
Brett was formerly an associate at one of the largest CRE Brokerage firms in the country (Marcus & Millichap), is now a Sacramento Multifamily Broker with eXp Realty. Brett lives in Roseville California, with his wife, Melanie and their 5 children.
