Ron Anderson is the owner of a small business called “Biosweep” (a smoke odor elimination business). For the most part, Ron is a local. He moved to Colorado as a toddler. He lived in Southern California for just over ten years before relocating to Colorado for the rest of his life. He has been involved in real estate investment, sales, and property management since 2005.
Ron Anderson also works as a Property Manager for a single-family and a small multi-family residential property. Increasing overall portfolio profitability through strategic capital investments. Expertise in increasing top-line revenue. He specializes in Sales, Real Estate transactions, Business Development, Sales Management, Technical Solution Selling, Financial Analysis, and Problem Solving.
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Exiting Multifamily Building – Deferred $4.2 Million Using A Deferred Sales Trust with Ron Anderson
Brett:
I’m excited about our next guest. He is a new client of mine and becoming a friend. He is out of the Great State of Colorado, originally, basically from Colorado, but he’s been in the multifamily investment space for some time, as well as the financial space, which we’ll touch on as well. He’s just going to share his story about the Deferred Sales Trust and this latest transaction for a property out of Colorado. Please welcome to the show with me, Ron Anderson. Ron, how are you doing?
Ron:
Doing well. Thank you, Brett.
Brett:
For our listeners to get to know you for the first time, would you give us a little bit more about your story and your current focus?
Ron:
Sure. Let’s see, I was employed as an engineer for probably a dozen years or so in sales for some of that. When I moved back to Colorado in 2002, I started buying some rental property. I bought my first small triplex and ended up getting my real estate license in the process. Through that, I had an offer to join a small group of people to purchase an 18 unit apartment building. My first five years in that partnership were as just a silent partner. Then after five years, I decided to buy out my partners. So for the last 10 years, I’ve been the owner-manager with my wife of this 18 unit building. Along the way, we’ve also purchased a handful of other houses and condos. But about two years ago, we realized we were just getting too busy, we were working too hard. I didn’t have enough time to play and is about that time, about a year ago, I ran across you on a podcast, talking about the Deferred Sales Trust. That got me thinking that there, there may be a way to make an exit out of at least the apartment building make a little bit more sense. Up until that time, I couldn’t wrap my head around a good way to maintain the income and cut my workday a lot shorter.
Brett:
Got it. So, background engineering turned into the real estate world for some small rentals. Then the 18 unit apartment building, had some partners buy the partners out. They were looking like, maybe we’re spending a lot of time and energy and stress versus what we could be doing if we had an exit plan. Is that a fair summary so far?
Ron:
Very fair.
Brett:
Excellent. So, I liked the way you put it. You said you were too busy and working too hard and didn’t have enough time to play. It was COVID that kind of taught us or reminded us that our time is short. Like, you can’t make this stuff for granted with health or with time or travel with freedoms, for that matter. We’ve got to liv to live today and not take that for granted. So what was it about the day-to-day management or the management of the management? What was it that you felt like this has taken up too much time and energy?
Ron:
Probably three or four years ago, we started on an upgrade path. As units were starting to come available. We were just doing a kind of a big upgrade – flooring, countertops, just kind of the whole thing. I think I’ve heard this story with a lot of other landlords that it just kind of snuck up on us all of a sudden, every project was taking more and more time. Instead of just doing what was required to do the turns. We are now spending a month or two months doing the upgrades and it just kind of snuck up on us. All of a sudden we’re working all the time. At one point I just got a little bit overwhelmed even in my wife graciously jumped in and started to help me manage some of this. Then when she got involved, she kind of put her own twist on it. We started converting some of our annual monthly rentals into minimum 30-day executive rentals and furnished rentals and that kind of added a little bit to the management time, but it also void really changed the financials of the building quite a bit to the positive. But, it just kind of snuck up on us, to be honest. My experience with property managers was not positive. The net result of that is it between my wife and me, we ended up doing way too much of it ourselves. I’m sure it’s a common story, nothing unique there. I wasn’t smart enough to get out of our own way.
Brett:
You know, it’s common for the entrepreneurial for the real estate owner for really anybody who likes to build things and do things like we can it’s exciting, it’s good. It’s like more money, it can also be more problems and more things. So you go from the just the oak was to like an upgrade or to the, to more upgrades to my gosh, you can raise your rents quite a bit to now we can do Airbnb, and wow, this just keeps becoming an opportunity here, but at what cost. Sometimes we don’t know that until we’re already in it. So take it to the moment where you’re like, Okay, that’s it, we’re ready to exit. What was that kind of the deciding factor to take the next step to exit?
Ron:
Sure. In the process, during that time, we were still buying a few properties. In fact, we were developing a property about two miles from our house where we could have a large storage, building a 4000 square foot storage building, and we’re just putting in a modular home on it. So I was spending a ton of time on that. I was just getting into where between my involvement in that my wife’s involvement with all the property management, that is just too much. So I started looking at if we sold it, what would that look like? If we 1031 exchange that, what would that look like? I wasn’t finding anything. While I was working on this development project, I came across a podcast that you were on with a real estate agent that I’d worked with, named Kyle Malnati. I remember listening to that podcast and the light just went on, it’s like this is the solution that I’ve been looking for we can still enjoy the gains and be able to enjoy some income and pack more income. Just handle the taxes, defer everything. So I came back home after work and worked on that unit, put pencil to paper and open up a spreadsheet, and started researching things a little bit, you open up a couple of browsers and start looking at some of your videos. The numbers, honestly just seemed too good to be true. So we started talking to a couple of real estate agents who started getting ready to do the final round of improvements on the building with an idea to list it this last February. In the fall, we made one more check-in with our agent just to see how the market was doing. They told us that it was another level of hot and said you don’t have to do anything. Forget that list that we were talking about. Just put it on the market, and we will get you more than top dollar. So we did that and ended up closing in January. The rest is a kind of history.
Brett:
Amazing. Let’s dive into some specifics of this deal. So people can kind of put pen to paper on this and kind of walk through some of the mindset of what you were going through. So the sales price we have is 4.2 million. This is a property. In fact, if you want to look it up, it’s 1878 Vine Street, it’s in Denver, Colorado, it’s 18 units, was built in ‘64, for about 13,000 square feet about a Class C property. But it mostly ones, in fact, only one studio, but it’s getting really solid rents. So, and now had an adjusted basis of about $730,000. It had a debt of about $1.75 million. But it had a key here had a mortgage over basis of $1 million. We’re going to get technical right now. This is important because the Deferred Sales Trust is amazing. A lot of ways we’re going to talk about here, but also it doesn’t solve every single problem. One problem that cannot solve is what’s called a mortgage over basis or debt over basis and so we actually had to combine two DSTs. By the way, this is why we’re calling the show, Exiting Denver $4.2 million Multifamily using DSTs with it with the “s” at the end. S’s has dual, so we’re doing a partial Delaware 1031 Exchange, and a partial Deferred Sales Trust. Are you ready to geek out on this, Ron?
Ron:
Absolutely. Actually, I want to just highlight one other part of my background because this was a surprise to me. I also have an MBA from Pepperdine. I also have a Master’s in taxation from EU Law School. I was unfamiliar with the debt over basis issue. So you educated me about that. But not only did you educate me about that as a problem, but you provided a brilliant solution. I was so impressed with it. So yeah, what if want to go ahead and get into those numbers? That would be fine.
Brett:
Absolutely. Thanks for sharing that. I’m learning something new today. By the way, this is the first time that Ron and I actually met on a Zoom video, we’ve only had phone calls. So you guys are getting a chance to connect with us. Because Ron, I mean, this from start to finish, I think it’s been about maybe 45 to 60 days. I mean, we had to wait a little bit to get things with the 1031. All that being said, let’s dive right into it. So there are two things to solve. The first thing is the capital gains tax. So if you just take the $4.2 million property, and you have an adjusted basis of about $730,000, that’s going to give a gain of approximately $3.47 million. So there’s a federal of 20%. There’s Obamacare 3.8. Then there’s the state of Colorado, which I believe is around 5%. Then you have depreciation recapture, which, depending on if you’ve done straight line, I think Ron had just done straight line on this one. So we like to use collectively 20, 24, 29 sees another 3%. So about 32%. I’m sorry, a 40. About 32%? That’s right. 32%. So 32% of about $1.1 million liability, So Ron does nothing here. This is part of where people before they find us, they’re like, I’m stuck between a rock and a hard place, I want to retire, or I want to spend less time with the toilet trash liability, more time with my energy. But if I exit, it’s gonna cost me 1.1. Or, I have to maybe do a 1031 exchange where I give up all the control and or to a Delaware Statutory company completely or I buy something they don’t actually really want to buy because I’d have to maybe overpay for something. All these reasons why we like to say that the old 1031 is a blockbuster and the Deferred Sales Trust is Netflix. So these are things to solve for. However, here, we have what’s called a mortgage over basis. So this mortgage over basis is about a million dollars. Remember, the debt was 1.75. The basis is about 730, which is about a million-dollar mortgage over basis. So, Ron talks through how we solve that mortgage over basis the best way you can with a Delaware, and I’ll fill in as well.
Ron:
Sure. So just how we got to the mortgage over basis issue. About five years ago, when I had, an adjustable loan that reset that I can lock it in for five years at a time. So after the first five years of owning it outright, I pulled out about $850,000. So that with the additional depreciation is how we ended up with that million dollars of debt over basis. So the way we solve the debt over basis problem was with the Delaware Statutory Trust, they put us into, I believe it’s called a zero-coupon DST that was associated with an Amazon warehouse. This warehouse they had, they borrow about 80, almost 85% of the, I guess the investment that they have in the warehouse, and so they’re able to basically help me pay down. So if by putting money into that, at that leverage, I think I’m able to put in 180,000. That times an 80%, 83% LTV gets us to about a million dollars of, I guess, total ownership. Instead of receiving an income from this Delaware Statutory Trust, it goes towards paying off the loan. So over time, my debt over basis is greatly reduced. It sounds like typically, these deals go about seven years before they end up selling the real estate portion often. So in about seven years, my debt over basis issue should be down to something that I can move into more of a regular Delaware Statutory Trust or a 1031 exchange type opportunity.
Brett:
That was really well said, Ron. Let me bring a little more context too. Part of what the debt over basis piece that we need to solve for is what’s called replacing the debt over basis. So this is part of the 1031 is our friend here. By the way, we love 1031 exchanges, especially for these types of scenarios where the Deferred Sales Trust just cannot solve the debt over basis because the debt needs to be replaced. In a Deferred Sales Trust, the debt is paid off at closing It’s part of why it’s the debt-free plan, but to the extent, since Ron refinance at a certain point pulled out tax-free refinance money at the time. It’s getting like recaptured in the government saying, now you’ve had that, you’ve been using it. But if you don’t replace that debt over basis, then you’re gonna pay ordinary income tax. So it’s even worse than just capital gains tax rates, it’s ordinary income tax rates. So it’s like a double whammy there. So, what we did, as we had all of the funds at closing net of the debt. So in this scenario, it’d be 4.2 million, and then approximately 1.75, minus some closing costs sent to the Qualified Intermediary, so about 2.45 million. Now that we have 45 days to identify, 180 days to close on the Delaware 1031 piece, which meant Ron allocated about $180,000, which is a really beautiful thing, because Amazon is the tenant, and so the bank and the owner, they’re willing to structure the deal to give the maximum amount of loan to value, which these zero-coupon deals are specifically designed for to solve this exact problem. So, a little amount of equity, which is 180 is going to replace the debt over basis, which is about a million dollars, but then the rest of the equity can go into the Deferred Sales Trust. So you might have to rewind that a couple of times. But you can go to capitalgainstaxsolutions.com to get a no-cost, no-obligation consultation, to go through your debt over basis challenges, as well as look at the Deferred Sales Trust for the option. Fast forward. Now, Ron, we have taken care of that, you bought that. Then what happened?
Ron:
So we closed on the Delaware Statutory Trust. So the rest of the exchange basically had to wait for it to fail. So the rest of the money could move into the Deferred Sales Trust that I’m leaving with your Investment Advisor, Bob, walk me through what he’s doing with that. Now I got my first check on Friday, or my first distribution from the DST on Friday, for $13,000. I’m seeing more income than I was seeing from the building, and the phone isn’t ringing. So that’s kind of the situation I’m in today.
Brett:
So that’s the outcome that you’re hoping for so far. That’s what it was a couple a year ago, six months ago, you’re like, if I can have it where I have less stress, fewer phone calls, and equal or greater, maybe more cash flow. Also, by the way, you’re debt-free, that debt is not in your name, it’s with Amazon. It’s with the company or the owners. I think it’s inland property. I think that’s what it was. And one of the bigger ones for the Delaware deal. So, Ron, it leads to this question, What was the number one secret to overcoming the Deferred Sales Trust? It’s just too good to be true, Ron, like, everyone will be doing this. it’s like you would have already known about it, your CPA would have told you about it. I mean, you’re a really smart guy. Ron, how are you just learning about it for the first time? Or is it just too good to be true?
Ron:
It doesn’t make any sense that it isn’t widely known. It was such a surprise to me. Just looking at the raw numbers that we’ve talked about if the net proceeds from my sale were roughly 2.2 million after commissions and everything else. My tax bill on that would have been half of that. So instead of having $2 million dollars in something that can be invested and spin-off income, I would have had half of that. There’s and those numbers just don’t work for accomplishing what I want to accomplish with the sale of this property.
Brett:
And it’s part of our values right here. Capital Gains Tax Solutions is to give people the freedom of their time, their energy, their stress, their location, their financial plan because there’s one thing to be either real estate rich or cashflow rich, but then the time and the energy can be at a not as a healthy place, or a strong of a place and place that you want to be. So how do you exit? This is part of this major shift in the transformation of wealth. It’s moving from or transferring wealth from Baby Boomers to about 32 trillion that’s going to transfer in the next 20 years. Its primary homes, commercial real estate, businesses, that’s 50% of the total net worth of America, and you’re seeing this major transfer. So if you can have something that gives you tax deferral, liquidity diversification, and the ability because guess what, Ron, you might want to get back into a real estate deal in a couple of years when the deals make sense. So talk about the flexibility of even having the funds invested with a professional financial advisor, but also to be able to get back into real estate because you might find a deal. In a couple of years, you might want to get back into it.
Ron:
Sure. Just to highlight the other part of the Delaware Statutory Trust. Even if I could have just paid $180,000 to make the whole tax issue go away, that would have been great. But the Delaware Statutory Trust adds another option that when that deal does close, when the Amazon warehouse does sell in, say, seven years, I now have an asset that will probably be worth likely double the 180 that I can exchange into another Delaware Statutory Trust, or I could do a 1031 exchange into another property. So instead of just only paying $180,000 on what would have been a huge tax bill, it’s another asset downstream. But you’re right, the ability to partner with the DST, to get into other real estate or other investments. That option is really interesting. I’d explored it a little bit when we talked about doing some other crypto investments. That may be something that I do want to get back into at a later date. But the flexibility is it’s really up to me, to figure out how we can best use the assets that are in the trust.
Brett:
You nailed it. For those who are wondering, can you exit cryptocurrency, defer capital gains tax, and buy real estate with a Deferred Sales Trust? The answer is yes. Can you exit real estate and defer capital gains tax and invest in crypto? The answer is yes. It’s flexible. The key is diversification. The key is like what do you feel comfortable with. Also, Ron filled out a Risk Tolerance Questionnaire, and we work with a professional Financial Advisor to help do some planning and some strategic alliance there. A strategy in line with his goals there. So, it’s a team effort here. But the key is optimal timing, like when does it make sense for you, with your lifestyle, that’d be for financial goals, that one deal makes sense. The Deferred Sales Trust gives you that bridge or gives you that safe harbor to wait in a tax-deferred state. So here’s the next question, what’s the thing that you’re most looking forward to when it comes to this? Or maybe before we go there? Were there any surprises around like, do we deliver what we said, we’re going to do? Were there any surprises? Did you feel like, I wish I would have known this, like any feedback for us on that?
Ron:
There really weren’t. The one thing that I learned more about the Deferred Sales Trust and how it worked. Just the realization that okay, I’m kind of in a lender role to the trust and so the income that I get is ordinary income. So I’m not getting the same character of the income. I’m not getting the capital gains treatment. But once again, it’s a small price to pay for just the overall benefits are so huge. I mean, having basically an extra million dollars to invest that I’m paying ordinary income on the money that I am distributed. It pencils out really, really well on a spreadsheet. So it’s really a fantastic option.
Brett:
Yeah. Also to clarify, you would pay capital gains tax if you dip into principal, if you dip into that correct point to but, any of the interest payments, but most of our clients is live off interest payments, they’ll just pay ordinary income tax, you get a 1099 for that, report to your CPA, if and when. I call it the golden goose laying the golden egg, if you ever dip in, he would pay capital gains tax at that given rate in that given year. So keep that in mind. So what do you feel like life’s gonna look like after a couple of years? Do you anticipate getting into more deals? What’s your take on the real estate market in general? I mean, Denver might be one of the hottest markets in America right now. So see for multifamily investment, real estate, so you sold at the high? We call it the Monday morning quarterback and we get a chance to buy at the low. Do you think that would be exciting, like if you could buy something for a discount in the future?
Ron:
Yeah, we definitely paid a lot of tuition in our journey in managing rental property. We still have, I guess, 11 doors, over nine units. So we still have a bit. We’re planning on doing just ordinary 1031 exchanges over the next couple of years. From what we have into more luxury, vacation rentals, it destinations where we want to spend time so we’re looking at Nashville in Florida and a place up in Breckenridge. So we’re looking at getting rid of our local property management duties over the next probably three or four years and just continuing to trade time just trying to get more and more time back. It’s interesting, I’m not sure what things will look like in 2, 3, or 4 years. Because we’re going through that stress of while we have time this is. There’s a lot of anxiety when you’re used to waking up and having your whole week planned for much less than a day. So we’re really looking forward to seeing what that does look like.
Brett:
Love that. That’s my favorite part of this and to give you a small part of the team, I want to thank you for trusting us because it’s not easy to meet somebody for the first time and to hear about a strategy for the first time after you’ve built up all of this wealth for many, many, many years. Then to entrust him with that exit plan. So for people who want to get started, go to capitalgainstaxsolutions.com. We also have our Mastermind every Friday at 10 am Pacific Standard Time, 1 pm Eastern, where you can dive in and ask questions and talk about the deal close story of the week with Financial Advisors, CPAs, people just like Ron that are doing this for the first time and learning about for the first time, you can go to capitalgainstaxsolutions.com to get started today. So if there’s one thing you could say to someone, Ron, who’s looking about this for the first time just like you, what would you say to them right now, if they’re calling you to say, Ron, should I do this thing? Like, talk me out of it, Ron? What’s the downside of it, Ron?
Ron:
Sure. I think just because everybody’s situation is different. I think that if anybody who’s had real estate for quite a while, and they have significant gains in this market, I don’t think it’s possible not to. All it really took for me was spending a little bit of time with a spreadsheet, and just realizing just what an incredible opportunity it was. Everything and I really didn’t touch on you asked me a question earlier what were my impressions after going through the process? Did you guys deliver on everything unwaveringly? Did you deliver it on everything that you said you were going to do? It was a really easy process. We had a handful of teleconferences with Financial Advisor, with the Attorney. I’ve talked to several people within your organization. Everybody’s been very transparent, very knowledgeable, and answered questions very directly. If I didn’t understand it, I asked the question in a different way. I’d get an answer that helped me understand things better. So it was very easy. We hit our deadlines. It was everything that was advertised to be. I’m just looking forward to seeing how the next bit of time pans out.
Brett:
Amazing. I want to thank you for sharing your story. It means a lot to jump on camera and share this with folks that are out there. But I think it’s gonna make a huge difference. I want to encourage you to keep using your engineer mind to keep looking at the numbers and to keep building some wealth for yourself and your family. And, of course, even the Deferred Sales Trust in mind for those other 11 rentals. But I hope you take those, and you knock those other ones out of the park and you come and we can add them, which is a common question that people have like, can I add multiple trusts or multiple assets to one trust? The answer is yes, you can exit slowly out of different assets and roll them into one trust. You have multiple promissory notes as a cool way to consolidate equity as well if anyone’s wondering, and you can check us out by going to our YouTube, going to our iTunes channel. Ron, any last words for anybody? For me, before we let you go?
Ron:
No, just thank you very much. It’s a great process, a great product. I can’t imagine where our lives will be in a year versus where they would have been if I hadn’t run across you on a podcast. So thank you very much.
Brett:
By the way, what podcast was it? I’m curious now. Do you remember?
Ron:
Yeah, it was Kyle Malnati’s podcast. He’s a local, commercial and residential real estate agent here in the Denver market.
Brett:
Yeah, by the way, thank you, Kyle. If you’re watching this right now, Kyle’s a rock star multifamily and real estate agent in Colorado, Denver. I’ve done multiple deals with Kyle now and so highly recommend Kyle if anyone’s looking for a strong multifamily broker or realtor at all anywhere in the Denver area. Well, Ron Anderson, thanks for being on the show.
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About Ron Anderson
Ron Anderson is the owner of a small business called “Biosweep” (a smoke odor elimination business). For the most part, Ron is a local. He moved to Colorado as a toddler. He lived in Southern California for just over ten years before relocating to Colorado for the rest of his life. He has been involved in real estate investment, sales, and property management since 2005.
Ron Anderson also works as a Property Manager for a single-family and a small multi-family residential property. Increasing overall portfolio profitability through strategic capital investments. Expertise in increasing top-line revenue. He specializes in Sales, Real Estate transactions, Business Development, Sales Management, Technical Solution Selling, Financial Analysis, and Problem Solving.
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