Brett Swarts is an entrepreneur, CRE investor, podcaster, deferred sales trust educator/trustee, and Nor. CA multifamily broker. His leadership roles include serving as the Founder of Capital Gains Tax Solutions podcast, Founder of Capital Gains Tax Solutions, and Founder of Commercial Realty Apartment Advisors. He leads a team of extraordinary people at his companies. He has served billionaires, Doctors, Dentists, Veterinarians, Attorneys, Tech Entrepreneurs, Architects, CRE Syndicators/Operators, and more, to help them create and preserve their wealth through investment real estate. He leads them through this process by leveraging the optimal timing capital gains tax deferral structure known as The Deferred Sales Trust. Its purpose is to help individuals escape feeling hostage to the 1031 exchange and 30-50% capital gains tax when they sell their highly appreciated assets such as; a business, CRE or a primary home so they can create and preserve more wealth.
In this episode, Jack Bosch talks to Brett about deferred sales trusts to find out exactly how this process works. You’ll find out how you can save a gigantic amount on your tax bill by using this legal loophole. It’s quite a technical episode, so get your notepads ready!
Listen and enjoy:
- Find out how Brett Swarts helps investors save on tax
- Discover what a deferred sales trust is
- Understand how to get maximum profit from your investments
- Learn how to bypass the 1031 exchange entirely
Mentioned in this episode
- Subscribe and rate our podcast at: http://www.Jackbosch.com/podcast
- Follow Jack Bosch on Facebook to get the latest updates: http://www.facebook.com/jack.bosch
- Learn to flip land for pennies on the dollar: http://landprofitfun.com/
- Join the Land Profit Generator Facebook Group: https://www.facebook.com/groups/LandProfitGenerator/
- Get in touch with Brett and save on your tax: https://capitalgainstaxsolutions.com/
- Check out Capital Gains Tax Solutions on YouTube: https://www.youtube.com/channel/UCAykQNmIWZ0KARBeVWcQxUA
Jack: Hello, everyone. This is Jack Bosch speaking, and welcome to the “Forever Cash Life Real Estate” podcast. I have a special guest. Today, we have Brett Swarts here, and he’s gonna talk about a concept that’s called the deferred sales trust, which allows you to time the sale of a property with capital gains perfectly and take advantage of all kinds of different laws. So, he’s going to talk about that. It’s something I personally, actually, had never heard prior to this call and prior to preparing for this call and prior to getting to know Brett. So I’m super excited about it because it opened some brand, not a lot of new, but some very little known loopholes and opportunities to save taxes. So, we’ll get started in just a second right after this.
Announcer: Welcome to the “Forever Cash Life Real Estate Investing” podcast, with your host Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.
Jack: All right, so here we are again. Well, first of all, welcome, Brett. How are you doing?
Brett: Great, Jack. Thanks for having me.
Jack: Wonderful. I’m super excited to have you here, so let’s jump right in. Tell us, you’re going to talk about or we’re going to talk about deferred sales trust. Now, what the heck is that?
Brett: Yeah, so most commercial real estate owners or business owners or high-end primary homeowners, they struggle with capital gains tax, somewhere between 30% and 50% of their gain when they go to sell their properties or their assets. We use a deferred sales trust, which is just a manufactured installment sale, to give tax deferral, liquidity, diversification. And the best part, probably, for your listeners, that they’re gonna be most excited about, is the ability to buy commercial real estate at optimal timing, therefore, eliminating the need for the 1031 exchange so that they can create and preserve more wealth.
Jack: All right, so that’s all sounds really great, but I don’t have a clue how it really works, and what does optimizing time of the sale or the purchase mean or the sale mean. Just start us from A and explain to us, how did you come up with that? What’s the challenges people are facing? Just go like, right…start at the beginning because our audience is a combination of…I mean, we have some really experienced people in there, we have some really beginners in here, so we want to make sure we cover something for everyone.
Brett: Absolutely. Yes, Jack. So, let’s start with what’s going on in the current demographics in the current economy. It’s a big picture, and then we’ll get into the micro aspect of how this all works.
So, according to the American Bankers Association, there’s about $17 to $20 trillion 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. And this generation is known as the baby boomers, okay? In fact, there’s 77 million baby boomers in the U.S. alone. And every day, 10,000 baby boomers turn 65. And what are they faced with? They are faced with highly appreciated assets, whether it be commercial real estate, primary home, or business, to name a few. In fact, those 3 categories represent 50% of the total net worth in all of America. And they’re struggling with, “How do I pass it from one generation to the next? How do I retire from the toilets’ trash and liability? How do I sell my business and be done with the employees and all the laws and all the different things that I have to deal with? How do I get a sense…get freedom from capital gains tax?” And the capital gains tax, again, is 30% to 50%. It’s the largest expense, probably, on their number one biggest deal to ever do in their lifetime, and they don’t have a good solution. Most of them don’t have a 1031 exchange. In fact, a 1031 only works for investment property at this point, practically speaking.
It’s been narrowed down, and it doesn’t work for primary home, it doesn’t work for a business, and so they feel trapped. They feel trapped, they want time, they want liquidity, they want to be able to pay off debt, and the deferred sales trust solves all of those issues and gives them back a lot of what they want, a passive income stream into commercial real estate, and/or stocks, bonds, and mutual funds of their choosing. And it takes the risk, a lot of the risk off the table versus staying in a highly appreciated asset with debt and/or going from a 1031 exchange to the next 1031 and overpaying for property. So, I’m going to pause there because you might have some questions.
Jack: No, so far I’m following you. So, basically, what you’re saying, and to simplify this even more, is basically the baby boomers are sitting on assets. They need to or want to sell those assets, but if they do, they end up paying a bunch of taxes, and you have a strategy that allows them to either reduce those taxes or delay those taxes or eliminate those taxes. Which of the threes?
Brett: Yes, exactly. Now, I saw two deals that were just closed, okay? One of them was on Thursday, just last week. It was a really, really nice lady. She lived in Cupertino, that’s just right next to the headquarters of Apple. And she sold her high-end primary home. She had been there for 20-plus years. She bought it very low, and she sold it for about $3 million. And so, she was faced with the capital gains tax above and beyond her exclusion, right, which is the 121 exclusion. If you live in the house to the last 5 years, you have 250 excluded or 500 if you’re married, 240 if you’re single. So, she was faced with 400,000 above and beyond her exclusion. So, she used the deferred sales trust to sell her house and get a passive income stream.
Part of the challenge is, when you live in a highly appreciated home and you feel trapped is, a lot of these folks, it’s hard to afford even rent down the street if they’re on a fixed income. And they feel real estate rich and cash flow poor. So, we’re able to trade an illiquid asset that, you know, her kids are gone, and it’s highly appreciated for a passive income stream. It can also be an active income stream. She can partner with the trust and go buy more apartment complexes. She owns some complexes too. But the point is she wanted to retire from that.
The second one is a gentleman, his name’s Peter. And he lived in Marine, California. And he was driving 2 and a half hours fighting traffic to South Sacramento to manage his 18-unit apartment complex. And he’s done 1031 exchanges for years and years and years. But he goes, “Brett, I’m close to 70 now. I have 18 problems now, I don’t want 36 problems.” Like, “I want to retire from this. I’ve made my wealth, I want to pay off my debt. But I don’t want to overpay in a highly appreciated marketplace via a 1031 exchange and get the same position I was in ’07 before the marketplace shifted.”
So, the 1031 exchange is a good, viable tax deferral option. However, it has some limitations. The first one has to do with the 180 days to close and the 45 days to identify. This creates a place where the timing is very, very restrictive. Therefore, oftentimes, we end up overpaying. We call this the sell higher, sell high, buy higher 180 days later. And we use an analogy of the candle burning on both ends, Jack. And so, imagine this is your candle, this represents your return. But as the candle burns, your return gets smaller and smaller. Well, what’s burning the candle right now? Well, first thing is cap rates are going lower and inventory is lower, right, which means prices are higher, that’s not good.
The other side, although interest rates have gone down a little bit here in the past month, interest rates are, generally speaking, over the last few years, have gone higher. And so, as this candle burns, your return represents smaller and smaller. And unfortunately, the 1031 exchange, because of the equal and greater value rules and the timing restrictions, tends to put a position for a lot of these clients where they are overpaying for properties that they otherwise wouldn’t have purchased if it wasn’t for the capital gains tax. I’m gonna pause there because you might have some questions.
Jack: So, no. So, I mean, again, so let me simplify this a little bit. So, in essence, I’m still not really at the bottom of it, but we have still have some time here. That is, in essence, so… So, there’s somebody, and by the way, it doesn’t have to be a baby boomer. It can be somebody who’s 35 years old. So, it can be done with your investment property or with your personal property, right? So, in essence, what they’re doing is they’re selling the asset. And so far, if they don’t use your strategy, if you sell your asset, let’s say, you buy for a million in the Bay Area, you get a little shack for that in the Bay Area, or even if you buy it in Phoenix, Arizona, I buy a house a few years ago for $100,000, now it’s worth $300,000 or $500,000, whatever the number is, you buy for 200 knots worth 500 and you sell it, you have $300,000 that you have to pay taxes on if it wasn’t your primary residence.
Jack: And if it was your primary residence, then it’s not an issue at those numbers. But if it wasn’t your primary residence…if it was your primary residence, and you have, like, now a million dollars in equity, you still have the same issue. So, you have, like, all this extra, you have exceptions and stuff but then you have to pay, on the top, you have to pay taxes, capital gains taxes. Now, they are, whatever they are, and I understand they used to be like 15% or 20%. Now, after Trump, they can be lower, they can be high. It depends on all kinds of different tax kind of strategies in the background.
But so, now, you have a strategy that allows them, that says, like, to turn that into cash flow and so on. But we haven’t fully understood, you haven’t really explained to us why yet, what do they do with the money? Once they sell their property… And I understand how 1031 exchange works, and it makes sense, as you said, but just for the listeners, if they don’t know how 1031 exchange works, it’s a tool that I’ve used plenty of times in the past. For example, I bought some houses here in Phoenix, some rental houses, that did horrible in cash flow, because they’re kind of, like, in the wrong area of town. I bought some rental properties that every year, we had a skip or a midnight move out or they trashed the property. So they destroyed my cash flow every year, and I had to put the money that I made in cash flow right back into the property to fix it up at the next tenant.
So, I never made cash flow on these properties, but they appreciated dramatically in value. So I took 3 of them that I had bought for $40,000 apiece, and they had now sold for $120,000 or $130,000. And I basically made $100,000 on each investment properties and basically took those $350,000 at the end of the day, and moved that into a different market and bought $400,000 or $500,000 worth of assets with that real estate again. And because I did that, I identified the new properties in 45 days and I closed on them in 180 days, I was able to do that with a 1031 exchange. It means the taxes that I would have had to pay on this $200,000 gain, I didn’t have to pay, they are deferred.
That’s being done in the real estate industry, but also who are in the real estate industry all the time. But the problem that you had mentioned, I fully get it, is that, in the current market conditions, if you want a particular, if you want to go into…prices of houses are high, prices of apartments are high, interest rates are up. So, basically, if you have to do a 1031 exchange, you have to trade into. You have to replace your old property with something that just produces less percentage of cash, because the interest rate is higher, the prices are higher, so it produces less. And so, what you’re saying is, basically, you have a solution for that. So, now, let’s really cut into it. If somebody sells their asset, whatever that is, the primary residence or their house, and they have a million dollars sitting there, let’s take an easy example of a million dollars, that they otherwise wouldn’t have to pay taxes on, what do they do? What’s your solution?
Brett: Right. So, they put the money into the trust, okay? And where’s that? Well, the funds are held in a bank, and the bank can invest in stocks, bonds, mutual funds, back into commercial real estate syndication deals, back into a new business startup, back into developing real estate. So, you basically get a lot more flexibility, and you also don’t have to take on any debt, because it’s not a 1031. We’re not having to replace equal or greater, or again, buy… Our parents taught us to sell high and buy low, but unfortunately, the 1031, you sell high and, oftentimes, you buy higher 180 days later, so that’s not good.
The second thing has to do with the new depreciation schedule, okay? So depreciation schedule travels with the 1031. The deferred sales trust, you had a brand new depreciation. Let’s walk through a practical thing. A million sitting there, and it’s invested. Most of our notes earn eight, and after fees, pay about 6.5%. But the key is it’s in safe, conservative allocations over any given 10-year period of time, of which, at that point, you can renew for another 10 years or renew for another 10 years and pass to your kids. But in the meantime, you might find a deal, Jack, tomorrow. You may find a deal on day 181, you may want to just wait for this market to shift and wait a year or 2 for that million-dollar property that you would have bought but now it’s worth 850,000. And, in the meantime, your cash was on the sidelines, and you waited for those values to drop. And you form a brand new LLC, Jack, and you partner with your trust, and you buy that property all tax-deferred. And because you’ve ordered with your trust, it’s in a tax deferral state.
Jack: Okay, so the trust. So, I’m taking a million dollars now putting in a trust?
Jack: How is that, why is that then not subject to taxes? To trust [inaudible 00:13:29].
Brett: Because you carried back. Let’s talk about how this works, Jack. Okay? So, let’s just put the trust to a side for a second. I want to explain to you IRC 453, which is the tax law that this is based on, which is a 90-year-old tax law. If anyone ever comes to you with a new tax strategy, you should ask them, what’s the tax laws based on? Well, ours is based on IRC 453 versus IRC 1031, right? These are different sections of the tax code. They are legal loopholes, okay? IRC 453 is also known as seller carry back. So, Jack, let’s just use a million-dollar deal. I come to you and say, “Jack, I wanna buy your million dollar property.” Imagine you own it free and clear. But imagine you had a $400,000 liability if you didn’t do anything. So, you definitely want to do some kind of tax deferral. But if I come to you, Jack, and say, “Jack, I’m gonna give you $300,000 down payment. Would you carry a note for 700,000?” And you say, “Sure.” And that scenario, Jack, if I gave you $300,000, how much actual receipt did you receive?
Jack: Three hundred thousand.
Brett: You got it. So, you’re gonna pay tax on that 300,000. Now, that’s 700,000 is in a deferral state. You’re carrying back, right? It’s not triggered. It’s owed but it’s not triggered till and if I pay you back that 700,000, correct?
Brett: Yeah. So, another scenario. I say, “Jack, I’m going to give you a zero down payment.” Now, hypothetically, if I gave you a zero down payment, Jack, and you carried a note for $1 million, how much tax is trigger today if you receive zero?
Jack: In this case, zero.
Brett: Zero. And the other million is in a deferral state. So that is the foundation of IRC 453, which is just a seller carry back, seller financing, okay? So, let’s enter in the deferred sales trust. What happens? Well, you have this million-dollar buyer all ready to go, Jack, right here, and you’re about to sell it. But instead of taking a million directly from that buyer and owing the tax, the trust is going to jump in right in between. And the trust is actually going to give you a note for a million, and it’s going to give you a zero down payment. It’s going to turn around immediately and it’s going to sell it to that cash buyer. You can have a loan too, it doesn’t matter, but the point is, he’s going to put a million into the trust. Now, follow me here, Jack. If the trust bought it for a million and sold it for a million, how much gain does the trust have?
Brett: So how much tax does it owe?
Jack: Therefore, zero.
Brett: Jack, if you received a zero down payment and you carried back the full amount of a million, how much tax is due today for you?
Jack: Also zero.
Brett: You got it. So, that’s how it works. The buyer goes away. He’s gone. He takes title the same way he would have, and now the funds are sitting in the trust, tax-deferred, no debt.
Jack: [inaudible 00:15:59] to you.
Brett: Just the proceeds. So I’m gonna pause here if you have any questions.
Jack: So now, I started to get this. So, this is actually very cool because, obviously, we are also doing lots of seller financing on our land. So, as you guys know, with our landprofitgenerator.com strategy, which is our core flagship home study course program, and everything we teach is around the land profit generator. Currently, we sell about 80% of all our properties that we sell with seller financing. These are, like, cheaper pieces of land in the range of $10,000 to $100,000. Therefore, though, I can vouch for, what you’re saying is correct, because I even have a segment in our seminar where I talk about the tax ramification of selling with seller financing and seller financing debt. In land, there’s a loophole that you’re not classified as a dealer, and therefore, you can use the seller financing tax rate.
If you are a dealer, I think, there’s a little bit of a problem with that strategy but still, luckily, we’re not dealers, so, therefore, this works. And the average person out there that just buys a property, holds it for a bunch, that is also not a dealer, so that works. So, we know that if somebody gives us $1 down payment, well, then, we pay taxes on that dollar minus subtracting any ordinary business expensive, which then means we’re really not paying taxes. So, that point makes sense.
So now that you are putting the trust in the middle, so you’re selling it to the trust on a note, and the trust sells it for cash to the next person. So, therefore, the property now is gone, the trust is a million dollars, and the million dollars is being owed to you in monthly payments but with or without interest.
Brett: Precisely. So yes, there’s an interest rate. And, by the way, great job. You got it really quick, Jack. And so, you’ve done a lot of deals, so I can tell your mind works well on this. So, yes, the interest rates are typically 8% depending on the risk tolerance, but your risk tolerance may be ultra-conservative, which means maybe 5%. So, there’s an interest rate assigned to the note based upon your risk tolerance.
What’s the risk tolerance? It’s a questionnaire, you answer about 15 to 20 questions that determines how and where the funds are invested. And then, the financial advisor, which you can use your own, or you can use one of our strategic partners, we have thousands of financial advisors across the U.S., and that they come with an allocation and they say, “Jack, here’s the allocation. What do you think?” Yap, before anything moves, you sign off on that, which is also another thing. The funds don’t move without your signature, okay?
Now, most of our notes earn eight. It’s a moderate over any 10-year given period of time. Earn eight, after fees, pay six and a half. Although the structure of the note is to pay you eight net of fees. We can’t promise that, it depends on how things get invested. But at the end of 10 years, the goal is to give you eight, eight, okay? Now you can renew that for another 10, renew that for another 10. And this kind of goes into the why you asked a little bit earlier in the conversation. The why is, as soon as you pay the tax, you lose. We define winning as tax deferral. We define losing as paying the tax. Why? Because once you pay the tax it’s gone forever, right? But if you can keep it in your family, keep it in your community, and so, you can earn, create, and preserve more wealth, you can give more, save more, and actually spur the economy. This is why they have these legal loopholes so people don’t put, you know, sell and put all their money under their mattress. They want to keep these things going so that it spurs economic growth. So are you following me so far? Any questions there?
Jack: I’m following you. So, in essence, what you do with your typical customer who does that is, let’s say, they take the million dollars, they know that the million dollars is now under trust. You manage the trust, and your team of trusted advisors invest that money for them in different kinds of equities, either stock market or bonds and funds… Oh, not really bonds, they wouldn’t produce 8%. But then, in different kind of things in other business arm, real estate. And because there’s no 1031 exchange involved, you’re not limited into what can you invest in, because the 1031, again, you have to invest into something like kind. So, if you go from real estate, you can’t just invest in horses all of a sudden, right? So this is not, like, kind, plus horse investing is probably not allowed by 1031 exchange rules. I don’t know exactly. But here, there’s no 1031 exchange. You just sold it to a trust that you happen to…oh, where you’re the beneficiary of, right?
Brett: You’re actually the creditor, okay? By definition, you could be the beneficiary or the owner of the trust because then you would take constructive receipt. So, everything you said was correct but I want to clarify a couple of things. The financial advisor can’t be the trustee. My role is the trustee. By the way, I can’t move the funds. The funds only move with your signature. It’s all protected, okay? The funds are never commingled with other accounts. But the key is the financial advisor and the trustee can’t be the same person. They need to be separate. And then also the law firm, we set this up, they’re also separate from each one of them. So, we call it kind of the balance of powers. Everyone’s kind of has to sign for anything to move, but ultimately, you’re the creditor, you’re the lender, right? And you have certain rights and protections that every lender has, that would say, you know, the funds can’t move unless you the lender sign off on it.
Brett: So, yes. And in the meantime, you invest in kind of whatever is available. But what I like best is you invest in commercial real estate deals, okay? And you find cash flow deals or land opportunities, that’s fine, too. And up to 80% of the funds. So a little caveat, if there’s a million in there, 80% can go to illiquid assets such as commercial real estate, land, development deals. The other 20% would stay with liquid investment-grade securities. So these are some of the largest companies in the world. And why? Because it’s like a reserve account. We don’t want to put too much stress on any one deal.
Now, we’ve done thousands of closes. And anyone who ever comes to you with a new tax strategy like this, you should ask a number of questions. The first one is, how many to close? Thousands of closes. How long you’ve been doing it? Twenty three years. How many people have joined you? Thousands of business professionals. But the biggest one is, how many IRS audits have you actually survived? And are there any current IRS audits going on? Our IRS is 14, 14 no-change IRS audits, including 2 of them, which were formal audits. And one of the biggest ones was $125 million Southern California property that was audited. So, and all those were no-change audits, not one single issue. So, it’s 100% legal. We’ve had zero issues with the IRS. And that’s key because we want to make sure that your listeners know that we’re not just saying try this out and see if it works. No, we’ve already blazed the trail, it absolutely works. But it does take a team of professional advisors, like I said, the tax attorney is a financial advisor, the trustee, everyone working together to make sure that we execute because there’s definitely rules we need to follow.
Jack: Right. That make sense. So, that’s good to know. So, thank you very much for letting us know that this has been existing for a while, and it’s been used for a while. And now with that all set, if you are the trustee, I’m sure there’s fees for that, too, right? So, what is like the typical fee structure on a deal like that?
Brett: Yeah, how do we get paid? Yeah, generally speaking, there’s three sets of fees. The first set is to the tax attorneys, it’s 1.5% on the first million, it’s a one-time fee. And so, if it was a million-dollar deal, it would be $15,000. Anything above that would be an additional 1.25 on that additional amount. And that includes the legal and tax structure and also audit defense for the life of the trust, which is very important. You want to make sure whatever tax strategy you’re using, that the attorney is staying behind their work, and the attorneys do on this one. The second set of fees is to the trustee, and that happens at close of escrow, and then plus once a year thereafter, based upon the net value of the trust. That’s 50 basis points, okay? One-half of 1%.
The next fees is of the financial advisor and for him managing the funds. That’s generally about one point, about 1%, just depends on the size of the deal, and depends on how and where the funds are invested. Now, if you say, “Well, I like commercial real estate, and I’m probably not going to be with the financial advisor,” that’s fine. Well, 20%, remember needs to stay with the financial advisor, the other 80% can go out to commercial real estate deals or a new business venture too as long as it’s investment purposes. So, he’s no longer managing those funds. So, what happens is that that fee goes away for the financial advisor, but the trustee fee does double to one. So remember, in the beginning, I said, earn about eight, net about six and a half.
Brett: So that’s how we work out those ratios. However, here’s the key. When you go to buy that deal, Jack, outside, the structure is an 80-20 split, meaning 80% to Jack and 20% to the trust, even though the trust puts up 100% of the down payment, okay? Now, the trust, remember, it needs to pay you, so it needs to get that 8%. So, it has a preferred return of eight. But after that, 80% goes to Jack personally, and the other 20 goes into the trust. So, you just bought a deal on an 80-20 split with zero down for yourself, although the trust that’s owed you the money has partnered with you. And this is how we get a brand new depreciation schedule.
Jack: So, let me quickly translate that and summarize it, because there’s a lot of stuff in that few sentences right now. So, what you’re saying is that, so now we have the trust that has the million dollars in that example. And, of course, again, just for clarification, it doesn’t have to be a million dollars. We’re just using this for mathematical calculation right now. Trust has a million dollars, and you’re now going…and the trust million dollars, that is no taxes too, right? Because the trust sold it for a million but also you bought it and you sold it to the trust for a million, so there’s no profit there. The trust sits there, and it sits on a million dollars. And you now, with the trustee, with you, we decide, “Let’s go buy this…” whatever it is, “…this $3 million commercial property,” right? So the trust puts up the million dollars, take it to a million-dollar loan, the commercial property spits out $200,000 a year in income, let’s just pick a number, or $300,000 a year in income. Let’s just pick $300,000 a year in income. You pay $100,000 to the mortgage. You pay… Now you have $200,000 left over. Let’s just pick a weird number here, right? $200,000 is left over. What you are saying is basically of that, the trust now gets an 8% return on its million dollars.
Brett: Preferred return.
Jack: Eighty percent, $80,000. So, there’s $120,000 left over. And after $120,000, 80% goes to me and 20% goes again into the trust.
Brett: Back to the trust, which is then going to pay you out, of which you’re going to receive income off the trust and pay ordinary income tax on that. Or, let the trust compound, let the funds compound, because you may not need those funds right now. And then when you go to sell it, same thing, pay back the trust the original, a million that it put in. Although, remember, it can only do 80%. So, $800,000 would be the down payment there…
Jack: True, good, yes, correct.
Brett: …instead of the full million because we had to keep 20% with liquid diversified securities.
Jack: I think I got that, yes, yes.
Brett: Yeah. But the original amount was back into the trust plus the preferred return, plus 20% of the upside, but the other 80 is with you Jack, of which you could say, “Well, how about we roll that into the trust too?” And that’s fine. And you have the same trust and multiple notes. So this would be the second note, of which let’s just say you have 1.5 million now. Now, you do the same thing, up to 80%, you can go out. This is where we say we eliminate the need for the 1031. The idea is to add value, ride the wave up in the highly appreciated market, sell, pay off the debt, move the funds to the trust, protect, preserve, wait, find a deal, great, maybe a smaller deal, great, maybe a big deal, right? But wait for optimal timing, right? I mean, that’s the key here. As commercial real estate owners, we know when it’s a buyers market, when it’s a seller’s market. And given enough time, we can find deals. But if you just take off that pressure of the timing, you can make better decisions, and hopefully, create and preserve more wealth.
Jack: Right. And that’s why it works with both residential properties and the commercial properties, because somebody right now decides, “Ah, the market is at that height.” They go sell their property, make $600,000 profit, and they’re single, let’s say. They take their $250,000 exception, they’re still having a $350,000 extra money sitting in there. You don’t have to…well, in this case, they would have to pay taxes on that. They do the strategy, they don’t pay any taxes, it still makes sense after the fees probably, they would have to pencil it out but probably makes sense. And then, they’re just, like, now that money is being invested in ways, conservative ways that it spits out some cash flow, in the meantime, they’ll rent perhaps just enough to pay their rent while they’re waiting for an adjustment to happen or while they move to a different market, while they move to a different city. And then, when they’re ready, they can buy them again and have the trust basically put the down payment on their next new house.
Brett: Yes. Or even better, Jack, they’re tired of managing in themselves. They’re tired of the ups and downs and having all the liability on themselves, taking all the risk and all the debt on themselves. And they say, “You know what? I want to put the million there, and I’m gonna invest some with Jack in some of the land deals, a couple of hundred thousand over there. I might do another couple of hundred thousand in the multifamily syndication, another couple of hundred thousand in a mobile home park.” And they’re diversifying their commercial real estate equity across multiple operators, right, and multiple geographical locations with different income streams, right. So, this is the key and the value of diversification. It’s not just stocks, bonds, and mutual funds, that’s a small portion of it. But the other part could be…well, the 1031 doesn’t allow this, right. 1031, basically, you’re trading one property for one other property. Generally speaking, one product type for another product type, remember, equal or greater value, you haven’t taken on all the debt. I mean, it’s just not very flexible.
So, we’re accomplishing the same thing of tax deferral. We’re just giving so many more options with no debt. And then, also liquidity. Some of the folks just say, “You know what? I want at any point to be able to access $100,000 or $200,000, pay the tax on it, great. I don’t have to sell anything or refinance.” They may need or want the liquidity, and nothing else offers that as well.
Jack: Right. Very cool. I think we got it, we got to understand it. And if you haven’t understood it, at least you’re watching this, then rewind and listen to it again, because I think between the combination of the two of us, we explained this, I think, pretty down story such that everyone can ultimately get it. Bottom line is, if I repeat it one more time is, well, there’s a vehicle that allows you to sell your properties, right, well, anytime, not pay the capital gains tax in that moment. Instead be able to invest that money into something else that produce more cash, have access to it. And if you want to dissolve the trust and just end up paying the taxes at anytime you can, that is not under the limitations of 1031 exchange, but instead you can move it into different points at that point, into different kind of asset classes at your will, really, and within the parameters of, that you mentioned, that 20% needs to be liquid and so on, which makes sense. Then this is a really interesting subject.
Now, if you only have like one house that’s worth $75,000 it’s probably not for you. But if you’re dealing with some more complex strategies and some more assets that, like, for example, we’re thinking about selling one of our apartment complexes very soon. And we’ll probably have about $1.5 million to $2 million to distribute between our investors and us. And not only…
Brett: Just to walk through that, Jack, just so you know. Most syndicators like yourself, operators, they don’t allow 1031 money and they don’t 1031. They just say, “Everyone, bring us the new money, let’s all buy it together, and then let’s sell, everyone pay their tax, and then, everyone, let’s go on to the next one together.” So this is what the deferred sales trust is amazing, in that not only for your own carried interest, right, you might have carried interest in the deal, which you can defer using the deferred sales trust, but also each of the investors could have, if they wanted to, their own deferred sales trust.
Let’s imagine there’s 10 investors, and 5 say, “I just want the cash,” no problem. They’re gonna pay the tax. The other five say, “No, I want a deferred sales trust.” Each one can have their own individual deferred sales trust with their own separate financial advisor, with their own risk tolerance. And here’s the best part for you, Jack, because they have more money now and they’re not paying the 30% to 50%, oh, guess what, they have more money to invest with you on your next deal. So, as a syndicator, it’s a way to attract high net worth individuals, but also, it’s a way to show a greater return for when you exit the deals because you’re helping him with 30% to 50% on every single deal.
Jack: Right. Very interesting. So, I will definitely look into that more. We’re still a few months away from selling those properties. We haven’t even put them on the market yet. But our properties are across the board now at 90. Well, actually, the properties that I manage are at 96% and 99% occupancy and really, really strong financial. So, we are looking at potentially selling them not too far into the future, at least one of them, so we will definitely run the numbers and pencil those in. Now, how does somebody find out more about you and how do they get in contact with you?
Brett: Yes, capitalgainstaxsolutions.com is the first place. And then, you can search for me on YouTube. I’m launching a podcast called “Capital Gains Tax Solutions with Brett Swarts.” It’ll be here in the next 30 days, you can listen there as well. We have free webinars. By the way, we don’t charge anything unless and if the client does the deal. So we will educate, we will ride, you know, modeling, you know, financial modeling for what you’re doing.
And another key thing here too. So, if the deal is $500,000 and below, it’s too small, right? So we found for the fees, for every $100,000 in liability deferred, you need about $500,000 of proceeds. Our average deal is about 2.6 million, and we’re deferring somewhere between, you know, $300,000 to, say, $400,000 or $500,000, okay? So, yeah, for the really small ones.
Now, if you have 10 different houses, and we come across this. Someone has 10 or 12 different houses, and they’re all within the $150,000 to $200,000 range, then you can slowly sell each of those properties one at a time. And ideally, you’re selling it to a primary homeowner, right? You’re not selling to an investor. And now, because think about this, the 1031 exchange, Jack, the challenges with multiple houses everywhere, if you’re going to do a 1031, you’re probably going to want to sell them all at the same time, which means you’re gonna have to discount it for an investor and then trade into a 1031. Whereas ours, you can just sell one at a time, hopefully, to primary homeowners, and therefore, get maybe a 20% increase, and then just compile the money. So, if you have multiple deals where it’s greater than $500,000 and greater than 100,000 liability, then yes. But if it’s just a one-off deal, that’s small, our fees are going to eat up the savings, and it’s not worth it.
Jack: But if you had, if somebody had, and we probably have a lot of listeners that build up a portfolio of houses, you still have one trust and then you just sell one house at a time, and just get it all, the money, into that one trust.
Brett: Exactly. And then it kind of compiles all in there, right? You just have multiple notes on different time frames based upon when you did it, right. And then, the money just keeps piling, piling, and piling, and hopefully, that’s 10 homes all with 100,000 in equity, well, now you have your million there. Well, great. Now let’s use that 800,000 to go buy that $3 million deal. So you’re scaling up as you’re deferring the tax. So that’s the idea, to give you more flexibility, more options.
Jack: Okay, wonderful. Awesome. Thank you very much. This was very, very educational. It was something that I have to admit that I had not heard about, and I can’t believe I hadn’t heard about it. It’s very, very interesting, very, very cool. Definitely, we’ll look into that because every example that you just covered is example that applies to us right now because we got the house that we’re selling and there’s enough equity, and there we are. We are having a bunch of single-family homes and different markets that are worth in that kind of price range. We are syndicating… On the [inaudible 00:37:00], we are already doing seller financing, so we’re already having the benefits of that there. And so, it’s a very, very interesting thing particularly for multifamily and for any kind of commercial property.
So with that, thank you very much, Brett. That was great, great information. Thanks a lot, everyone, for watching this. This was another episode of “The Forever Cash Life Real Estate” podcast. And coming up soon is another episode, so make sure you subscribe, make sure if you’re watching this on YouTube, you subscribe to our channel. If you’re listening to this on iTunes, make sure you give us a five-star review. You subscribe to our channel. Obviously, listen to the other episodes. We have lots of great guests and solo episodes. So with that, [inaudible 00:37:43], have a great, great day, and thank you, Brett.
Brett: Thanks, Jack.
Announcer: Enjoyed this episode? Then make sure you like, subscribe, and post your comments and questions below the video. We’re looking forward to hearing from you.