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Deferred Sales Trust is the Debt Free Plan with Brett P. Swarts

 

Are you looking to overcome your capital gains tax deferred limitations? In this episode, Brett P. Swarts, Founder of Capital Gains Tax Solutions, joins Moneeka Sawyer to discuss what a deferred sales trust is and how you can take advantage of this. Brett talks about helping people escape feeling trapped from capital gains tax and to never have to overpay for a property via 1031 exchange. Brett and Moneeka dive into the difference between a deferred sales trust and a 1031 exchange. Brett also gets into detail on how you can sell your property high and take advantage of a deferred sales trust and ultimately defer capital gains tax for your transaction.

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Listen to the podcast here

 

Deferred Sales Trust is the Debt Free Plan with Brett P. Swarts

I’m excited to welcome to our show our guest, Brett Swarts. He is the Founder of Capital Gains Tax Solutions. Each year, he equips hundreds of business professionals with the Deferred Sales Trust tool to help their high net worth clients solve capital gains tax-deferred limitations when selling their highly appreciated business or real estate. The Deferred Tax Trust offers an exit strategy that helps business owners escape feeling hostage to capital gains tax and venture capital to fund their next business deals by deferring capital gains tax and depreciation recapture of 30% to 50% of the gain on the sale of their businesses. That was a lot of cool words. We are going to go into it. Brett, welcome to the show.

Moneeka, thanks for having me. It’s such a pleasure to be here.

This is such a hot topic. Could you first start by talking a little bit about your story? Tell us where you came from.

Many commercial real estate owners struggle with capital gains tax. I started at a company called Marcus & Millichap back in 2006 where we help people defer capital gains tax using a 1031 exchange. We were focused on helping them create and preserve more wealth in particular through multifamily. It was my specialty here in Northern California. We learned about the 1031 exchange on day three. The 1031 exchange is a way to defer tax when you sell an investment real estate, as long as you buy a like-kind investment real estate.

Something happened during what’s called the 2008 crash where the marketplace shifted and people got hurt quite a bit. I had friends, family and clients, everyone lost something, some lost everything, all of their net worth because, in particular, we found that they were forced to overpay for properties via a 1031 exchange. They felt trapped. They felt pressured in this 180-day window to take on equal or greater debt for an equal or greater property. I set out on a mission saying, “How do we help all my friends, family, and clients to never have to face this again?”

At the right time, my manager brought in a gentleman to speak on this topic called a Deferred Sales Trust. I sat in an office, probably a lot of your readers are sitting somewhere reading for the first time saying, “What is this? You’re telling me you can defer capital gains taxes not using 1031, not have to go back into real estate immediately? You can do it for a business or a primary home. It’s got to be too good to be true,” but I kept digging in. I kept learning and kept being open-minded to what it could be. Fast forward, several years later, after countless deals of 1031 exchanges, Delaware Statutory Trust, Deferred Sales Trust, we’re helping a lot of people escape feeling trapped from capital gains tax and the best part about it is they never have to overpay for a property ever again via a 1031 exchange.

Why don’t you tell us the difference between a 1031 exchange and the DST, which is what you used?

Sell high and buy low, not sell high and buy higher. Share on X

The premise is this, most business owners or commercial real estate owners are high-end primary homeowners. They struggle with capital gains tax somewhere between 30% and 50% of their gain when they go to sell their highly appreciated assets. We use a Deferred Sales Trust to replace the 1031 exchange to give liquidity, diversification, flexibility and then the ability to go back into real estate at optimal timing. That’s the premise here so that high-net-worth individuals can create and preserve more wealth. Optimal timing is the key here. Most of us know when it’s a seller’s market for real estate and when it’s a buyer’s market. Most would agree, especially here in California and even in most states that prices are through the roof. They’re ultra-high. It’s hard to make sense of any deals right now with cap rates and interest rates being so low. Rents have appreciated such a great deal over the last number of years.

You couple that with, “I’m going to sell high.” That’s great, but our parents taught us to sell high and buy low, not sell high and buy higher, which is not optimal. The 1031 exchange, the first thing is you sell a piece of property. You need to buy something of equal or greater value. You need to identify potential properties within 45 days and then close within 180 days. We call that the sell high, buy higher 180 days later, which is not what you want to do. That’s the first thing. It’s timing. Do you want to buy at an optimal time? Do you want to sell high and buy low? That’s the intention. How could I sell high now, sit on the sidelines, be debt-free and park until I see a deal?

The intent is to have timing. The challenge is the 1031 doesn’t allow you to have that timing. The solution is the Deferred Sales Trust. We can sell high now, sit on the sidelines all tax-deferred, out of debt, and you can wait for a deal. That could be tomorrow, that could be day 181 or that could be five years from now. The key is, what is the best timing for you when you find a deal? I’ll tell you about a quick deal story. I had a gentleman who did this in 2006. He’s one of the top Deferred Sales Trust clients. We called this the Monday morning quarterback. He dropped back and he threw the perfect pass at the perfect time. He sold at the peak, moved all of his funds to the Deferred Sales Trust. This is a large transaction. He was able to defer all the tax.

Five years later, that same property that he sold, the buyer was foreclosed on by the bank. He bought that property back through his trust, all tax-deferred, not using a 1031 at $0.60 on the dollar. We call that buying at an optimal timing, sold high and bought low. That’s the first thing about the 1031 exchange. It doesn’t allow you to do that. The second thing about the 1031 exchange is it forces you to buy equal or greater value, which often means equal or greater debt. Let’s say you sold a $10 million property and you had $4 million in debt. Now, you need to buy equal or greater value, $10 million or more, which most people end up buying more.

Now, you’re not only taking on that $4 million in debt. You’re taking maybe $5 million or $6 million of debt. You couple that with not buying at an optimal time, you’re putting yourself in a risky position. We call that dumb debt, taking on too much debt for a property that doesn’t make sense because you want to defer the tax. That’s where most people live in the commercial real estate world. They buy and sell via 1031 exchanges and overpay, or they get a bit smart. They buy and then they sell and pay the tax. We would say, “No, there’s a better solution. It’s the third one. It’s called the Deferred Sales Trust.” Put it into the trust. You get the best of both worlds.

The next thing to consider is what’s called the depreciation schedules. For any of your readers and have owned for a long time, specifically 27.5 years if you have multifamily or 39 years if it’s commercial, you go to zero depreciation. Depreciation is the number one reason or the top two reasons to own commercial real estate in my book because it offsets the income that’s coming in. The only thing that does this is business or commercial real estate, therefore, you pay less in taxes.

However, if you own long enough, you depreciate out. If you’ve done multiple 1031 exchanges, you also depreciate out. The depreciation schedule travels with a 1031 exchange, which is not good. You want more depreciation. You don’t want the same schedule. The intent is to get more depreciation. The problem is the 1031 exchange travels. It doesn’t give you more unless you buy a bigger property. The solution is the Deferred Sales Trust. You can sell through the funds into the Deferred Sales Trust and then use those funds like a self-directed IRA to go purchase new real estate via a new LLC where you’re the managing member of it. You’re running that deal the same way you would be. Except now, you’ve got a brand-new depreciation schedule, which is powerful for creating and preserving more wealth.

My question is, does the property need to be in the trust when you sell it? I know that’s a little bit technical, but you said that he sold the property and then he moved all that money into the trust. Give me a little bit more clarity on what that cashflow looks like.

 

Let’s walk through how this whole thing works. That’s probably what your readers are thinking. How does this thing work? What is this trust? How is this all going down? Where’s the money flowing? Moneeka, we’re going to start with this premise first. It’s the premise of what is the actual receipt or constructive receipt? Actual receipt for your readers is when you receive the cash. If you get paid or you close a real estate deal or whatever, when you receive that cash, the IRS says you owe some tax on that. This is the first concept.

If I come to you and I said, “I want to buy your $10 million apartment complex.” Let’s imagine you own it free and clear. This is a zero basis. You’ve owned it for 27.5 years. You’re fully depreciated. If you were to sell, you owe about $4 million in tax, about 40%. It’s a good number with the depreciation recapture. You’re thinking about a tax deferral strategy. You’re not sure about a 1031, but let’s say you’re considering a traditional seller carryback, which is the foundation of our structure. If I give you a $2 million down payment and you carry a note for $8 million, how much actual receipt did you receive?

$2 million.

The other amount is in a deferral state. You haven’t received it yet. You don’t owe the tax on what you haven’t received. Let’s call it traditional seller carryback. It’s very well-known. Your readers probably know about it. If not, their CPA definitely does and their broker does. It goes back to the 1920s. Let’s adjust that a little bit. Let’s imagine, I came to you with a zero downpayment. I said, “Moneeka, I’m going to buy a property from you. I want to give you a zero downpayment.” Let’s say you did that deal. That scenario, if you took 100% financing and a zero downpayment, how much tax is triggered now? Zero because you haven’t received any funds yet. It’s in a deferral state.

You’ve got a carryback. You could do a 100-year carryback and live off those interest payments for as long as you would want to. In a traditional seller carryback, you would never do that deal for a couple of reasons. One, you’re putting a lot of faith in the buyer. You may have to foreclose. They could run your property into the ground. Most of those deals are structured at 2 to 5 years. Therefore, they’re paid back and the seller owes the tax anyway. They don’t decide to do that. All your eggs are in that one deal. It’s part of why you’re selling your deal is because you’re trying to get away from that but the law works.

Enter the Deferred Sales Trust, this is the difference. We’re going find that cash buyer for $10 million. A broker’s going to find him. You’re going to find him. You’re going to be selling it for $10 million. You’re all ready to go. He’s coming with the full amount of cash at the close of escrow. Instead of doing directly to him, receiving that $10 million and therefore owing all of that tax, you decide you want to use the Deferred Sales Trust. The trust jumps in writing before the close of escrow. It buys your position for the full $10 million, but it gives you a zero downpayment.

You took 100% financing. It turns around immediately and sells to this cash buyer for $10 million. The $10 million goes into the trust. This is where the funds flow like your question. The funds are sitting in the trust. If the trust bought it for $10 million and sold it for $10 million, how much gain does the trust have? The trust doesn’t owe any tax. It bought and sold for the same price, no gain. Moneeka, if you took a $10 million note and you carryback a 100% financing, how much tax is triggered now? Zero. The smoke clears. The deal closes. The funds are sitting in the trust. This is the best part about it. You’re not in a 1031 exchange, the whole blue ocean opens up to you rather than the red ocean. The red ocean is where all the sharks are at. It’s where all the 1031 exchange deals. There are people chasing deals overpaying for properties, feeling rushed and forced. It’s a lot of blood in the water.

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Instead, all of a sudden, you’re in this blue ocean. This blue ocean is wide open. What can you do? You can invest it into stocks, bonds, or mutual funds. How long can the note go? As long as you want, we structure the notes as ten-year notes. At the end of ten years, you can renew for ten. You can put it into investment real estate. You can put it into another business. You can do hard money lending. It’s this big blue ocean also you’re completely out of debt. This scenario, if you owe debt on that property, that debt would be paid off. The difference would go into the trust. That’s also powerful too. A lot of clients, especially Baby Boomers, and this is a stat for maybe some of your readers.

According to the American Bankers Association, there’s about $17 trillion that’s passing from one generation to the next in the next twenty years. This is known as the largest wealth transfer in the history of the planet that we know of. There are about 10,000 Baby Boomers every single day turning 65 in the US alone. There are about 77 million in the US alone. Every day these Baby Boomers are stuck in properties or stuck in businesses or ready to retire or have income needs or different challenges. They’re ready to get some solutions to this. Too often, it’s not to buy another property.

I closed a deal in Sacramento for a gentleman named Peter. He’s a Baby Boomer. He sold eighteen units and he’s been a real estate broker all of his life. He had never heard of the Deferred Sales Trust. He had heard of a Delaware Statutory Trust. He’s done 1031 exchanges but had never heard of the Deferred Sales Trust. He goes, “Brett, I felt trapped before I met you because I had eighteen problems. These are eighteen units.” He was driving every other day to Sacramento to bang on doors, to try to collect rents, to try to get evictions, and do all of this stuff.

He’s looking to retire. He’s going, “Brett, I have eighteen problems right now. I don’t want a 1031 exchange and have 36 problems. I’d rather be out of debt.” He paid off all of his debt. He sold his building for about $1.8 million. He paid off about $500,000 of debt. He also said, “Brett, I remember debt in 2008 before the crash. I got overpaid for properties. I almost lost everything. I held on, but it was very stressful. I don’t want to ever want to go through that again. If I can get out of debt, that’s a beautiful thing. If I can defer all my taxes,” his tax was about $550,000, “That’s a beautiful thing. I can put it into conservative allocations.

I’m not a big stock market guy, but if I can put it in conservative stuff and wait for the market to shift, that’s exactly what I’ve been looking for. Where’s this been all my life?” I go, “I know. I learned about it several years ago. I’ve done more and more deals now.” He’s since become a member with us. He’s out educating his clients too because it works for the primary homes, which has mainly been his focus. That being said, that’s the power of the Deferred Sales Trust.

When the money goes into the trust and you can sit on it, do you have limitations on what you can invest that money in? Does it have to be real estate again or can it be other things?

It can be stocks, bonds, mutual funds. It can be insurance products. It can be an investment real estate of your own or with partners. It can be multiple syndications. That’s part of the beauty of the Deferred Sales Trust especially for me. We talked about diversification as a way to reduce risk, but too often with real estate, you’re trading one asset and one location for another single asset and one other single location. Oftentimes in the same product type and oftentimes in the same geographical location, because let’s face it, if you’re the owner of that property, that’s what you know.

You don’t know anything else. By definition, you’re not diversified. What can you do? You can sell a multifamily property. That’s highly appreciated especially in California. Maybe there are some multifamily properties in other states with some proven track record operators who are doing it for 10, 20, 30 years. You can put a portion of that fund with them. You don’t have to put all of it. In Peter’s example and another client right now, we’re interviewing multiple syndicators. One is a senior housing syndicator. One of them is multifamily. One of them is a mobile home park.

 

Think about diversifying not only product types but also geographical locations and also your dollar amount. Here’s the cool part. None of the debt is in our client’s names if they don’t want it to be. It could be in everyone else’s name. You get some diversification there. Let say, “Brett, I want to do it myself.” You can do that too. Up to 80% of the funds is the limitation. Let’s imagine it was $10 million in the trust. $8 million can be used to form to go purchase a new property or go into syndication deals.

We call those alternative investments. The other 20% is going to stay in stocks, bonds, mutual funds. It’s still earning interest. Most of our notes earn around 8% over any ten-year period of time. Net cashflow is around about 6.5% on cashflow to the client. They’re going to pay ordinary income tax on that cashflow that’s coming off the trust. Some of our clients will say, “I don’t need any of the income. Let it compound and let me pull it out on a different date,” which is called the net income tax advantage especially for our very wealthy clients who are still pretty young and still have a big income over here. They can sell an asset and let the interest compound on top of it over here and keep all of that interest also deferred as well as the capital gains tax. There are lots of nuances to this Deferred Sales Trust. The key is creating a plan and getting connected with your trusted advisors, with us so that we can all make sense of what’s best for you.

That was a lot of information. I’m sure my ladies have questions for you. How can they get in touch with you to find out more?

We have a YouTube channel. They can search Capital Gains Tax Solutions, YouTube, LinkedIn, as well as CapitalGainsTaxSolutions.com. We have our podcast, the Capital Gains Tax Solutions Podcast. You’ll search Capital Gains Tax Solutions and that’s the key here. It works for businesses and private practices. We’ve done dentists, veterinarians and optometrists. We’ve done trucking companies, tech companies, you name it. We’re also doing a Bitcoin case right now too, which is interesting because it’s subject to capital gains tax. Unlike a 1031 exchange, we can work with about any asset type, which is powerful. We also did a house in Cupertino. We helped an individual who is selling a high-end primary home. As your readers may know, a primary home qualifies for what’s called the 121 exclusion, where if you lived there for the last five years, you get that $250,000 if you’re single and $500,000 if you’re married. That’s a beautiful structure. I did that for myself, my family already and it’s wonderful.

Above and beyond that, you owe capital gains tax and you cannot do a 1031. We helped her. She sold a $3.1 million house. She’d been there for over twenty years. She is a couple of miles from Apple headquarters. We helped her defer another $350,000 in tax. What’s neat about that is not the external things that we’re solving, but it’s the internal things. I’m able to move from my house. I’m able to relocate. Maybe live near next to my grandkids. I have an income stream from an asset. I paid off all my debt. There is an income stream that’s coming off these different assets versus sitting in a house, the kids are gone and it’s empty where you feel real estate rich and cashflow poor. We escaped the capital gains tax, provided a whole new opportunity for income. It works for the primary home. I would encourage your readers to consider those different avenues too.

You have a webinar that my readers can watch to get a little bit more information, correct?

Yes. You go to my website and request free access to that. We’ll send it to you as well as a free gift of the brochure, an overview. It’s like a five-pager about escape feeling trapped by capital gains tax. That’ll give you a great introduction to what we do and what we’re about.

That’s going to be at CapitalGainsTaxSolutions.com. Thank you.

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You’re welcome. Thanks for having me.

Are you ready for our three rapid-fire questions?

I am.

Brett, tell us one super tip on getting started investing in real estate.

Find a mentor and/or join an amazing company that can train you. For me, it was Marcus & Millichap. I had multiple mentors and some of the best training on investment real estate. You may not have to be brokerage full-time. There are tons of conferences, tons of podcasts like Moneeka’s podcasts. Dive in and not only consume the information, but then go apply it. You have got to learn, but you’ve got to apply. If you do those two things and you look at it as a long-term game, not a sprint, you’ll do fine.

What would you say is a strategy for being successful in real estate investing?

Once maybe you’ve established the basics and have a good understanding, it’s investing yourself. Putting money into deals, whether you’re buying the deals yourself and/or partnering, figuring out what your strengths are. You might be good at raising money or you may not be good at managing a property. You might be good at finding deals or connecting networks with brokers. Finding your niche within a team. People aren’t good at all five things, but they might be good at 1 or 2. For me, in my strategy right now, I’m married with five kids and have two businesses. I don’t own my own real estate by myself. I go with partners who are operators, senior housing, multifamily, retail, and mixed-use. That’s what they’re doing every single day. They’re the brain surgeons there, but I also raise money for those deals.

 

I roll my fees into those deals or I may find a deal, broker the deal and roll my fee into it. The key is to take all of the wealth. For me, it’s completely passive. I put it there and I get the check coming in, which is great. Defining what your strengths are and realize getting into real estate may mean one or two of those things. It’s not all five figuring out what your strengths are, what you most enjoy, and then figure out a way to connect with the team and add value to other people, to help them achieve their goals as well.

It’s all about networking too. It’s finding those people that can fill the holes. What’s blissful for you? What are you good at? Instead of you having to learn every single piece along the way, which can be very unblissful.

We put it like this. Hire the who or find the who instead of being in the how. You have a vision that you set. Too often, we want to try to be the how. We’re entrepreneurs. We’re hard-charging investors. We want to figure this thing out. That’s good to have that fire but too often, we get stuck in the how. We do this circle of procrastination and frustration, to save a buck or to figure it out rather than saying, “Here’s my vision. Let me hire the who or team up with the who and I can achieve that so much faster.” It’s so much more enjoyable because now you’re in your sweet spot. You’re in your strengths. You’re focused on the highest and best use of your energy and your time versus being in the how and getting frustrated or doing it too slow.

Tell us one strategy that you would say you use every day that contributes to your personal success.

I have to continue to remind myself to learn to work harder on myself than I do on my job. This is a quote by Jim Rohn. He says, “If you work hard on your job, you’ll make a living. There’s nothing wrong with it. That’s fine. If you work harder on yourself, you’ll make a fortune.” The first idea we think about is money and that is a part of it, but that’s a small part of it. The real big value to this is who you become along the journey. If I want to become a millionaire, if I want to invest in real estate, if I want to do all of these successful things, what is it going to make of me to become that person? That’s the value to our family, our community, our country, our world, is the people we can become, the character we can grow. The legacy we can leave from that point on is working harder on yourself.

What does that mean? That’s your health. That’s your finances. That’s your personal development, your leadership, your spiritual walk, that’s your relationship with your friends and your family, your intellectual goals. It’s 5, 7, 8 top major things. Learning to major in the majors instead of minoring on the majors. Having those priorities, but it’s a continual learning process. It’s so easy to get caught up in the noise and the distractions. Even the discussion we had before about focusing on our weaknesses or working on things that we’re not naturally gifted at. We’re not all made to be brain surgeons or attorneys or tax people or real estate people or whatever your profession is. Figure out what your strength is, set your vision and then work in your strengths to make that vision work by connecting with people but also growing yourself and your character.

It’s so well said. Thank you so much for that. Brett, this has been truly amazing. I’m looking forward to the EXTRA portion of the show where we’re going to be talking about mitigating estate taxes because a lot of us are fortunate enough to get an estate or be there to inherit but we worry about those taxes. Brett has got an answer for us on that too. I’m so excited to hear that. For those of you, ladies, who are subscribed to EXTRA, stay tuned. We’ve got that coming. If you’re not subscribed to EXTRA, but would like to be, it’s easy. This is what you do. You go to RealEstateInvestingForWomenEXTRA.com. There you can subscribe. You get the first seven days for free so you can test it out and then you subscribe. Once you subscribe, the EXTRA shows will come to the exact same device that you’re listening to your normal podcast on. You don’t have anything extra there. You get extra content. For those of you who are leaving us now, thank you so much for joining Brett and I for this portion of the show. I look forward to seeing you next time. Until then remember, goals without action are just dreams. Get out there, take action and create the life your heart deeply desires. I’ll see you next time.

 

Important Links

• Capital Gains Tax Solutions
• Capital Gains Tax Solutions – YouTube
• LinkedIn – Capital Gains Tax Solutions
• Capital Gains Tax Solutions Podcast
• CapitalGainsTaxSolutions.com
• RealEstateInvestingForWomenEXTRA.com

 

About Brett Swarts