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David: Alright guys welcome back to the discount property investor podcast. This is your host David Dodge and today I am joined by Brett Swarts, and Brett is from Capital Gains Tax Solutions and he has his own podcast on this so he is a pro and today we're gonna talk about some different solutions on how to protect yourself from paying those big capital gains. Brad welcome to the show man, how you doing today?

Brett: Mr. Dodge, better than I deserve, thanks for having me on the show.

David: Hey I'm glad you're here man. Okay so let's start first start talking about- let's first explain what a capital gain is if you don't mind.

Brett: Yeah capital gain is when you buy something and you have a gain and you go to sell it, the difference in which you bought and sold it for is called a gain. So let's say you bought a property for 100,000 and you sold it for a million, that's a $900,000 gain and that is taxable in U.S. government, in your state, most states will tax you then you have a thing called Obamacare, somewhere between 25 and 50% with the depreciation recapture is going to Uncle Sam or your state authorities.

David: Man that is no fun at all, nobody likes that. Okay so what do we do to prevent that or avoid it or reduce it or mitigate it or defer it? All of the above right? How do we avoid that or you know what solutions do we have?

Brett: Yeah there's a couple that you might know of. 1031 exchange is the most common one for the real estate investor where we can you know identify something in 45 days, close it within 180, if it's- you've owned it for more than one year, you can also buy assets and do what's called cost segregation or depreciate an asset mostly multi families 27 1/2 years with some of the best residential, commercials 39 years and you can maybe get some offset there but beyond that most people- and we call those the blockbuster methods, they're very well-known and you remember blockbuster video David showing up on a Friday night when you're getting that movie and it's behind that cardboard box and you're excited to get it and you're on a mission to get it and then somebody steps in front of you and grabs that movie and you're like shoot I wish I would have been here 10 seconds earlier, why isn't there a way for me to rent something out? Well it's kind of like a blockbuster 1031, you've got 45 days to get engaged, 180 days to get married, it's a shotgun wedding sometimes or even if it's short term for some of your clients that are doing the BRRRR method where they're fixing and flipping unless they're dealers, if they're just doing few that are less to dealers, we can use the deferred sales trust as an alternative and this is where we call this the Netflix way of exit planning. Instead of using a 1031 exchange, you can exit highly appreciate cryptocurrency, businesses, real estate, limited partnerships, carried interest, captive insurance, and you can defer the tax using a trust. The way we do it, we can talk about here in a minute, but the key thing is you gotta figure out a way to exit your asset and not get hit with the tax 'cause it's not just about cash flow David, it's about tax flow, and the government has a big big debt to pay and they're looking for David and Brett and everyone else listening to this to pay for that debt but they also give us incentives to not have to pay tax right away and that's by using stuff like the deferred sales trust.

David: Holy cow, okay awesome man. So yeah you just named a bunch of different ways that we can use but you just mentioned another one at the end there, the deferred sales trust. Am I saying that right? Is it deferred tax trust or deferred sales trust? What's the proper word?

Brett: Deferred sales trust is the proper way but a delayed sales trust or delayed tax trust is another way to think about it, you're delaying the tax but the official is the deferred sales trust, not to be confused with the Delaware statutory trust which is another DST that most people, it's just a part of the 1031 family, they call it the Hollywood video next to the old 1031 blockbuster where you're just giving up all control to a third party corporation typically that have Class A non-value add deals typically and there's 7 to 10 year holds, huge fees and no liquidity, no diversification, whereas ours the Netflix version you can literally you can put it into the bank, you can put it into hard money lending and have liquid funds, you can put it in securities. The whole idea though is to sell high and buy low which is what our parents taught us to do David. They teach us to sell high and buy higher 180 days later properties that we know don't make it- make a lot of sense but we feel forced to because of the tax and so that's where we come in and we provide a better way and it's a way to help you create and preserve more wealth.

David: Nice. So when you mention that- okay interesting. So you have to have a liquidity event to use one of these? Is that the case for the most part?

Brett: Correct.

David: And what would be the ideal person that would want to use this? I mean does anybody- can anybody use this? Should anyone use this? Is there certain people that this might not work for or isn't ideal?

Brett: Yeah so who does deferred sales trust work for? Anyone who has $1,000,000 net proceeds and $1,000,000 gain or any single asset that they're trading or exiting from, okay? Now if you have two at 500 each, you can also combine those two to scale and make it make sense. We found it's a 10 out of 10 every time in no matter what state you're in, no matter where you're at, if you have $1,000,000 net proceeds and $1,000,000 gain, it's an absolute home run. It works for LP's, GP's, it works for you know again primary homes, businesses, cryptocurrency. You can save a fail 1031 exchange investment property of course, artwork, collectibles, NFT's. Remember the blockbuster 1031 only works for investment real estate right? We work for all asset types.

David: Okay. Deferred sales trust. Okay so you have to have $1,000,000 net liquidity event and that's gonna be a gain as that's net not gross you're saying.

Brett: Yeah net and net. $1,000,000 gain and $1,000,000 net proceeds.

David: Okay got it. Okay interesting. What is the cost setting something like this up?

Brett: About 1.5% on the first million so let's just say it's $1,000,000 dollars, it's about 15,000 one-time fee and the ongoing, my role is a trustee and the financial advisors we work with, it's about 1 1/2% ongoing up to 2% just depending on where and how the funds are invested. This is why we like to have the gain David to be big enough to offset and get a good return on your investment. The more important question to ask is well how do I make this thing an investment and not an expense? Cause some people look at that, they go oh it seems like it's kind of ongoing, it's expensive. Well yeah maybe, you know if your tax is you know 3 or 4 hundred thousand dollars and it's the government money anyways and you're able to defer that earned wealth on that, well then maybe it's a really good deal, you can pay that tax or you can refer and earn interest on it. Our typical paybacks are somewhere around 8% net of the fees, net of the 1 and 1/2 to 2% per year over any 10 year period of time, that's net of the recurring fees and so the rules- the idea is the rule of 72. If we can use the government's money along with our money and we could net 8% net of fees over a 10 year period, well in 9 years you doubled that money and now you can keep it going for as long as you want, you can go for another 10 years, you can keep passing to kids keep it going and again the idea is just to keep living off the interest. You'll pay tax as you receive some payments back right that's normal but it's kind of like an IR- it's kind of like a 401K but the best thing is you can sell high and buy low and in fact the reason I started this company David was because in 2008 the marketplace fell apart and I was at Marcus & Millichap buying and selling and helping my clients with multifamily properties and the market completely fell apart and we saw clients, friends, and families lose half or lose everything over the next 3 years, and part of what we identified was a 1031 exchange was the enemy because they were overpaying for properties and they knew they didn't wanna buy but because of the tax they felt they had no other way, they were gonna buy it and so they got hammered and so we learned that the deferred sales trust could have been that solution and that began the journey of educating people and now this is all we do, we coach, train and close deals everyday.

David: Interesting. So what if somebody- okay so you had mentioned that you guys- so you're investing these funds for people but you also said that there's like a liquidity there so how does that work? Like you know what if somebody doesn't want you guys to invest their funds, they just want you to hold them in trust and then they then take those funds and then invest them you know into their own real estate or crypto or whatever and they don't need an advisor essentially?

Brett: That's the best part right 'cause we're not- you know by nature I grew up in the real estate business with rentals and development and then brokerage so that's where we made and my clients have made all of our wealth. If it wasn't for what I'm about to tell you right here I wouldn't be here and if it wasn't for what you just said I wouldn't be here. Like there's none of our clients and no entrepreneurs and mostly crypto millionaires, they don't want to just give it up to some third party financial advisor and just run it so the first thing to understand is the funds never move without your approval or your signature, okay? So you must approve all of the investments okay? Number 2, the entrepreneurial freedom that this provides, and in fact in 2006 the reason I started this company was for what I called the Monday morning quarterback deal for the deferred sales trust, it's one of the most prolific deals in the history of the deferred sales trust. If you're a football fan maybe you're a Kansas City Chiefs fan right? You're out of Missouri, you know if you could play back with Mahomes you know the next day, you know he could throw 10 touchdowns right? Versus 6. Well this is what this guy did, he sold in 2006 at the peak and he's looking around, this guy’s actually out of Minnesota across the street from the Minnesota Vikings, he's looking with these 1031 binoculars, he's like he's still makes zero sense. He had a sense that something was gonna happen, he had no idea in 2008 but he's like I am not going to buy something right now. I'm either gonna pay the tax or I'm gonna take a shift here, I'mma do this deferred sales trust. So he sells the $20 million asset, he places the funds into the trust, puts into liquid investment, great securities, stocks bonds mutual fund stuff that wasn't suffered to the big crash, hedged to protect it, had it very conservative stuff, but he kept his powder dry right? With extra millions of dollars right that he would have paid with tax so he's like if I keep it just breaking even I'll be okay. 5 years later the bank calls him back who he had sold the property and had did a loan for the new buyer, and I said hey we're just calling you, you know that property you sold 5 years ago to that crazy 1031 California buyer? He said yeah. Well we just foreclosed on him and we're just calling because we're curious do you wanna buy it back from us? He goes well maybe, what's the price? They said well about $0.60 less than what- or $0.60 on the dollar for what you sold it for, 40% less. He goes yeah give me a few days, so he was able to reallocate the funds that were in the trust to a brand new LLC which he's the owner operator of in partnership with the trust and he bought back the property at $0.60 on the dollar okay? So he sold high David and he bought low. And my brain at this point exploded 'cause I'm going no no we're 1031 exchange, you can't do that right? You know, this is not a 1031 exchange. Wait wait, you can't sell high and buy low and still defer the tax. Yeah you can, this is how you can do it, this is exactly what you can do. And so that began the journey of wow this is actually real, this will change everything for every investor who's in real estate and in cryptocurrency and business, crypto wasn't around at that point right? But it'll change everything and so that's the deferred sales trust, that literally gives you the ability to do that and we do it every single day with clients.

David: Awesome awesome. So the money that's in the account though is you had mentioned dry powder but you also said like it's in- it was in you know stocks and bonds, so you guys are investing the cash or is there any reason that somebody would just want cash in their account? I guess not because-

Brett: You can, I had clients- again the funds will never be invested without your approval. Let's say it's your deal David but I'll just give a client- I had a couple clients here COVID-19, they didn't want to be in real estate and they didn't want to be in the stock market so we sent cash for months. So there's no- there's no like you know 45 days to get into something or you know invest something but what the goal is to return that money to you plus the rate of return, it's a promissory note. The way this thing works by the way is you loan the funds to the trust in exchange for the trust to pay you back overtime. It's based upon IRC 453 where if David owns a $10 million apartment complex in St. Louis MO, he has a zero basis he's owned for 27 and a 1/2 years, he has no debt, he could carry paper for a brand new buyer, he could become the lender right? And the buyer could put $1,000,000 down, you could carry paper for 9 and you're in deferral state on that 9. The difference is that we say hey David don't finance that buyer, let him go get you know money that's pretty cheap relatively speaking for interest rates and let him come with cash at the closing table, who cares how he gets it, but ask him to cooperate with the trust and David you will finance the trust 100% and sell the asset to the trust first and then the trust would immediately sell it to the cash buyer second. And it's in that framework the smoke clears, the buyer takes title he's gone and you're left with a promissory note and you are the lender and so you haven't taken any actual or constructive receipt of the cash therefore you're in the deferral state, okay? Now it's at that point-

David: You sell it to the trust at $0?

Brett: You sell it for $10 million but you receive a 0 down payment, you carry back 100% financing. Now you're welcome to take whatever cash, you can do 90% or 80% and just pay tax on what you receive but if you wanna basically do a 0 tax event at that point. By the way it's not unlike what a 1031 does as well, you could send all of the funds, all of the 10 million, take no actual receipt of those funds to a qualified intermediary, the funds sit there for those time period and then it gets moved over to another deal right? So it's the same concept except this is kind of like a long term 401K or a long term IRA or a long term 1031 however it's also entrepreneurial. You can use the funds for fix and flip, for business sales, for- we had a cryptocurrency seller she had 50,000 at Bitcoin went to 50 million, she exited 5,000,000 with Bitcoin at 54,000 a coin and she put 4,000,000 into a tech startup. We had another Ethereum client, sold Ethereum when Ethereum hit 13- for them they bought Ethereum 100,000 and it went to 13 and a half million, they exited 5 million another two and a half million, and part of what they want to do is buy some Airbnb rentals. Now right now they're in the stock market just kind of keeping their powder dry and luckily they did a lot of that 'cause if Ethereum kind of dropped in half again. And so these are the things that we could do, it works- it just depends on what you want right? And we design it around those things. There's some guidelines, we can't put into a primary home right? Any cash you take will be taxable and that's okay, people pay taxes all the time but the remainder if you're keeping it in this deferral state remains in the first state.

David: Interesting. What about- what about future events? Right? So let's say I have an apartment building that I sell and there's $1,000,000 gain on it and I wanna come to you guys and set one of these up and then you know we take that money and we defer it and we do all the things that you mentioned which is awesome. I love that, very cool by the way, very cool. I actually just learned about this about 2 weeks ago so this is really cool that I'm getting the deep dive on it 'cause that was just like 5 minutes. This is really great to like kind of get the deep dive on it. But what happens if you know 3 years goes by for example in this scenario and I have another you know 500 thousand or another- maybe even less, maybe $200,000 event, am I able to roll that into the trust as well or how does that work?

Brett: Absolutely. So can the deferred sales trust work for multiple investments? The answer is yes, at different times the answer is yes. You form one trust and you have multiple promissory notes. So I'll give you an example. One of our clients in Phoenix AZ, 2 GP's on a $20 million asset, actually the first one was in Vegas, they sold the multifamily property for about 20 million and then just their GP interest went into the trust, the rest of the LP's has paid their tax then they sold their second deal in Phoenix a couple months later that was a $16 million deal, the same thing their GP interest rolls into the trust as their second promissory note then they sold their third one and they're selling their fourth one just closed on Monday and collectively it's about 90 million now of the total asset sales prices. Now they just put their GP interest in there and each time they get promissory notes, one trust for each of the partners, multiple promissory notes so the answer is yes.

David: Okay so when you pull money out though you're not pulling it out? I mean it's a distribution at that point like let's say that you wanted to take some money out of there right? To use it to like buy your groceries or whatever it is, buy that boat or that airplane, that car, that RV. When you pull it out, are you borrowing from it or are you actually taking it out and having the tax in at that point?

Brett: You're taking it out and having the tax at that point. So when is it- when is the deferred sales trust taxable? It's taxable when you're basically using it for personal use or personal property right? Now if it's an investment property, you can do the partnership LLC that we talked about and that's tax deferred but yeah groceries or regular you know, regular primary home investments or you know and that's all taxable.

David: Oh on deals per se you can, okay got it.

Brett: But investment real estate, that's the thing right? So that's what we always ask the people, our clients say what are you gonna do with the money anyways? Well I'm just gonna invest it anyways. Okay what were you gonna do? Well I was gonna go build with it, I was gonna do fix and flips, I was gonna go buy some crypto, I was gonna go put it in the stock market, some hard money lending, I was just gonna stick it in the bank. Okay well do you want to pay that 30 to 50% capital gains tax depreciation recapture or would you like to defer that? Well I'd like to defer it, of course you would right? So that's why our deals gotta be big enough to offset and make sense of the ROI.

David: Man that is awesome. Holy cow, this has been an awesome awesome show Brett. Brett how can people connect with you if they want to learn more about this. Again guys you need to have a 7 figure taxable event to set this up, that's basically the minimum so there's a lot of people that are just getting started that this isn't going to apply to but I'm glad you're hearing this and I'm glad you're learning about this because you can circle back to this episode once you grow your portfolio up and you start having these taxable events. And there's of course people that are listening that are you know probably having this issue already, so this is great. So Brett how can people connect with you? Where can they learn more? I know you have your own podcast, Capital Gains Tax Solutions podcast but where's the best place for them to go? You have a website or a social or an e-mail or what do you suggest?

Brett: Yes, so search Capital Gains Tax Solutions on YouTube, Instagram, Facebook, LinkedIn, capitalgainstaxsolutions.com. Check out the new book 'Building a Tax Deferred Exit Strategy' and it's we call it the proven playbook for unlocking your ideal wealth plan when selling assets of any kind for yourself or your clients. We got some really smart people David, they say to get in a room with smarter people. We have people like Kevin from shark tanks in the book, people like Joe Fairless, Dan Handford, Buck Joffrey, Kevin Bupp, David Young, these really really- Brian Berg, so these are a lot of multifamily syndicators in the book too so I'm a cash flow real estate kid right? Grew up loving multifamily investments, value add deals, ground up development, and so we buy, syndicate, you know broker, all of the above, but we niche focus on this deferred sales trust to help all of our clients friends and family you know deferred tax grow well so yeah go to capitalgainstaxsolutions.com.

David: Awesome and this is cool. Do you guys- so I would imagine that there's CPA’s and advisors for the actual investing, you've got financial planners and advisors, is that all held you know under one roof or is there multiple parts that are involved? And you know I'm saying like what's the- let's say that I wanted to you know set one of these up, would I be working with you or I would be working with somebody that you work with or how does that process work?

Brett: Great question, so we were working strategic alliances across the country so who- what are the roles for the deferred sales trust? So there's a couple roles, the first role or one of the roles is a trustee and that's our role, capital gains tax solutions, a third party unrelated trustee. The second role would be the tax attorney, he's one of my business partners and creator of the structure, he's a CPA and a tax attorney, has a law firm and they do all the legal work, they're also the ones who survived all of the audits with the clients and provide lifetime audit defense, 26 year track record, thousands of closes, billions under management, so it's all there. And then the third role is a third party financial advisor. We work with advisors across the country to help do that and also we're not under one roof and necessarily for tax deferral because each of us can't be one another but also it's good for transparency and accountability for everything that we're doing. And then we have a third party- another third party tax preparer who files a tax on behalf of the trust. You keep your own CPA, you file your own taxes the same way you would have, you also have your own 1099 that you get based upon what you receive in the given year, you just report that so we're not replacing your CPA your team, we're just in addition for the major exits and then we work alongside to keep that tax deferral in the business trust going so hopefully that answers your question.

David: It did, multiple ways and multiple angles all that, you nailed it. Wow that's amazing. Brett thank you so much for coming on and talking about you know, how we can reduce our capital gains tax, defer the capital gains tax, and essentially you know mitigate them completely in some scenarios at least in the short term. Whatcha got?

Brett: Can I throw a bonus in there too?

David: Please.

Brett: So for any ultra high net worth clients listening to this, we did a deal out of Colorado it was a $5 million exit for a multifamily owner. Now their biggest challenge wasn't just capital gains tax 'cause that's what we've been talking about mostly here today and we call that the tiger by the tail which is very important, again it's 25 to 50%. Their challenge was the elephant in the room, they're worth $25 million and they have all of it inside of their taxable state so that's something called estate tax or death tax so it basically states that David if you're married you get about 22 million exempt and if you're single about 12 million exempt although those are set to cut in half in 2025. Anything above and beyond that's gonna be hit with a 40% death tax, has nothing to do with the 1031 or a stepped up basis, it doesn't do anything for that, it's your total estate. So this particular client based upon some of the rough numbers, we rough- we’re estimated they're gonna be worth 50 or 60 million by the time they pass given their age and everything else, and so their challenge was all 25 million was inside of taxable state so as they exited their first $5 million asset, their number one reason they used a deferred sales trust was not just the capital gains tax, they eliminated the estate tax in one day in one transaction without buying life insurance, without doing any gifting, without giving it all the way to charity, and we believe that's honestly for the ultra-high network like an amazing thing that most people just don't know about but it has to happen at the exit, it can't just be oh I just wanna move stuff over here, no no it has to be a third party buyer, fair market value, it's like the 4th quarter 10 seconds to go, we've got to get it all set up prior to by the way so if you are listening to this, we work at a no cost obligation basis, you need to get with this early to get everything set up if your deal doesn't close, we don't charge you anything, but if it does close and you use the trust then we charge you. So just get with this early so we can make sure to get everything set up properly.

David: I love it. Brett this has been amazing. Guys check out Brett Schwartz, connect with him directly, go to YouTube, all the socials type in Capital Gains Tax Solutions and you can connect with him. You can go to his site, you can learn more. This has been an awesome podcast Brett thanks for coming on, thanks for educating me and my audience on how cool these- I'm going to say this, hopefully I say this right, deferred sales trust, is that right? Awesome, got it. How cool the deferred sales trust is and how amazing it can be to help build your wealth and preserve it at the same time simultaneously, it's amazing. Alright guys thanks for listening. Don't forget you make your money when you buy, you get paid when you sell so get out there find some deals and with that, signing off. See you next time. Thanks guys.

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