Gain Freedom From Capital Gains Tax Using a Deferred Sales Trust
In today’s show, Pancham interviews Deferred Sales Trust Expert, Brett Swarts. Brett is the founder of Capital Gains Tax Solutions.
Real estate investors have to pay out an extremely high capital gains tax when they sell a property. In this show, Brett explains how a Deferred Sales Trust or a DST can help you defer your taxes, thus allowing you the opportunity to create and preserve more wealth.
We reveal some of the biggest drawbacks of a 1031 exchange, and reveal why are you are better off using a DST. Some of the topics discussed in today’s show include when and how to create a DST, cost of creating and managing a DST, and the kind of returns that you can generate using a DST.
Tune in for some great nuggets!
- 02:50 – Brett shares his background information
- 07:39 – Are the rules of a 1031 exchange applicable to a business as well?
- 08:08 – How Section 121 Exclusion can help you save your tax dollars if you have capital gains from a high-end primary home
- 09:44 – Different restrictions in a 1031 exchange
- 11:30 – Handling depreciation in a 1031 exchange and saving your tax dollars using a DST
- 13:03 – Do you need to keep the proceeds of the sale with the 1031 intermediary?
- 14:14 – How to use a CRT (Charitable Remainder Trust) for saving your tax dollars
- 15:49 – How does a Delaware Statutory trust work?
- 18:34 – History of IRC 453
- 19:30 – How to save capital gains by selling your real estate property to a DST and then to the buyers
- 21:55 – Who decides the notes or the terms for the DST?
- 23:50 – Can you use the funds parked in your DST, and make fresh investments?
- 26:28– Who is managing the funds parked in a DST? On a broad level, what is the investment strategy?
- 29:24 – How hedging helps protect asset value in case of black swam events
- 34:09 – When is the right time to create a DST?
- 36:41 – What is the cost of creating and managing a DST?
- 37:56 – What sort of returns can you expect from a DST?
- 39:03 – Can ultra-high networth individuals get rid of estate tax by creating a DST?
- 42:34 – Taking the Leap Round
- 42:34 – When was the first time Brett invested outside of Wall Street?
- 43:17 – What fears did Brett have to overcome when he first invested outside of Wall Street?
- 44:17 – Can you share one investment that did not go as expected?
- 45:10 – What is one piece of advice you would give to someone who is investing in the Main Street?
- 47:02 – Brett shares his contact information
- Different restrictions of a 1031 exchange that you need to be aware of
- How and when to create a DST (Deferred Sales Trust)
- Savings and returns that you can generate by creating a DST
Welcome to the Gold Collar investor podcast with your host Pancham Gupta. This podcast is dedicated to helping the high paid professionals to break out of the wall street investments and create multiple income streams.
Here’s your host Pancham Gupta.
Hi, this is Russell Gray, co-host of The Real Estate guys radio show and you are listening to the gold collar investor podcast.
Pancham: Welcome to The Gold Collar Investor podcast. I appreciate you being here. We have discussed in show number four that taxes are your biggest expense in most cases, it is not your mortgage payment or your rent as your biggest expense. It is the taxes. tax planning is important. However implementation of that plan can be really challenging depending on your personal situation. I still remember back in 2011 or 2012 I have once had a 45-minute strategy session with one of these top CPA firms in the country. After they asked me a few questions, they found out that both me and my wife have w two jobs. The CPA on the other side of the telephone goes. In that case, sorry, we cannot help you. He mentioned that the IRS does not give many incentives for people where both husband and wife are working w two jobs. I got really discouraged from that call, but not for very long. What he was really saying is that their phone specializes in working with people who own businesses, or real estate professionals. So if both you and your spouse work a W-2 job, there are ways by which you can reduce your tax bill, but there are limited ways. If you are interested in learning more about some of those ways. You can tune in to show number four where we discuss this topic. Pick with CPA Brandon Hall by going to thegoldcollarinvestor.com/show4. For today, we are going to talk about one such strategy, which is called deferred sales trust, or DST. I recently found out about the strategy myself and I invited Brett to learn more about it and see how it works. Brett, welcome to the show. Thanks for having me. Happy to have you on and enlighten my listeners about the different strategies that they can use to save on taxes. So are you ready to fire up my listeners break out of Wall Street investments?
Brett: Absolutely. I can’t wait.
Pancham: Great. Great. So before we get started, can you give your background to my listeners?
Brett: Yes, absolutely. So I started commercial real estate back in 2006 at a company called Marcus and Millichap and we’re really focused on helping people create and preserve more wealth through real estate investing in particular, my focus is in Northern California in multifamily properties. There’s about that time that the marketplace took a big shift. And I was not unlike what we’re facing right now with the corona crisis and people hit a wall. And that wall was overpaying for property being too much debt and not being able to make sense of deals, right. And so what essentially happened was a lot of folks are doing 1031 exchanges, and I was helping them do that before the crash, but then they hit the wall, and then the market shifted, and some of them lost everything. And it sent me out on a journey to find a way to help my friends, family and clients never have to face capital gains tax decisions based upon having to be forced into a 1031 exchange. I was looking for an alternative. And just about that time our manager brought in a gentleman to speak on a strategy that we’re going to talk about called a deferred sales trust in my life has never been the same at the time. I was a brand-new agent and I had a family home, and I was the only income. And for those who don’t know, in commercial real estate, you either sink or swim, so you either make money or you don’t. It’s 100% commission, no salary, no benefits. And so it was very, very stressful. I was trying to make it work. And so when the deferred sales trust came along, it gave me that edge to add value to clients and really kind of propel my business. But the key thing is add value to clients and given them a solution, so it solved their problem and it also had a propelling my business. And so now my journey is one to help other people do the same.
Pancham: Great, that’s awesome. So, you know, you mentioned few things in your background like 1031 exchange and, you know, saving them on capital gains tax and all that. Let’s start from the very basics and talk about these different tax incentives that IRS code has, which helps you know, people defer the taxes right, so can you talk about different strategies that people can…like most common ones briefly.
Brett: Absolutely. So we like to say that most business owners if you if you own a franchise or own a business, or if you own commercial real estate or even high end primary home, or even we do in Bitcoin cases in different cases with artwork and collectibles, if you own anything that’s highly appreciated, right, you struggle with capital gains tax somewhere between 30 and 50% of your gain, when you go to sell. And so we use a deferred sales trust to give you tax deferral, liquidity, diversification and freedom from the 1031 exchange so you can create and preserve more wealth. So capital gains tax as a whole is simply whatever you’ve made, whatever you bought something for, and whatever you’re selling it for, you’re gonna have what’s called a gain, and you’re going to be taxed based on the state you live in and based upon what kind of asset it is, and so it’s more it’s usually between 30 and 50%. I’m in California, and so it’s a little bit higher. If you’re in New York, it’s a little bit it’s a bit higher here, but some of the states in between are lower, but the other thing to consider is what’s called depreciation recapture. So if you own a business or a piece of real estate you’re depreciating along the way. And the government gives you that tax incentive. But when you sell that gets recaptured unless you do some kind of tax deferral. So the first most basic tax deferral strategy most people know about is what’s called a 1031 exchange where you can own investment, real estate, and then sell it. And then they do it what’s called a 1031 into another piece of property now has to be like kind and has to be within 180 days, and you also have a 45 identification period. So there’s certain rules you need to follow in order to achieve tax deferral. And by the way, the government gives us these incentives. These we call illegal tax loopholes to incentivize us to do transactions and to keep the money flowing. As the money flows, more deals get done, and actually they get higher property taxes. You know, people get commissions, they get taxes off, and companies want to expand and when they expand, they add more employees. And when they add more employees, there’s more revenue. So they create these legal tax loopholes to incentivize people to buy and sell real estate to own and sell businesses to expand. And actually, it’s a study of macroeconomics produced is more and more tax income. So that’s why they do that. But there’s certain rules you need to follow. And that’s where that’s where you want to make sure you have an expert who’s guiding you through this process
Pancham: So, 1031, as the common name suggests, like a lot of people know about this, but it’s actually section 1031 in the IRS tax code, and it happens to be named with that, that it’s 1031 like exchange. So that’s one right that he explained where you actually buy something and you have to take the proceeds when you sell that particular property or business, not business, actually, does it apply to business to 1031?
Brett: Yeah, so technically, I think you potentially can do a business 1031 but I’ve never seen somebody do it here the key components here you have to be… So if it’s investment, real estate, need to sell that investment, real estate and buy invest in real estate, and that’s a really 99% of the 1031 exchanges. I’ve yet to meet someone who’s done a business exchange because most people are selling a business aren’t gonna find a light coin business and it’s going to. It’d be very difficult to transact. So most folks just pay the taxes for the deferred sales trust comes in really well, because we work for not only a business, but also for investment, real estate. The other is a high-end primary home, we have what’s called a 121 exclusion. We live there to the last five years, you receive $250,000, if you’re single and $500,000, if you’re married, and so that means let’s say you bought a house for 500,000. And you sold it for a million and you’re married. Well, you have that 500,000 exclusion, therefore, you’re your tax free, you can walk away no taxes. But if you were to sell for 2 million right now you have a million-dollar gain, and let’s use a 30% tax and now you have a $300,000 tax. So we just did a deal in Cupertino, California for that a gal who actually sold her house same thing. She lived about three miles from Apple, and she was she her house to just rapidly appreciate it over all the years. She’s in this big empty house. her kids are gone, and it has dead on it. It’s and she sold it for 3.1 million and she was able to take that asset due to the deferred sales trust and then start living off at income stream where she can invest at different places. But essentially the key is what Is your asset and then what qualifies for that tax deferral? And if your gain is big enough, you’re you might want to use a tax deferral. And that’s where we help you clarify that and figure that out. Hopefully that answers the question.
Pancham: Yeah, it does. It does. I want to go into deferred sales trust in a bit, but I just want to go back to 1031. So 1031 seems to be very restricted. In terms of the example that you gave of a guy who sold the house for 3.1 million, that was her own house. So you cannot do 1031 on your own house. Right. It has to be correct as some kind of investment property. Right. So and there are a lot of rules around it. Do you want to talk about some of the restrictions or the rules around 1031?
Brett: Absolutely. And so my background was helping people and I, by the way, I still have people do 1031 exchanges. I’m a commercial real estate broker. I’ve sold over $85 million in commercial real estate, so I’ve helped people do that over the years. But so the key the first most important thing, or really the, I guess the biggest detriment because most people notice in 31 But the biggest detriment of a 1031 is you have to buy within 180 days. And we call that the sell high buy higher 180 days later, especially in a rapidly appreciating marketplace. So we found that can be a challenge. Our parents taught us to sell high and buy low, not sell high and by hire 180 days later and too often, that’s what happens. And that’s that can be a challenge. Now if you can find a deal, by all means buy it. And if it makes sense on the cash flow, and it makes sense on the forced appreciation value, add opportunity, hey, buy it, but it’s really about timing. We think timing is the best thing to have. And so the ideal way to do it is what we call optimal timing. And that’s the intention meaning by when and if you want to win the deal makes sense. Not because you’re forced into this pressure situation and you feel trapped to overpay. And that’s what happened in the Oh 50607 run up people were overpaying for property and felt trapped and end up taking on too much debt which leads me to the second challenge with the 1031 wishes this had to be equal or greater value which often means equal or greater debt. Okay? And debt is not your friend in a highly appreciate it marketplace or when the market is rapidly shifting like right now it is we’re going through a Corona crisis and we’re seeing people who need liquidity who are going to need to get out of debt and maybe over leveraged and they’re going to get hurt, unfortunately, if they take on too much debt, and that’s what we say do not do a 1031 exchange and overpay for a property and take on too much debt, because now you’re putting yourself with a lot of risk. And that’s what happened in it and people lost everything. And then the third thing has to do with the ability to get a new depreciation schedule. So one of the biggest reasons to own an investment real estate is for the depreciation that offsets the income. So let’s say you had $100,000 of income coming in, but you’re able to write off $20,000 of depreciation. So on paper, you have 80,000, you’re getting taxed on that she brought in $100,000. So that’s really good. However, if you own property long enough, it’s 27 and a half years for multifamily or 39 years for commercial you’ll depreciate to zero, okay? And also when you do 1031 exchange As your depreciation schedule travels, so let’s say you were selling a $5 million business, for example, and it’s fully depreciated or $5 million piece of property is probably a better example, if you do a 1031. And just by an equal or greater value of 5 million, you’re going to have zero depreciation to offset but if you use the deferred sales trust says the intention is to get a new depreciation schedule. The deferred sales trust solves that and then you can buy that same property through your trust all tax deferred, and then now get a brand-new depreciation schedule. So the key is to create a wealth plan or tax deferred wealth plan around you and help you save that 30 to 50%. And then engineer it so that it helps you pay less in tax and defer the capital gains tax.
Pancham: But it’s so you mentioned three kind of things like you have to buy something within 180 days and then your depreciation schedule doesn’t travel and also that you have to sell high and buy high at the same time and get more debt. That kind of is the point again. So in terms of the rules, like there is another rule, right? Like within 45 days you have to identify the property after you go under contract or after you sell. And then also you have to keep that money that you get all the proceeds from the sale with the 1031 intermediary. You know, like you cannot get that money to your own account. Is that right?
Brett: Correct. So, the key thing here is what’s called actual or constructive receipt, okay? And so actual she’s what she think about is like receiving that $5 million property, you’re receiving all 5 million into your bank account. So when you do that, the government says you’re taxed. So to perfect a 1031 exchange needed your direct escrow to send all that 5 million to the what’s called a Qualified Intermediary. Well there hold the funds and that maintains non actual receipt or non-constructive receipt in your hand and then from there and move that 5 million to that new property to perfect the exchange. Same concept is true for the deferred sales trust. We’re just moving the 5 million to the trust, right instead of directly into your hands. We’re maintaining nonsense. constructive receipt.
Pancham: I see. Okay. Yeah, I want to get into DST, which is Deferred Sales Trust. So other than DST and 1031. Are there any other strategies that are out there in the tax code which helps with the deferral?
Brett: Yeah. So charitable remainder trust are one of them is that notice the CRT, right? The key there is you’re basically giving it all away to charity once you pass away. So let’s say it’s a $5 million property, you do a CRT, you’ll get to live off an income stream all tax deferred for your lifetime. But when you pass, all of that goes to charity. So if you’re 100%, charitable inclined, I think it’s a great strategy. Most of our clients are not 100% charitable, there might be 10, 20, 30, 40, 50. They want flexibility. So we like to say we’re the deferred sales trust is like to see our T except no C is required. It can certainly, you know, be offered if you want to do that. I think there’s two distinct advantages of the DST versus the CRC. The first one is that you can control how we’re the funds are sent to charity. So for example, if you if you sign up with a charity Today that you’re really passionate about, but five or 10 years from now the leadership changes and their values change. And they’re no longer doing what you signed up for what you do at the CRT, it’s over. No, you can’t change anything. With the DST, you can change, right? So you can be having those payments, go to the charity. And then even if you pass the DST is a part of your living trust, and it could be going to the charity, but your trustee of your living trust could say, hey, that doesn’t fit my parents values, I can now change that. So that we like that flexibility within that gives power to the people, right versus just giving it up. You know, kind of like if you give your money to the government’s gone forever. If you give it to the charity, it’s gone forever. But if it’s a great charity, and you’re 100% charitable, great, the DST has that advantage over that. So the next one would be we are talking about 1031 would be a Delaware statutory trust. So by the way not to be confused with the deferred sales trust, which we’re talking about. It is also a DST.
Pancham: Yeah, and I’ve done Delaware’s for clients to a Delaware statutory trust. It’s just another form of a 1031 exchange where essentially you can sell your property and investment property and you can move it into a big corporate Who owns a couple properties in a portfolio or it can be 1, 2, 3, 4, 5…doesn’t really matter the number, but they’ve already closed on the property. They’ve packaged these deals, and you could sell and your interest goes into that deal. And it’s a form of a 1031 exchange via a Delaware statutory trust, who owns the DS Delaware statutory trust, do I have to as the owner of the property, who’s selling that property of 5 million has to create that trust? And then it will go into that? Or I’m talking to someone else who has the trust?
Brett: Yeah, so someone else has it. So typically, it’s a bigger owner, like we work with one of the largest owners in America for real estate and they own and buy real estate for 50 years, and they close on the property properties already closed, and you’re going to do a small 1031 V A Delaware into that property, can you become an interest into that deal. So that’s what’s good. They’re already in place. Most of the time, they’re already packaged ready to go. They are non-recourse debt, meaning the debt is in the corporation’s name, they work for the 1031 equal or greater value, as long as the ratios are good there. And a lot of times we’ll also be able to get dead on those people. properties so they can replace your debt requirements. Some of the downsides are typically very high and fees, zero control, meaning what as soon as the funds go in there, they’re basically locked up for seven to 10 years, meaning you have no liquidity, and I cannot use those funds. Now you can live off the interest, right. And those interest rates typically, it could be somewhere around 5% is where you see a lot of these are at so you’re getting 5% of your money. And you can of course, you’re going to pay tax on that as you receive that. But all of your proceeds have gone into this deal if you want to be 100% tax deferred. And again, you have no liquidity, you have no diversification, you’re just with them. But that can be a good a good solution. I’ve had clients do that. The key here though, is buying right back to optimal timing. We think it’s best to buy when deals make sense. We think a lot of these properties are overvalued because we’re at a high part of the marketplace. Now that might shift over the next three to six months, which could happen with the way things are going and that’s when you want to buy into property when the marketplace is low right when the market places it has a lower price point. So don’t buy a Del just to defer the tax. By the Delaware because of the intrinsic value of the real estate because of the return, which leads us into our new on the deferred sales trust, and I say new in that because your clients or your friends and family or your listeners haven’t heard about it, but we’ve been around for 24 years, thousands of closes. We’ve done deals with Marcus and Millichap with callers with Keller Williams with different kinds companies. We have thousands of business professionals across the US national law firms, CPAs financial advisors, we have a big big network that we work with across the US, however, it’s a very specialized installment sale.
Pancham: So DST, when was it put in place in the IRS code? So the IRS code is IRC 453?
Brett: Great question. So if anyone comes to you with a new tax deferral strategy, you want to ask a couple questions. And the first one is what’s the IRS tax code? It’s IRC. 453, which is known as an installment sale goes back to the 1920s is one of the oldest or oldest tax law for tax deferral on the books Okay, versus the 1031. IRC 1031 goes back to 1954. Okay, and then they had a court case and then it really didn’t become popular until like the end. 80s and 90s, and really the 2000s. And still people are still learning about the 1031. So if we go back longer than them, but we’re both tried and true tax law, the key is how you apply the law. And that’s the nuance that we use. So we’re proprietary and how we apply section, IRC 453. And essentially, what we do is we allow the seller, let’s say, the $5 million property to sell to the trust right before that buyer was about to pay the 5 million.
Pancham: So let’s break it down. I want to keep it very basic. So we let’s say I have a $5 million property and I bought it for 2 million and now it’s a $3 million capital gains, you know, on that, so I want to sell it. So you’re saying that I would go ahead and create a DST, which is deferred sales trust, and then DST will buy $5 million property from me. And then let’s say you are the buyer, right, and you would go ahead and buy that property from the DST. Is that right?
Brett: Correct. Okay, exactly right. And here’s the key here since the trust gave you by the way, the way it does it, the trust gives you a zero-down payment, and you carry back all $5 million. As a note, you became the note holder, right? You did a seller carry back. Everyone knows this, your CPA certainly knows that you just carried back 100% of financing. So since you receive a zero down payment, none of the tax is triggered today, it’s in a deferral state, you still owe it. It’s just in deferral state until you receive it.
Pancham: So there were two transactions here though, right? I sold it to DST and DST sold it to you. You got it right as a buyer. Yeah. So the money from you game to DST?
Brett: So this happens right away. Yeah, it’s all in one escrow. Yeah, it happens. It happens and if by the way if for some reason I as the buyer back out, then the deal doesn’t go and then you don’t owe anything right so we only charge if and when you do the deal, but let’s keep us keep this keep on this concept here because then people are going want to know what happens to the trust. Well, the trust bought it for 5 million and it sold it for 5 million. And so since it bought and sold for the same price, it has a zero gain. Mm. It says it has a zero gain, it was zero in taxes. So the smoke clears and the buyer takes the business or takes the real estate takes the asset and he’s gone. And you are left with a note. It’s oh two, 5 million minus some of the fees that you paid to the tax attorney, you paid our company capital gains tax solutions, and now you receive a payment based upon how these investments performed. So here’s the cool part. Now, funds are held at some of the largest banks in the world, TD Ameritrade. And it was just bought Charles Schwab. So the now the largest, that’s where the funds are held, and now you receive a payment. Okay, who decides the payment?
Pancham: So let’s send out this $5 million. And that said there’s some fee let’s say there’s less awkward zero fees for now. So 5 million sitting in DST and now I me as a settler has nothing right. So who decides the note or the terms of this?
Brett: Great question. So before the deal closes, you fill out a risk tolerance questionnaire. It’s like About 12 questions and you’re basically going to stay you know what your need for the income is what’s your experiences with different investment stocks, bonds, mutual funds, real estate, you’re going to fill that out based upon that you’ll get a score based upon that score, you’ll get a rate of return that’s assigned to it. Most of our deals, they’re assigned at 8% target rate of return. And by the way, over the 24-year track record, all of our financial advisors have been able to achieve that, that’s net of the financial advising fees and net of the trustee fees. So most of them are earning nine or 10 over any 10 year period, and you’re netting about 8% on your money, okay. In the meantime, the client, you may say I only need 4% or I need 5% or I want 10% whatever you need to live off of is up to you. The key is most of our clients want to keep that 5 million of principle in place and just live off the interest and as long as you just live off the interest you’re paying ordinary income tax unless interest payments and the principle is in a tax deferral state. Most of our clients like to pay them Tax the second data never. And they’re going to keep that trust going. And this is the unique part versus a traditional installment sale is that most traditional installment sales, there’s typically short in nature, and they’re typically paid back within three to five years, which only gives you a couple years of tax deferral, whereas with the deferred sales trust, you can go for as long as you want. So our notes are typically structured at 10 year increments, and every 10 years, you can renew for 10 years or new for 10 years. And then you can pass it on to your kids, and they can step into your shoes and they can keep going as well. And in the meantime, you can live off the interest. And then let’s say a piece of real estate comes up, okay. And that piece of real estate used to be worth, let’s say, used to be worth 7 million, and you would have bought it in the 1031. Well, now it’s worth you know, six years five and a half because the market shifted, and that’s a year down the road or tomorrow or day 181 or five years from now doesn’t really matter. The neat part is with the deferred sales trust about the optimal timing, you can use up to 80% of the fun to go what we call tentative investments, such as hard money lending, such as developing real estate, so fix and flips such as investment, real estate, or starting a new business, you know, franchise, right. As long as it’s business purpose and investment purpose, you can use up to 80% to into a brand-new LLC, which you’re the managing member of, to go buy that piece of, let’s just use it the real estate, for example. So now you bought it at a discount, and now you’re living off of the interest that that’s earning, we set up an 80:20 structure there, where 80% to you and 20% of the trust, trust gets a preferred return of eight, but the trust puts up all of the down payment. And this is the neat part. This is how we get a brand new depreciation schedule, because you just bought a brand new property with a brand new LLC, you happen to be partnering with your trust, okay, and this is where we we have our tax attorneys do all of the work here, and the attorneys line everything up. But essentially what you get as the client, you get the brand-new depreciation schedule, you bought an optimal timing, right? You were diversified. You were added debt if you want it to be, which is the other part here. We don’t have to replace any equal or greater value. We’re not doing 1031 we’re just buying a brand new property. And so all of that empowers you to create and preserve more wealth and do the best part time the marketplace, which we think is the number one way to actually creating and preserving more wealth.
Great. I have so many questions there. Let’s break it down a little bit so true. at a very high level, I think I would just want to repeat for my listeners, I mean, as a seller, I sold it to DST, DST sold it to you as a buyer, you pay 5 million to DST, DST pays 2 million to my bank, which I owed the money, so the 3 million is leftover in DSD. And at that point, DST between DST and mean there is this contract, based on my risk tolerance, they will generate x percentage which is typically eight and then that principle is still sitting there and I can use it however way I want to use it 80% of that amount and use it to pay down payment on certain different kinds of assets. Whenever I want, so that’s kind of the summary, right? This is summary.
Brett: Yeah, we’re real quick. You’re going to approve the allocation. So the financial advisor is going to come to you and say, Hey, here’s what we suggest you invest in yes or no. And you say yes or no, or let’s adjust it before the deal even closes. We already have a map mapped out. Okay, then it closes. So yeah, that’s Yeah.
Pancham: My question is like, who is investing? Like, how is that generating a percent? For example?
Brett: Great question. Yeah. So we have some of the largest and best financial advisors and most successful advisor, finest advisors in the world, and they are in our in house team, and they invest the funds on behalf of the trust to wait at the projected rate of return, right? And so that is all set up beforehand. And it’s just like if you sold and just pay the tax and then walked in and said, Hey, can you invest my funds, they’ll do the same type of analysis and same type of allocation this way. You just have an extra let’s say on this deal, an extra million dollars to invest, right, which is nice. So that’s approved for this approved by you. You’re kind of like the chairman of the bank. And basically the trust comes to you and says, Okay, Mr. Chairman, here is the allocation suggestion based upon your risk tolerance. What do you think? And he said, Yes, no, maybe okay. And eventually you figure out what you like, now it’s invested. Okay. And then the next day you find a real estate deal or two months from now. Now you say, okay, sell out of those, those positions, and let’s move the funds over. So for example, we just did a deal out of Walnut Creek, California, and they actually happened to close three weeks about four weeks ago, right before everything crashed, they sold really high and now the marketplace crashed. The neat part was they were sitting on the sidelines, they weren’t investing in anything, they were just kind of waiting and they caught the window and as soon as everything started falling, we just kept all the money in the money market account. And now they’re gonna invest very low. So they’re able to sell real estate high and we said this is like the perfect storm for you. It’s perfect and you can be able to buy really low and then ride that wave up and then along the way they go well, we might want to jump into real estate when the market the real estate market falls. So I want to let your you and your listeners know that it’s very flexible and we will What you want, whatever you want, we’re going to customize. Now there’s certain guardrails we have to follow again has to be business purpose, it has to be investment, you know, purpose, you can’t put it into a primary home, you can’t use the principal balance and put it into like a personal property because that’s taxable. But as long as we follow the business purpose and the investment purpose, then we remain tax deferred. And then you can dive into things like cost segregation, you can buy that new piece of property, and you can do cost segregation on that with the brand-new depreciation schedule. Now all of a sudden, all of that income that’s coming off the trust and the property can be washed away through the costs, at least for the first couple of years, depending on the deal, of course, but we can start to combine multiple tax deferral and tax elimination strategies to help you create and preserve more wealth.
Pancham: Got it. So if I don’t decide to put my money like your client and put it in just money market funds, in that case, I won’t be getting anything right if it is just sitting over there or whatever it is. 2% but there is an argument to be made here that, you know what you were saying buying low and selling high. If that particular client who sold that property and kept that money in money market fund, he wouldn’t have done that he put money in some liquid securities, including stocks, bonds, mutual funds, whatever. And then the market crashes.
Brett: So what was paused there, the CEO, the clients who’ve done the deferred sales trust, work with the money manager we’ve worked with are already hedged and protected. I see. Okay, so, we’ve already prepared for this. Okay, so we have for example, in 2008, the market was down 37 to 40%. The fund managers we work with are down four and a half percent. Okay. So don’t assume that all financial advisors and all strategies are created equal. They’re not right and working with trusted advisors who have been through this. So when this market is fallen by 34% here in the last couple of weeks, our deals were only down about eight to 10% We’re actually buying, we bought short positions. And we kind of anticipated potentially something like this happening. And so when the market comes back, if it did, like, if it does, like, oh eight, we were up 25% on that next year. So now that being said, past performance is never a prediction or guarantee of future results. Okay. But that is based upon your risk tolerance. So what we would say is, where would you put the money anyways, if you would have paid the million in tax, you know, you have this allocation in this protected amount and these fixed, you know, the fixed news could be insurance could be, you know, treasury bonds, whatever, we always say, look, let’s do that same thing that you would have done, and let’s make sure that it fits your risk tolerance, but now you have an extra million dollars, so maybe you’d have less risk on the table. So it’s up to you how and where you want to invest. Now we’ll present the allocation and you decide, but the key is you have that extra million dollars in your scenario that you didn’t have to pay tax on, which is the key to all of this, as long as that tax liability is big enough, it makes a whole lot of sense.
Pancham: Got it. Alright, sounds good. So I want to get into Do the costs. So before we get there, like how long before I need to start preparing for DST when I’m like trying to sell a property.
Brett: Let’s just remind everyone what this works for. And then let’s talk about you know, kind of the preparation for it. So it works for gas stations. It works for veterinarians. It works for optometrists, rooks for dentists, it works for anyone selling high end primary home and investment, real estate. We’re doing Bitcoin deals, we’re doing a horse deal out of Kentucky, it works for trucking companies. We’ve done car dealerships, so you name it, we’ve done it, okay, thousands of closes not one single issue. So works for everybody who’s probably listening to this as long as you have enough appreciation. So let’s talk about that. As long as your tax liability is $100,000 or greater, and your procedure net proceeds that were going into the trust is $500,000 or greater. We found that the rule of 72 kicks in when you have those numbers and it offsets our fees and it pays for itself. But if your tax liability is only 25,000 or 50,000, or 75, and your proceeds are only you know, two, three or $400,000 It’s too small. And what we say is just pay the tax because the savings that you have there are fees are going to eat up the savings, it doesn’t make any sense. But if you have 500,000 or greater, by the way, our average steals 2.6 million, and we’re deferring some around four or $500,000 of liability. By the way, don’t get liability confused with game, your game, let’s say is a million dollars, but your liability may only be 40% of that, which is $400,000. So make sure you’re calculating that correct by that we have a free calculator, you can go to our website, capital gains taxation comm and click on the calculator link and you can answer 12 questions and side by side comparison, do the trust don’t do the trust, okay. So once you establish what your liability is your proceeds, and then you want to look at the rule of 72, which states if I can earn 7% on any given amount over a 10 year period of time, that amount will double so in your scenario, you have 3 million in the trust, right? You pay up to 2 million in tax. Let’s say you saved a million so you would have had two but now you have three and let’s imagine we can earn seven. Let’s imagine you didn’t need to take any of the income you’d let it just compound Well over 10 years, guess what, that 3 million will turn into 6 million, at which point you could just pay the tax and take all the rest of it right? Or you could just do it again. Now most of our clients would just live off the interest payments so in the meantime, you’re living off a self…six and it’s earning hopefully about eight and you have a little bit of room for fees or fees about one and a half percent per year. Okay, and you give a little bit room for that…amount…go down the amount
Pancham: Yeah, the proceeds that are in the trust. Okay, and so now you’re just living off of that you’re paying ordinary income tax on that and you’re keeping that 3 million in tax so it’s really up to you now let’s say you say well, Brad actually need about 15% per year no problem we’re only earning a you’ll dip into about 7% into the principal every year so either way it’s your principle which is okay you’ll pay capital gains tax on that amount you take in that given year and you’ll slowly bleed it out. It’s up to you or or even more you say look, I want to take a million this year okay, let’s take a million out this year, you know, and pay the text. So it’s up to you. It’s really your money. The question is how when do you want to receive it and how when do you want to pay the tax, we’re just the facilitator and the guide to walk you through that. So hopefully that answers your question. Yeah. And how long ago I need to start preparing for it?
Brett: Okay, great. Yeah. So you need to do before you close escrow. Okay. So ideally, you’re talking to us today, especially if you’re considering selling in the next 3, 6, 12 months, right? You’re going to talk to us today, and you’re going to ask all the tough questions that you should be asking, you’re going to ask about indemnification, you’re going to ask about audit defense, you’re going to ask about what language do I need to put into the contract? You’re going to ask about how do I talk to the buyer about this, and this is where we’re going to guide you along all of this, by the way, we don’t charge anything in less than if you close the deal. So we will do all the tax legal preparation, everything ready to go. And for some reason, the deal doesn’t close or for some reason you decide not to do it. There’s no risk or obligation. We You don’t owe us anything. We only get paid if you close the deal. So you want to be early, if you call us and you say hey, the buyers remove all contingencies. I’m closing in 15 days, can you do it? We’re going to say no, I’m so sorry. You can’t get considered constructive receipt. Now. If you were doing anything In real estate, we could say, well, can you go for a 1031? And then you could say yes. And if you can go through a 1031, then we can save a failed 1031 which we just did last week for a gentleman who sold a $7.6 million property in Georgia and apartment complex to pay it off about four and a half million in debt. And he was in his exchange period, he’s been…looking…looking…looking. Corona everything crashed. And he said, I bought buying real estate right now. And he moved it all to the deferred sales trust as a Friday and so that is something we can do we can save a fail 1031 so if anything if he did that correctively he did that kind of because the property was already sold.
Pancham: Got it right and he was in the and money was sitting in intermediaries account.
Pancham: Okay, qualify so…so if you’re selling investment, real estate, you’re listening to this. At least you should always have a backup plan just in case something like this happens right just in case your deal falls through or the lender won’t when we think it’s really very risky. If you go out with a 1031 company who has never heard about this be won’t allow you to do it. Which leads me to my next point, you need to work with us to connect you with 1031 exchange companies that can do both. We’re experts in both not every 1031 exchange company is created equal. So make sure you’re with us early. Connected with us. And by the way, if you do your 1031, great, you don’t owe us anything. You don’t pay anything extra to have to have that. But just in case you have that backup plan, but for everybody else who’s selling a business or selling, you know, primary, yeah, primary residence, or Bitcoin or anything else, we need to do it before close of escrow. And we need to do it before the buyer removes all contingencies. Okay, so anyways, you can reach out to us, and we’ll provide all that language to get you all set up and ready to go. You just have to contact us. How much is the call? You said? 1.5%, let’s say close today, and we use DST and you get paid on the day of close you get 1.5% of the total proceeds. And is there anything on top of that?
Brett: Yeah, so there’s that that’s an annual recurring fee that goes to the financial advisor and the trustee that covers all of that. And now there’s the other one-time fees to the tax attorneys and they charge about 1.5% as well as a one-time fee. That includes the audit defense, which is very important for the life of the trust, meaning if you’re ever audited at no additional charge, they will protect and defend you and also covers the legal and tax structure of it all. And also advising and working with your CPA advising and working with the financial advisor and the trustee and general questions that come up along the way. Also advising and working with escrow. The AI company has a lot of behind the scenes work that does go on that it all includes that one 1.5% fee got it. So you basically pay in about 3% closing costs, let’s call it that okay. And then once a year, they’re after one and a half percent. Now hopefully we’ve to earn that. There are some administrative fees. There’s a dock account fee, which stands for direct access control agreements to a bank account is so that the funds are always protected. The only ever move to your signature you have 24 seven access to the funds and there’s also a tax return of about 1000. But the goal of it at the end of the 10 years net of office except for the tax attorney is to hit that 8%. Okay. And in the 24-year track record of all the advisors who have helped all their clients do this, they’ve been able to do that. So that’s net of the financial advising fees, trustee fees, account maintenance fees, 8%. So that’s pretty good considering now if you’re ultra-concerned, nine and a half percent, nine and a half to 10%, you have to generate to kind of get exactly and over a 10 year period of time, you know, that’s actually pretty reasonable, given the things now I think you can even do better than that in the real estate market, right? And I can guarantee that and if it goes a little bit lower, well, you know, when a little bit lower, but you still are able to live off all of that interest. But then if you renew for another 10 years, you’re more than likely to get that as well. So yeah, so the key is, how big is the tax? How much can we get it for? And then let’s invest it and let’s figure out a way to help you create and preserve more wealth along the way.
Pancham: Great, man, thank you so much. This has been great and I for sure wasn’t aware of this strategy. And this is definitely one thing that I make sure that I have in the back,
Brett: Can I leave one more for your listeners just in case. This is the one I want to make sure everyone understands as well. So it’s for any ultra-high net worth individuals who are listening to this podcast right now and you’re worth more than $22 million, and you’re married for 11 million and you’re single, you’re faced with what’s called the estate tax. It’s known as the death tax, and it’s going to be you’re going to hit with a 40% of anything that left inside your taxable estate. So let’s imagine you’re married and you’re worth 52 million right now, all of it’s inside your taxable estate. Let’s imagine well, that first 22 is exempt, but that next 30 is going to be hit with a 40% death tax. That’s $12 million. What a lot of people get confused with that they think the 1031 exchange is the end all be all and that you can just exchange, exchange, exchange die, get a stepped up basis and then walk away tax free. That’s not true. You can walk away capital gains tax free, but you cannot walk away a state tax free to separate tax Okay, so the intent is to get as much out of the taxable city as you can. If you’re ultra-high net worth you probably have already done some gifting and some planning over the years and but the challenge we found most Clients before they meet us as they do this gifting, but they do it in small amounts, and they run out of they run out of amounts per year. So they’re left with all of us inside of their estate. So the solution is to get all of the all of that out as fast as you can. And the solution is the deferred sales trust, you can sell a $30 million asset today, move it all outside the taxable estate. And with the deferred sales trust, you cannot do that with a 1031. And now you just saved $12 million for your state. Why do I say all that because part of what we believe here at capital gains taxes is we want to unlock capital, all tax deferred and outside the taxable estate so that those in need can be helped the most. And so you might be passionate about those who need food, who need water, who need health care, who need you know, freedom from captivity. And all of those funds can be used to fund projects like that, but it does take you taking action today. This is not something you can do after you pass away. You have to do it before you pass away before your state passes. So we have that session. And it’s something that we think is going to change everything, especially part of the $17 trillion that’s passing from one generation to the next in the next 20 years. And it’s known as the largest wealth transfer in the history of the world. And it’s by the baby boomers. And everyday, there’s about 10,000 turning 65 in the US alone, and there’s 77 million in the US alone, and they’re challenged with all this capital gains tax all of this estate tax, and they don’t know how to get out of the toilet trash and liability without getting caught with that 30 to 50%. Tax and then the 40% estate tax. So the solution is the deferred sales trust.
Pancham: Thank you, Brett for answering all those questions. We’ll be back after this message. Have you ever wondered why the rich keep getting richer? What is the secret that they know? But you do not. What if I told you that wealthy people make their money work for them in two different places? Yes. The same dollars invested into different places and working hard for them while they sleep. They used to Eyes these special accounts that have been in existence for more than hundred years. Do you want to learn more about these accounts then you are in the right place. Listen to the episode number five by going to thegoldcollarinvestorbanking.com/bankingshow. I repeat thegoldcollarinvestorbanking.com/banking show or visit thegoldcollarinvestorbanking.com. So, Brett I asked these four questions to every guest on my show and I call this taking the leap round.
My first question for you is when was the first time you invested outside of Wall Street.
Brett: First time I invested outside of Wall Street was in 2009 at the bottom of the market, I found a deal in Arizona It was a 50,000 square foot partially built for close retail center and we bought it at a steep discount and the operator was able to improve the property And within 13 months, we were in it for for 5 million. And I believe they were able to sell it for eight and a half million if I recall, it was a it was a home run of home run. It was in 2009. Great. Wow.
Pancham: Nice. Good for you. So what fears did you have to overcome when you first invested? Our said horse? Did you have to overcome any fear at the time? 2009?
Brett: Yes, yeah, absolutely. If there’s two things, and I also advise everybody it’s trust the deal can trust the sponsor, okay, trust the deal and trust or does that mean? Well, you’ve got to make sure you’re underwriting the property properly. You’re actually in a predictable cash flow or predictable value, add opportunity. You’re buying at a good price per square foot, you’re buying it in a good location, right, all of those things. So that’s trusting the deal. You trust the business plan and the deal that you have for the intrinsic real estate now, then it’s also trusting the sponsor, the sponsor may be yourself but you may need to bring in a partner or bring in somebody else and that’s what I partner with those who are specialists in either retail Tell multifamily mobile home parks senior housing and allow them to do what they do best. So you need to trust both of those things. And that does take some, you know, fear because you’re putting money with somebody else. And it does take some trust. And so those are the two biggest things I had to overcome.
Pancham: Great. So my third question is, can you share with us one investment that did not go as expected if you have any?
Brett: Yeah, I was pretty fortunate in that I was, you know, still pretty young. And oh six is still just making any of my career. I didn’t really have any money until about Oh, nine actually, you know, and then and then I guess I was pretty fortunate when I graduated college and hadn’t bought the house. That being said that every deal has gone is gone. You know, perfect. There’s a condo deal that we bought, we still did really well. We did 23% on our money, but there’s a lawsuit that was a part of it, and they got dragged out and we didn’t get the money back as quickly as we’d like to. And this is also with another operator that was experienced in it still did well but it didn’t go quite as active. And then I’ve been very cautious to invest these last few years because price has been through the roof. But even other deals that I have put money in who knows that there might be some hurt here coming with the Coronavirus?
Pancham: Yeah, absolutely. All right. So my last question is what is one piece of advice would you give to people who are thinking of investing in the main street that is outside of Wall Street?
Brett: You know, learn to work harder on yourself than you do on your job. Right? If you’re if you’re a W2 employee, right, and you’re they tell you to focus on working hard on your on your job, your job, your job, but we’re kind of trained to get good grades and get the promotion but learn to work harder on the things that are outside of Wall Street or outside of your jobs such as real estate, investing in your education and underwriting properties in masterminds and groups. And, and this is saying from Jim Rohn, that if you work hard on your job, you’ll make a living, but if you’re harder on yourself, you’ll make a fortune. And the idea is not just to make a bunch of money which is a part of it though, because you can help more people it’s really about growing your character and growing your influence and growing your emotional intelligence and in growing your health and your spiritual walk and your, in your character all of those things are the most important. So most people set goals for careers, but they’re not necessarily setting the goals in the major areas of life. And when you do these things, you become more valuable as a person, you become more attractive to help more people and you can’t help but succeed in real estate. Real estate is just a tool. The deferred sales trust is just a tool. The most important part of setting goals is what it makes if you did become what it makes you to become more for your family, more for your community more for this world to give back. And what I believe that we’ve all been given God given gifts, and we’ve got a chance to get free from Wall Street are free from the day job by getting passive or active real estate income as much as possible, deferring capital gains tax so that you can use those gifts or use your time and energy more to make an impact for other people’s lives.
Pancham: Wow. That’s an amazing advice and I’m a big fan of Jim Rohn. And that quote is definitely something that resonates with me so much. Thank you for sharing all your wisdom today, Brad. So how can listeners reach you?
Brett: Yes, absolutely. Well, you can go to thegoldcollarinvestor.com/DST. And you’re actually going to see a live workshop that we, you know, together we put on together and we kind of walk through how this thing all works, you can see it visually because it can be kind of confusing, you know, he just hearing over the air. But if you go there, I’ll give a presentation there. And then also, that’s a place where you can also go to the deferred sales trust calculator, which will also be a link there where you can enter your deal information, so just go to thegoldcollarinvestor/dst.
Pancham: Thank you, Brett for your time today. Thanks so much. hopefully that was helpful. It is just another tool in your tax planning toolbox. Like Brett mentioned, there are certain minimum amounts you have to hit before you can start thinking about using deferred sales trust. I appreciate you being here and spending time with me. Thanks for listening. If you have questions Email me firstname.lastname@example.org. That’s p as Paul..p@thegoldcollar investor.com. This is Pancham signing off. Until next time, take care.
Thank you for listening to the gold collar investor podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook at the gold collar investor. The information on this podcast are opinions as always, please consult your own financial team before investing.