91 – How To Defer Capital Gains With the Deferred Sales Trust with Brett Swarts

So this is the power of it, where 1031 you have to buy something now in a seller’s market. So thinking about the 2008 crash, you know playing the Monday Morning Quarterback, what would you have done? You would have sold everything in 06 and 07 and waiting for everything to crash. And you would have sat on the sidelines with the deferred sales trust in conservative bonds, when the marketplace went down by you know, 30, 40, 50% in real estate and bought everything at a discount. In fact, we’ve had clients do that, exactly that. They sold a property in 06, moved it to the trust, put it in conservative instrument. So even when the stock market crashed too, they didn’t go down much you know. They weren’t making much in the meantime, but they didn’t go down much. And then the same property that he had sold got foreclosed on and five years after he sold it he went back to the bank and partnered with his trust, all tax-deferred the whole time, and purchased this property at 60 cents on the dollar. So it’s the best of both worlds. That’s the key here. You can sell high and buy whenever you want to.

Hey everyone, and welcome to another episode of the Everything Real Estate Investing Show with Sean Pan. Today we have Brett Swarts. Brett is with Capital Gains Tax Solutions. And today he’ll be telling us everything we need to know about the Deferred Sales Trust. A deferred sales trust is an alternative to the 1031 exchange and helps you keep more money working for you. There’s a lot that we go over in this episode, so be sure to listen to the end to learn everything. If you enjoyed this episode, subscribe to the show and leave a review. We release episodes every Wednesday and Sunday and release the show notes on our site EverythingREI.com. Enjoy!

Sean: [00:01:48] So Brett, thank you so much for being on the show today. Go ahead and introduce yourself and let us know who you are and what you do.

Brett: [00:01:53] Hey, thanks Sean for having me. Yeah, my name is Brett Swarts. I’m with Capital Gains Tax Solutions. I’m also a commercial real estate broker by trade. I started in the market in 2006. And now I have another company called Commercial Realty Apartment Advisors. You know, I live here in Sacramento. I’m originally from the Bay Area in Mission Hills,San Jose, Fremont. And kind of grew up both places with my dad building custom homes in the Mission Hills and then go into high school out here in Rocklin, California. My wife and I now have five kids and we are full-time parents, right? With that many kids of course. And yeah I educate people on tax deferral strategies in particular the deferred sales trust and the differences with that, first the 1031 exchange and Delaware statutory trust. So that’s a little bit of the background.

Sean: [00:02:42] That’s very exciting. And congratulations five kids I’m sure is not very easy.

Brett: [00:02:48] It’s probably one of the biggest feats we’ve been able to accomplish. So absolutely it’s… I call it a hundred percent work a hundred percent joy, especially when they’re really young.

Sean: [00:02:56] Alright, so today I guess your main specialty is in the deferred sales trust. Do you mind quickly going over what is a 1031 exchange? What is even a Delaware sales trust? And then you can talk about what the deferred sales trust is, and what differences and pros and cons between each of them.

Brett: [00:03:13] Sure, yeah, what are the differences and what are the pros and cons of each of them? Yeah. So the 1031 exchange is so far the most commonly used and known tax referral strategy for selling commercial real estate and buying commercial real estate. And when I say commercial I just mean investment real estate because it cannot be a primary home. And so a 1031 exchange, what you do is you buy a property, you can add some value, and you can take some depreciation and you get what’s called a basis. And that basis will determine if you were to sell, how much capital gains tax you might have. But instead of paying that tax, if you follow the 1031 rules and you execute and you buy something of equal or greater value within a hundred eighty days of closing the first property, then you defer the tax and you can continue to build your wealth. And so that’s actually the beginning of my career with helping people buy and sell investment real estate. And I still do 1031 exchange too, by the way. We call ourselves Capital Gains Tax Solutions because we provide all the options and just see which one best fits a client based upon what they need. So the 1031 is for lifetime real estate, investment real estate. It’s also a restrictive too in that if you don’t buy again within a hundred eighty days and don’t identify properties within 45 days, basically you’re disqualified from using the structure. So there’s some limitations to it that make it challenging. The other thing that is the biggest challenge with the 1031 exchange is the fact that you have to buy in the same market that you’re selling in. So most people like to you know sell high and buy low, but the challenge with the 1031 is your often selling high and then a hundred eighty days later you’re buying higher. And that’s what we’ve seen especially this last few years in the marketplace. Now I want to jump into the deferred sales trust. The deferred sales trust is an installment sale. It’s a manufactured installment sale and owners or your listeners may know it as a seller carry-back. And so if I were to go to you Sean, “Hey Sean, I want to buy your property for five million dollars. If I give you a million-dollar down payment, would you carry a note for 4?” And if you carry that note for 4 that’s called a seller carry-back you would only owe tax on that 1 million and the four millions would be called a tax deferral state. And so the key here is the deferred sales trust is just that and we just actually have it jump in between you and the buyer and we buy your position for 5 million and we sell it for five million to the buyer who’s lined up. And since you haven’t taken any actual receipt the funds, you’re in what’s called a tax deferral state. So it is a bit of a complex thing to think about, especially for the first time your listeners are listening about it, but just think of it as an installment sale. But the key thing here is you don’t have to put it in like kind real estate. Sean you can divest of your commercial real estate or your business or your high-end primary home, and it doesn’t have to go into equal or greater value. You can put it into stocks, bonds, mutual funds of your choosing. And also you don’t have to replace any of the debt. We have to call it the debt free Dave Ramsey plan for your commercial real estate or business. And so it gives some more flexibility that the 1031 just does not. The last one we have is what’s called the Delaware statutory trust. And Delaware statutory trust sometimes gets confused with the Deferred sales trust because they’re both DSTs on the letters. But the Delaware is just a 1031 exchange into a group of properties. And so it’s kind of like a tenant in common. There’s like a big corporation that owns say two or three or four properties at a time and they allow people to 1031 into those properties and take an interest in ownership. You give up some control, you give them all the control. Typically they’re seven to ten years, non liquid, and pretty high fees, and returns are around five percent. I’ve done a number of Delaware’s as well as you know, 1031s and deferred sales trust. So the question we always say is what are you looking for? What are you trying to accomplish? And what might be a good fit for you? The Deferred sales trust too by the way is a back-up plan for a failed 1031. So. Your listeners are listening to this, you don’t necessarily have to just pick one. You can pick one two or three. We’ve done deals like that where you know, a third of it goes into a deferred sales trust, a third is into a 1031,a third is into a Delaware. So it’s customizable and flexible for that too.

Sean: [00:07:30] Perfect. Thank you for your very elaborate answer. I’ve quite a few follow-up questions. I think the first one is let’s talk about the failed 1031 exchange. How is that possible? How are you able to do a deferred sales trust after you have a failed 1031? Because you’re supposed to owe that before you close escrow.

Brett: [00:07:47] So understanding when the tax is due is the first concept which is called constructive or actual receipt. So in a failed 1031 exchange the exchange company sends you the funds and then you’ve received the funds and that’s when the IRS deems that the taxes are due. But as long as the funds are still with the 1031 company or a separate entity like a deferred sales trust, you haven’t received actual funds. So what we do with our 1031 companies that we work with is on day 46 or day 181 or somewhere between those dates, we just have the QI company send the funds to the trust instead of sending them to Sean. And that’s the key. If Sean receives zero funds, the tax is not due. If the trust takes his position and say it’s a five million dollar deal, buys your position for 5 million and sells it to the cash buyer who’s lined up for five million. In this situation it’s just sending you the funds with the QI company. It hasn’t taken any constructive receipt or even it has but it’s bought and sold for the same price. So the key is what is the game and how much have you received? And if Sean received zero, then Sean owes 0 at this time, and in the meantime it’s invested and its earning an interest rate. And that’s part of more complex than it needed to be. The simple answer is just send the funds to the trust so they can either send the funds to Sean and he owes the tax or send it to the trust and you don’t owe the tax. That’s the short answer of that.

Sean: [00:09:16] I mean that makes sense. Basically I was confused about why aren’t you triggering that tax and that makes sense: if you don’t get the money yet, you don’t get taxed. Okay, so I’m going to go through a little scenario to kind of explain I guess to our listeners what’s actually going on because I’m sure everyone gets confused. Before I do that though, I want to clarify something. Are we doing a double closing in the situation? Because you’re technically have like two or three parties involved.

Brett: [00:09:38] That’s a good way to look at it. It’s assignment of contract, right? And it’s like a simultaneous close. So it close close close. It’s like so all at once, you know or right after each other. We call it a New York minute. So the trust position is going to say, “Look Sean. I’m going to buy it from you with the understanding that I immediately selling to that cash buyer you have lined up over there.” And you’re saying the same thing. You’re saying, “Mr. Trust, I’m only going to sell it to you if you sell it to that cash buyer right over there. And if you put it into these investments that you’ve already decided beforehand how and where you want the funds invested.” So you become the creditor and it’s customized to your own risk tolerance: stocks, bonds, mutual funds, or commercial real estate syndications, which really my passion about starting this business. At any time you can have your own deal, you partner with your trust, or you can send it to multiple syndication deals at any time. And we would say today is not a good time to buy a property because prices are so high, you could find one, but maybe you find one tomorrow, day 181 or 5 years. In the meantime, you can keep your powder dry on the sidelines and conservative bonds, conservative diversified portfolio of stocks, mutual funds, insurance products, fixed instruments of your choosing. And then when the deal comes you can direct up to 80% of the funds. So I’ll pause there again to see what questions you have.

Sean: [00:11:01] Okay. Now let’s go back to the double close situation. Are you paying I guess as for a company to do a double close for you, or is it just like a one-time thing and it’s all sorted out?

Brett: [00:11:12] Yeah, it’s not any more expensive than… there’s no additional expense to the seller or the buyer. We work with Orange Coast Title for a lot of these actually out of Cupertino. Just not too far from Milpitas where you’re at.

Sean: [00:11:26] I’ve used them before.

Brett: [00:11:27] Yeah, exactly. So there yeah, we work with any escrow company really but we like to work with those who have done these before so it’s a smooth transaction is it can be. But as far as your listeners are concerned it’s not going to be any more expensive because you do this. In regards to escrow fees, of course, there’s our trustee fees and there’s the law firm fees that are associated with it but no additional charge. And it really is just processing paperwork. And with the way Orange Coast Title says it’s a lot like when they do a 1031 exchange, there’s a few pieces of extra paperwork, a few extra signatures to do, but as far as the seller and buyer concern, especially the buyer, makes no difference to the buyer. And the seller is going to sign a few more documents, and escrow is going to process it to the trust.

Sean: [00:12:12] Perfect. And as a seller when you get the money, are you allowed to just get it in cash or do you have to put it somewhere else?

Brett: [00:12:19] So it’s your money Sean or your clients’ or whoever is going to do the deal. The question is how and where do you want the funds invested based upon your risk tolerance? So yeah, you could just put in money market accounts and not have it on any interest. The challenge with that would be you’re going to start incurring the fees and it’s going to eat away at the principal balance, which is then going to not be efficient for you. So most of our clients will choose a risk tolerance somewhere between five and eight percent. And these are over a 10-year period of time diversified with some of the top companies in the US. And that’s at least going to cover, you know, more than cover the fees if you do that number. But technically yes, you could park it for a period of time and just put it in just money market, you know. But we would say look there’s some stuff that’s better than that that you don’t have a lot of risk, that at least give you three to five percent. But really that’s between you and your financial advisor to figure out what you’re comfortable with. My role is as the trustee that oversees this and make sure the structure stays intact.

Sean: [00:13:22] And when you get the balance is it like 93.5 percent of the sale price? What is that balance you get?

Brett: [00:13:30] No, so a hundred percent of the funds go into the deferred sales trust, if you want to remain a hundred percent tax deferred, okay? So not to be confused with other structures that are out there that give you cash up front. So this one would be let’s say you wanted a note interest payment of 8%, okay? And let’s say the trust earned 10. Well, you would receive eight percent on it and you will pay ordinary income on that income. But I’ll give you a live deal. It’s probably the best way for your listeners. I had a gentleman just two weeks ago he sold 1.8 million dollar apartment complex in Sacramento. He owed five hundred thousand. He paid off the debt and put 1.3M into the trust. His note was structured with an 8% payment. He’s going to actually receive about six to six and a half percent to leave the rest of it building. On that six percent that he’s receiving, he’s gonna pay ordinary income on that. All the rest of it is deferred. How much did he defer? He’s deferring about $500,000. So instead of having basically $800,000, he has 1.3M in the trust. So he’s living off the full amount of the trust. So the question becomes are you receiving the cash? Yes, how much? Well, it’s off the interest. OK, so pay ordinary income on that. If you dip into the principal, you’re going to pay a proportionate capital gains tax on that amount which you can do too. You can dip into the principal whenever you want.

Sean: [00:14:49] Got it. So I guess my question is what are your fees? Because I guess we’re talking about different structure than the one that I was familiar with.

Brett: [00:14:55] There’s three sets of fees. The first set of fees is the tax attorney and it’s 1.5% on the first million, and then 1.25% of anything above that. And so let’s just say like this deal that we just talked about. It was a 1.8 million dollar deal. So it’s 1.5 on the first million and 1.25 on the remaining 800,000. That’s a one-time fee to the tax attorneys. And then it covers legal, audit defense. By the way, whenever you’re looking at a new structure, a new strategy, there’s some questions you should ask. How do we know it’s legal? What’s the track record? What are the fees? All of those things. So along these lines of fees, the track record is over 2,000 closes, and 14 no change IRS audits, and we’ve closed businesses, commercial real estate, primary homes. The other question you should ask is you know, what happens if I do get audited which could happen, then the audit defense kicks in. But going back to the rest of the fees, trustee fees about 50 basis points, which is 1/2 of 1%. And that’s recurring every year at the close of escrow and then every year on the trust, total trust proceeds. In this case, it was 1.3 million to be 50 basis points on that. As long as it’s just with the financial advisor. If for some reason you want to direct it to outside deal like a commercial real estate deal, you can do that with up to 80% of the funds. In that case it would be a 1% on that on whatever amount goes out. And then the other fee would be to the financial advisor whatever he charges you. Sometimes he charges you 50 basis points to a point depending on where and how the funds are invested. So again, most of our notes will earn 8%, after fees they net the client 6.5%.

Sean: [00:16:42] Okay, perfect. That answered all my questions. And yes, we are talking about a different structure than the one I was used to. So thank you for clarifying that. By the way, the 80% of the funds, is that kind of to protect your client in case they go all in on a deal and lose all their money and now 30 years later they have a huge tax bill they can’t pay?

Brett: [00:16:58] Exactly. So we don’t want the structure to fail and just to be clear, so this is not a monetized installment sale. This is a deferred sales trust. So the monetized is a 30-year plan. Ours goes for as long as you want. So they’re in 10 year increments, but the end of 10 years you can renew for 10 years and then renew for another 10 years and then renew for another 10 years. So we’re not them. We’re separate from them. We both use IRC 453 which is installment sale, which goes back to the 1920s, but we are completely separate from them. You can also pass it on to your kids too. They can inherit your position. But yeah, they don’t want the trust they being you know, the tax attorneys who created the structure and then the other founder of this deferred sales trust strategy with the estate planning team, they don’t want the structures to not be able to pay out. So we don’t want to take on too much risk and not be able to pay back the note holder in any one particular deal. And and then also they need to have liquidity to pay the note as well along the way because that’s really what’s happening. You are becoming the bank and you are owed that money. So we need to keep that reserve in there so that we can make sure we service the note.

Sean: [00:18:03] Perfect. Thanks for clarifying that too because yes, I was thinking about the monetized installment sale. I’m sure you know, you’re in the industry.

Brett: [00:18:09] Yeah, it’s a great… it’s common. You know, we compete with a lot of them quite a bit and so it comes up quite a bit. So yeah, no worries.

Sean: [00:18:18] Okay. So again, we’re going to do some small explanation here using three different figures. We’ll call them A, B, and C. Okay a is your buyer, who is going to buy your property with whatever funds they have whether cash or maybe their 1031. Doesn’t matter, right? The buyer can be anybody, any Joe Schmoe who has money. Then we have you guys which is the trust. We’ll call them B. Trust is just this middle person who’s going to handle the transaction on both sides. Then you have C, which is the seller, which is let’s say us. So seller sells their property and they don’t want to pay a huge capital gains tax right there on the on the spot when they sell it. And they also don’t want to do 1031 exchanges for whatever reason. So what they do is they sell the property, but they contact you guys first. You guys are involved. When they sell the property, effectively what happens at escrow is the trust buys the property from the seller first, and the seller which is us sells it at a deferred state.

Brett: [00:19:13] That’s a seller carry back. You can do the carry back, just me and you and the trust of the carry-back.

Sean: [00:19:17] Exactly, because you don’t get taxed until you actually get the money.

Brett: [00:19:21] You got it, the principal balance.

Sean: [00:19:23] Exactly. So if you defer the money, if you say, “I want this spread out over 30 years or so” or however long it is, then I don’t get charged capital gains until that actually gets in my bank account. So meanwhile this trust then sell to the buyer and between them too it’s like instantaneous. They sell it instantly. The buyer pays the money, the trust receives the money, and now the trust has this pool of funds. Whatever the sale price is minus whatever debt the seller owed, right? And that is the money that you guys are working with and you start investing it into stocks, bonds, and mutual funds. Maybe making 8%-6% a year and subtract all the fees. Supposedly this pool of money should be growing every year and it’s not until the seller actually takes the money out, that’s when you start paying the taxes. So the seller can decide to leave it in the trust or pull it out and pay taxes. Is that basically it?

Brett: [00:20:18] Yes, exactly right. And you can direct it to a commercial real estate whenever you want. So this is the power of it, where 1031 you have to buy something now in a seller’s market. So thinking about the 2008 crash, you know playing the Monday Morning Quarterback, what would you have done? You would have sold everything in 06 and 07 and waiting for everything to crash. And you would have sat on the sidelines with the deferred sales trust in conservative bonds, when the marketplace went down by 60, you know, 30, 40, 50% in real estate and bought everything at a discount. In fact, we’ve had clients do that, exactly that. They sold a property in 06, moved it to the trust, put it in conservative instrument. So even when the stock market crashed too, they didn’t go down much you know. They weren’t making much in the meantime, but they didn’t go down much. And then the same property that he had sold got foreclosed on. Got foreclosed on and five years after he sold it he went back to the bank and partnered with his trust, all tax-deferred the whole time, and purchased this property at 60 cents on the dollar. So it’s the best of both worlds. That’s the key here. You can sell high and buy whenever you want to. And the bigger picture to look at is the demographic Sean. There’s about 17 trillion dollars according to the American Bankers Association that will pass from one generation to the next in the next 20 years. And this is known as the largest wealth transfer in the history of the world. In fact, there’s 10,000 Baby Boomers every day in the US who turns 65 years old. There’s about 77 million Baby Boomers in the US alone. And so what they’re faced with is these highly highly appreciated assets whether it be commercial real estate, primary homes, collectibles, businesses, and they’ve made their wealth for 30, 40, 50 years. They’ve worked really hard. These are our parents Sean, right? And they go, “You know what? I want to be done with the toilets, the trash, the liability. I want to be I want to retire from my my dental practice being a veterinarian. Whatever it may be. And I want to have a passive income stream, that’s diversified and that’s liquid. And I want to enjoy my wealth.” But they didn’t know how to get out without getting hammered by the 30 to 50 percent of their gain being wiped out by the capital gains tax in the depreciation recapture. So they literally feel trapped. They feel trapped and in particular in our backyard here in the Silicon Valley some people bought houses in Fremont for $200,000 30 years ago and now they’re worth 2.8 million dollars. And they can’t even afford the rent down the street. All of the rents have gone so high. They’re on a fixed income and they look at their 250 exclusion or even their 500 exclusion on the primary home and they just go, “Forget it. I’m not going to pay, you know, $700,000 dollars in tax. I’m just going to stay in my house.” So we literally give freedom from capital gains tax liability to sell their house, get a diversified income stream, move wherever they want, fund their kids college education, you know fund their health concerns and health needs, all without having to go into debt. And also they can create and preserve more wealth, so that’s at the heart of what we’re about and really we want to focus on the client but also the business professional who’s out there trying to help their clients out when they go to sell as well.

Sean: [00:23:26] Nice. So when you do the strategy like you mentioned before, are you allowed to decide how much you want to put in the seller’s trust yet?

Brett: [00:23:34] Say if it’s a 10 million dollar sale, you could put 8 million in there. Now in that 2 million you take, you’re going to pay capital gains tax on it. That’s okay. You know, you may not need all 10 million right now. Or even let’s say it’s called a million dollars. You don’t need all million right now. Maybe you only need 200,000 right now. So it’s your money, just realize whenever you receive principal balance you’re going to pay a proportional rate of capital gains tax on that amount that you received.

Sean: [00:23:59] Right, but I mean like you said, if you service your debt again, or you get your $500,000 tax-free, then you don’t necessarily need to put all the money into deferred sales trust.

Brett: [00:24:08] Good question. Can you use both the 121 Exclusion and the deferred sales trust at the same time? The answer is unfortunately no. I know right? So you kind of got to pick your horse. And there is a technical reason for that. But essentially we’ve worked through that with the tax attorneys. By the way I’m not a tax attorney or a CPA. I’m a commercial real estate broker by trade. I have to say I’m just the nurse, Sean, and I take your pulse and take your vitals and say, “You know this thing might work for you. But before you get surgery, check with the brain surgeons and bring in your brain surgeon, so your CPAs and trusted advisors, and make sure all the structures’ blessed before you move forward.” That being said, this has come up multiple times where like, “Well, how about I just take my 500 Exclusion” and we’re like “Sorry, that wouldn’t work. You’re still going to pay taxes on that amount.” So you got to kind of pick pick your horse which one you’re going to go with.

Sean: [00:24:58] So this is just a technicality in I guess the tax law that says you can’t do your 121 Exclusion as well as your tax deferred.

Brett: [00:25:08] Yes.

Sean: [00:25:09] I see. It’s interesting. So I mean, I guess this works really well for investment properties and maybe not necessarily for primary residence.

Brett: [00:25:17] Well, let me give you two family residences where it just goes through the roof. So did a deal, 26 million dollar deal in Newport Beach on the ocean. The couple owed six million dollars in capital gains tax beyond their exclusion. Okay, they lived there the last five years. It did not qualify for a 1031. They needed to sell today. Okay, they didn’t want to rent it out for two years and wait and then try to do a 1031. They just they needed to sell like right now. So they deferred six million dollars in capital gains tax. So the question is, how big is that capital gains tax? But you’re right. If the number is only you know, $500,000 gain, no problem. Just you know, we tell people all the time, “Just go, you know, just pay. No worries. You’re good to go” And we’re doing a live deal right now in Palo Alto. A gentlemen. It’s an over 10 million home that he’s selling. And he goes, “Brett. I feel cash poor. I feel real estate rich and cash flow pour. All of my wealth is tied into this property that I built 13 years ago for 6 million dollars.” And when I sell he has a small exclusion of 250 but above that he owes 2 million in capital gains tax. So for him, it’s like 250 is small beans compared to that 2 million. So we’re going to look at every situation a little different. We’re going to just do the numbers. The neat part is we have a calculator online. You can just go to our calculator, enter in your information. What did you buy it for, what do you considering selling it for, how much depreciation have you received. And then let’s do a side by side comparison. But the deferred sales trust number one works best for high-end primary homes that are highly appreciated. Number two is businesses. And the number three would be commercial real estate. And it also works for collectibles as well.

Sean: [00:26:50] It’s cool to hear that. Man, 26 million, Newport Beach, huh? 6 million dollar capital gains, 500K who cares, right?

Brett: [00:26:55] Exactly. Exactly.

Sean: [00:26:57] That’s pretty cool. I want that.

Brett: [00:26:59] Yeah, you know, so why, right? So you can give more away right? So you can help more people pursue their passions, right? so they can be they can live and give more. That’s the goal behind all of it. Versus giving it to the government and it’s gone forever. Both sides were wasted away so quick, right? To pay down that 22 trillion dollars. So we literally want to provide freedom from capital gains tax. That’s what we’re all about.

Sean: [00:27:23] Awesome. Awesome. I was curious though. So it seems like even if I decide to go with you guys and create deferred sales trust, at the end of the day you still keep 20% of that inside the trust. When can you get the 20% back?

Brett: [00:27:36] So remember that 20% is hopefully earning about 6% after fees, 6.5% after fees and you’re living off of that. So that’s your income stream. You can sell out of commercial real estate syndications and get the LTV. Basically the LTV needs to maintain 20 percent. So if you’re a non liquid assets, let’s say 80% is in commercial real estate, you would need to sell a portion of those and move it back into the trust and then cash out up until 80 percent. Now if you move all of it back into the trust, you can cash out of all of it and pay the tax tomorrow, next year, you know five years from now. It’s your money, you decide how and when you want to receive it and pay the tax. But honestly Sean most of our clients like to pay the taxes second day to never. Meaning they’re just going to keep it deferred every 10 years, then they renew for 10 years, renew for 10 years, and keep this going and pass it onto their kids. Because again, once you pay the tax it’s gone forever. Why pay it? But it is flexible and you can receive it and pay the tax.

Sean: [00:28:38] I see. And when you pass away and you give it to your kids, is there any kind of step up in tax basis? I’m not sure how this works since you already sold the property.

Brett: [00:28:46] Correct. Great insight. And that is the one downside to the deferred sales trust. It does not maintain the stepped-up basis. So one of the advantages to the 1031, is it maintains a stepped-up basis. Now that being said, the recent Trump tax plan, they talked about taking away or limiting the stepped-up basis, taken away or limiting the 1031 exchange, right? These are serious serious things because they’re faced with is 22 trillion. So we always advise, “Look, that is something to consider. If you have some serious health things, health conditions going on, and you feel like death can be in the short time period, then consider not doing anything and maintaining that stepped-up basis.” But if you’re in good health and you want to retire, don’t just not sell because you think the stepped-up basis is going to be here because it may or may not be, you know. And you could just hold on and not really achieve what you want to achieve which is time, travel, liquidity, diversification, and you may be foregoing an ill-timed sale. Even with the stepped-up basis your kids could get, maybe the marketplaces’ dropped when they sell it, you know? They can’t sell it for a sigh. So yes, that is true. But be cautious to put all your eggs in that stepped-up basis basket.

Sean: [00:29:55] Gotcha. And when you renew are there any other renewal fees? Say if you continue for 10 more years. It’s like saying, “Yes. I want to continue for 10 more years.”

Brett: [00:30:03] Exactly. Yep. It’s just this annual recurring fee from the trustee and the financial advisor, right? But the original law firm fees are already gone.

Sean: [00:30:11] Cool. I think we talked already about the pros and cons right? Are there any other downsides that people don’t foresee when they go through it?

Brett: [00:30:19] You know, no. That’s the biggest thing is people just say, “Hey, this sounds too good to be true. Why haven’t I heard about it?” And I know it seems like it’s too good to be true. I know it seems like you would have heard about it. I know it seems like your CPA would have told you about this, but honestly until they talk to us and get educated, they just don’t know. We now have though over 1,100 professionals over across all of the United States. CPAs, tax attorneys, financial advisors, realtors, commercial real estate agents, 1031 QI companies. We’ve had national law firms review the structure and we just say, “Hey get to know us. Bring your trusted advisor on. Get educated.” Because at a certain point your listeners didn’t know about the 1031 exchange and somebody told them about it and all of a sudden they said “Oh, what’s that? So does it really work?” And then they say, “Oh it does work.” And they got comfortable with it, it’s like riding a bike. The first time you ride the bike’s a little bit awkward. But as you ride the bike you get more and more comfortable. But as we compare ourselves to the 1031, we have a longer tax law that has goes back to the 1920s, and then we have a 23 year track record with over 2,000 closes. So just really get over that hurdle of “I should have heard of this by now.” But until you hear somebody put it in a simple way that speaks to what you’re doing, you probably have it. So just get to know us and take your time making a decision.

Sean: [00:31:38] Yeah, just get educated and learn more. Are there any minimums and maximums for this plan?

Brett: [00:31:43] Great question. So for every $100,000 in tax liability Sean. So let’s just say your deal is only $20,000 in tax liability, we’d say,”Just pay it. That’s too small.” But for every $100,000 in liability, you need about $500,000 in proceeds, right? So if you’re selling a $10,000,000 deal and you only have a hundred thousand dollars in tax liability, we say “Just pay the tax and walk away with your 9.9M.” But if you have a 10 million dollar deal and you have 3 million dollars in liability, wow, that’s significant. That’s 30% of the total. Let’s defer all that three million instead of having 7M. So minimum is a hundred thousand dollars in liability, minimum is $500,000 in proceeds, and then look at the ratios to make sure they make sense.

Sean: [00:32:24] I’m glad I asked that question. It is a big number. So do you ever have flippers who decide to do this with you guys, or is it mostly for people who do large large large projects? Like you said like a five hundred thousand dollar profit for it to be worth it.

Brett: [00:32:38] Yeah, you know so that hundred thousand dollar liability could be multiple properties. So yes, we do have those who do flips who we can look at their circumstances and how many they’re doing per year. The neat part about it Sean is there’s one deferred sales trust and you can have multiple notes. All right so let’s say you had five properties and one’s selling today, one’s selling a year from now, one’s selling a year and a half from now. Every time there’s just a new note that goes into the trust and that’s a new schedule for that. So yes, if they’re doing a high enough volume, if they have enough tax liability and have enough proceeds, you can roll it into the trust. One strategy I would… you know at a certain point the music stops for the guy who’s doing the flips, right? And that’s the part where you don’t want to be caught, you know without a chair. So this is the deferred sales trust. You can take some of your chips off the table roll them into the trust one property of time. I think right now is a great time to do it because the market is so hot and then wait, you know, get out of real estate for a little while. And by the way, you’re also pooling all your money together too. We work with people who have 25 properties, you know worth between 150 and 400,000 and they go, “This is impossible! if I want to do a 1031 exchange it’s a nightmare because no way I’m going to sell them all at once. And if I am to sell them all at once, I’m probably gonna have to give a discount to the investor who’s buying a pool of these. I want to sell them to primary homeowners who are going to pay that 20 to 25% more premium.” So we say, “Exactly! So slowly sell out of each of your deal and move them into the deferred sales trust and pool all your money together. Now you have this pile of money that you can partner on an apartment complex. Let’s say 50 units because you were able to get three million dollars all pooled together with your partner with you, and then you also have a brand new depreciation schedule.” So every circumstance is different and we’d love the opportunity to walk through any of your listeners who want to learn more.

Sean: [00:34:34] All right, cool. I think that’s all the questions I have for you today. Is there anything else that we should know about the deferred sales trust?

Brett: [00:34:40] Yes a hundred percent. Thanks! I would say these two things. Okay. The first one is for the ultra high net worth individual. Whether you know the person or the listener is here. They have what’s called the estate tax or the death tax. And the death tax basically says like Sean if you’re worth more than 22 million dollars and you’re married, anything above that that’s inside your taxable estate is going to be hit with a death tax, which is 40%, okay? So let’s just say you’re worth 52 million dollars and all of it’s inside of your taxable estate. That first 22 million is exempt, but that next 30 million is going to be hit with a 40% death tax. So the 1031, the stepped-up basis, it doesn’t fix that. This is huge, the deferred sales trust, we solve that. We can move the funds outside of the taxable estate as we close the deferred sales trust. So this has huge implications for those who are worth more than 22 million collectively and they’re married, and or 11 million, if you’re single. Nothing else that we’re aware of can do what we do on that scale. So that’s the estate tax. And then if you’re a real estate broker, if you’re a luxury and high-end realtor, if you’re a business broker or financial advisor listening to the show, how are you differentiating yourself from your competition? How are you helping these baby boomers diversify and get liquid and sell high right now and solve their challenges? If you’re just selling the same thing and walking in with the same tools that everyone else is walking in with like the 1031 exchange, the charitable, or other things, you’re not differentiating yourself. So we love to empower business professionals, right? Because I am a business professional, I’m a commercial real estate agent. And I was faced with a reality check with this exact thing. How do I compete with brokers who have been in the industry for 20 years? Why will they want to hire me versus hiring that person who has so much more experience? The answer is finding solutions to the clients’ problems and when you add more value to them, you can actually win the business. So use this as an opportunity to have another arrow in your quiver, right? Another tool, another value-add opportunity, to help your clients solve these massive problems. And when you do that, you’re going to grow your business and you’re going to separate yourself from your competition. So again get educated and empowered by strategies like this. I’m here to support, that’s my passion. I go and I’ll speak at big events and I’ll educate on this. I’m here to support you and we have a whole turnkey marketing system with personal branding, personal deferred sales trust calculator. By the way, we don’t charge for any of it, okay? A lot of services will come to you and say, “Hey, sign up and I’ll get you on the front page of Google for $300 a month.” We don’t charge anything. We only ever get paid if your client does the deal so there’s no charge to these business professionals. So come take a look and see if you want to join us. We’d love to partner with you.

Sean: [00:37:28] Thank you Brett. And how can people get in contact with you?

Brett: [00:37:31] Yeah, the best way is CapitalGainsTaxSolutions.com my website. But you can also look that up on LinkedIn, on Facebook, on YouTube. I have a YouTube channel with videos that I try to release, and the last one is BiggerPockets if I didn’t mention that one already.

Sean: [00:37:44] Awesome! Everyone’s out of your pockets.

Brett: [00:37:47] Yeah, you know it’s a good site right? Full of some good information.

Sean: [00:37:50] Yeah, alright Brett, well thank you so much for your time today and sharing your information about the deferred sales trust. I hope they will contact you if we have any questions regarding this product.

Brett: [00:37:59] Thanks Sean. Appreciate it.

Sean: [00:38:01] Thank you. Take care.

Here are some of the key takeaways from this episode. A deferred sales trust is an alternative to the 1031 exchange and is a great way to have your money working for you. It’s really only worth it if you have a large tax liability; something over $100,000. And with the deferred sales trust you had the flexibility of selling high and buying low, whereas with a 1031 exchange you need to identify and purchase something in a relatively short time window. You’re also allowed to create a deferred sales trust for a failed 1031 exchange. It’s good to have as many options as you can when you sell your property. So do your research and reach out to Brett’s group if you think the deferred sales trust is right for you. I hope you learned a lot. You can find the show notes on our site EverythingREI.com. Thanks, and have a great day.