All Forum Posts by: Brett P Swarts

Seth:

How do you structure deferred sales trust?

Brett:

So, most commercial real estate owners, they struggle with capital gains tax when they go to sell their highly appreciated multifamily senior housing, primary home business. And it's somewhere between 30% and 50% with depreciation recapture depending on what state you're in. And we use a deferred sales trust to give them tax deferral, liquidity, diversification, and freedom to say goodbye to the 1031 exchange, get out of debt, put the funds in stocks, bonds, mutual funds of their choosing, or back into commercial real estate and whenever they want with no timing restrictions, all tax-deferred, and so that they can create and preserve more wealth. From the investor who's looking to approach it, they struggle with attracting wealth sometimes to actually buy these deals. So this is a great way for the syndicator as well, to attract high net worth wealth, through business sales, primary homes.

A couple of stats for you, according to the American Bankers Association set, there's about $17 trillion that will pass from one generation to the next in the next 20 years. And this is known as the baby boomer generation. In fact, there are about 77 million in the US alone, and about 10,000 turns 65 every single day. And they've made their wealth. These are our parents. They've worked for 20, 30, 40, 50 years, they've made their wealth. I mean, a lot of in commercial real estate, in fact, 50% of Americans net worth is tied to high-end primary homes, commercial real estate, and private equity, which is businesses. And this baby boomer generation is the majority of that wealth. And so they're trying to figure out a way how do I finally retire from the toilets, the trash, the liability, the management, how do I relieve all that debt?

You know, they went through the ‘08, a crisis where things really sort of lost everything. Some of them were close to losing a lot. And because of that debt, because of over leveraging, because of doing the 1031 exchanges, so they're tired of that. They're now 11 years older, and they're trying to say how do I pass off pass the wealth without getting hammered by the 30% to 50%. So into the deferred sales trust, we solve that because they can be completely passive. They can be debt-free from their real estate. And then what's cool is they can actually invest with other syndicators and operators around and diversify their actual assets. Most 1031 exchanges to hold ATT must move. 1031 is great, I still do 1031 exchanges, I love them. But I love them best when the marketplace is low, when the marketplace has good buy opportunities, and also when the entity the partnerships will want to stay together. So the intent of 1031 is tax deferral.

But the biggest challenge has to do with timing and flexibility with partnerships whereas the deferred sales trust solves that there's no timing at all you can go whenever you want tomorrow day one anyone five years from now, or and or you can also separate a partnership so each partner can go their separate ways. The other big one has to do with depreciation. So some of these owners have their own properties for the life of the say 27 and a half years for multifamily are 39 years for commercial property, and they're fully depreciated. And one of the number one reasons set to own real estate is the depreciation that offsets the income. So you actually get higher income less taxes. The challenge is when you sell a 1031 exchange, the depreciation schedule travels, which means that you have to buy a bigger property and perhaps take on more debt, perfect the exchange, therefore you take on more risk. The solution is the deferred sales trust, we actually close we pay off all the debt, and then when you direct the funds whenever you want to you get a brand new depreciation schedule. So this is very powerful a counter to that. So hopefully that makes sense.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Buck:

How does the deferred sales trust work? Tell me, I want to use this as an example, Brett, I am coming to you. I'm gonna make it a little challenging for you because most of the people who are listening to this podcast are real estate investors.

So I have a $5 million asset. Let's say I'm selling for 5 million, but I've only got, $2 million of equity, 3 million in debt. I know how 1031 works, how would this work with the deferred sales trust? Why don't you sort of take it, you can describe what a deferred sales trust is first, and then how this would work in this scenario?

Brett:

A deferred sales trust is just a manufactured installment sale, a specialized installment.

Buck:

Okay, so explain that because not everybody knows what an installment sale is.

Brett:

So it's where you become the lender, and you allow the buyer, to borrow from you. So let's imagine this $5 million deal, Buck, which you own. In this scenario, you owe us a couple of million dollars of debt, $3 million in debt. And this scenario, you could potentially loan, the new borrow up to $2 million. And that's your actual equity in the deal. And so you become the lender. And in that scenario, the buyer puts in less of down payment, and therefore, they get into the deal. And on your side, you get to defer the tax until you receive payments from that. So the deferred sales trust, we're just actually asking the buyer to come with the full 5 million closing. And we're asking them to actually buy the asset from the trust and you in exchange gonna get an installment sale for the 2 million that was leftover will pay off your initial three to that to the bank.

Buck:

So, the debt doesn't necessarily make this more difficult?

Brett:

Depends on the basis. So let me ask you that, what's your basis on the deal?

Buck:

A million. We're gonna make it harder.

Brett:

Yeah, you have what's called a million-dollar mortgage basis. So in that scenario, we do need to replace that debt, because what the government says is, but if you close out on this deal, or try to do deferred sales trust, you really already took that income, you took that money out of that refinance of your basis, therefore won't attack you as ordinary income. But our solution to that is twofold. Either pay down the mortgage to the basis, or B will do what's called a bi-fracture 1031. It's really simple. We move your $2 million equity to a Qualified Intermediary and we purchase a partial Delaware statutory trust, I'm actually doing a deal right now, for a client very similar. He sold an 18 unit apartment complex in Sacramento for about 2.6. And he has about a $500,000 mortgage replaces, and so we found a Delaware deal, which has about an 80%-82% LTV. So he's going to take 18% of that 500,000. And he's going to use that to replace the debt and Delaware. So he has a little bit of equity into that deal. And the remaining goes into the deferred sales trust. The key here is we just replace the debt. That's what 1031 does. That's what the Delaware 1031 does. We replace the debt number 1031 is the equal or greater value, and also equal or greater debt. So as soon as we take care of that, you're good there and the rest of it can go into the deferred sales trust. So that would be hopefully the short answer to your question.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Clayton:

Let's take it to the next level. Let's talk about the deferred sales trust and how this builds on that or exceeds that.

Brett:

So the big thing that baby boomers are facing right now. And this is kind of the big demographics Clayton, it's the largest wealth transfer in the history of the world. In fact, according to the American Bankers Associations, about 17 to 20 trillion will pass from one generation to the next in the next 20 years. There are about 77 million baby boomers in the US alone, and every single day, about 10,000 of them turn 65 years old. So they've made their wealth for 20, 30, 40, 50 years, and what and business and commercial real estate and with their primary home, in fact, those three categories represent 50% of total net worth for the US, commercial real estate, private equity, which is like business, and primary home. So all three of those things and all of this large transfer, these baby boomers, actually feel trapped, or they feel trapped because they don't want to necessarily do another 1031 exchange. They don't want new toilets, new trash, new liability, they're also trapped because 30% to 50% is going to be wiped out by capital gains tax and depreciation recapture depending on what state they live in. But they want to be done, they want to transfer it to the next generation, they want to enjoy their well. So the other part of this perfect storm that's sort of happening, that's what we like to call it, is the fact that you have real estate appreciate it a great deal. And we're basically 10-11 years since the big crash in oh eight. And they don't want to go through that again. They want alternatives and they want to be done. They want to diversify, they want to be liquid, they want to be able to invest in commercial real estate at any time not be forced to have to overpay for a property. Also, interest rates are hovering near 40-year lows, which in some ways is sort of propping up values as well. So we call it the perfect storm facing the baby boomers. So how do you solve that?

Well into the deferred sales trust, you can now sell highly appreciated real estate. In fact, this tax law goes back to the 1920s. It's just an installment sale, which is what a deferred sales trust is, we just call it a specialized installment sale, where we're using the tax laws. And we've been tested and tried over a 23-year track record 1000s of closes 14 no change IRS audits, the largest deal is for over $100 million. But we've done veterinarians, we've done dentists, we've done apartment complexes, self-storage, and essentially, instead of doing a 1031 exchange, you can put it all into this deferred sales trust that closing at which all your debt is paid off of the asset. So now you're debt-free. And now your liquid and by liquid, what do we mean? Well, you could put it with your own financial adviser or use one of our strategic partners and put it in stocks, bonds, mutual funds of your choosing. Now I'm not a big stock bonds guy, I'm more of a commercial real estate guy. That's what I love. And this is the best part up to 80% of those funds can be directed to syndication of your own or someone you know. So let's just say there are a million dollars in the trust tomorrow, you just sold your business, and it's all tax-deferred, you would have had 600,000. But now you have a million. 80% of that $800,000 the very next day can be sent to an LLC of which you can purchase up into a partnership or buy your own real estate all tax-deferred. So it's it becomes we call optimal timing, which is the best thing what you would have done an array. Of course, before the crash had you known about this, we call this the Monday morning quarterback, you would have sold an ‘07, you would have paid off all your debt. You sat in this deferred sales trust and very liquid diversified safe investments because there's a lot of safe stuff you can put it into and wait for the market to shift and then bought properties at 60 cents on the dollar. In fact, that's what one of our clients did in Minnesota, he sold a large, large building, and '06 he waited five years, that same building was foreclosed on. And through his trust, he purchased it tax-deferred at 60 cents on the dollar, which by the way, provides a brand new depreciation schedule, which is also something that 1031 does not do, the 1031 only you travel with the depreciation schedule. And this is an important point because the number one reason at least in my book to own investment, real estate is the ability to offset the income that comes in by the depreciation and not paying as much tax but still having that income. And so in a 1031 exchange, unfortunately, it's traveling that schedule so eventually you run out whereas, with a deferred sales trust, it gives you a brand new depreciation schedule because we're not buying it through a 1031 exchange.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Jack:

Tell us a little bit about your history. How did you get started in the whole real estate game? How did you become an expert at this? How did you get to where you are today?

Jeff:

I think we know as much as or little than our actual audience listening, as far as this subject goes. So we're gonna be hungry students and ask all the questions to try to unwind this with Brett.

Brett:

That's the best way to learn. I think too, right, especially for folks who are hearing for the first time. So most high net worth individuals who own commercial real estate, primary homes, businesses, or other highly appreciated assets, they struggle with capital gains tax and depreciation recapture when they go to sell those assets. So we use a deferred sales trust to give them tax deferral, liquidity, diversification, and the best part is the ability to invest at optimal timing back into commercial real estates deals like your guys or their own or someone else's at any time, all tax-deferred, and here's the key so they can create and preserve more wealth. So that's kind of the premise.

My story starts you know, back when I was a kid. I work with my dad in the Bay Area Mission San Jose Fremont building custom homes and growing up in that world of owning and selling real estate, and building real estate. You know, I was the kid on the bobcat, or hammering the nails, moving the bricks, my dad always taught us don't move bricks twice, right. So just if you're gonna do something, have a plan, and do it right the first time. And along my journey I learned, I fell in love with real estate and invest in real estate in particular, and knew I wanted to be in that space somehow, someway, but fast forward, played college hoops. And I took an internship at Marcus and Millichap. And I learned the investment brokerage world of how to buy and sell apartment buildings and how to help people do the same. So that was in 2006. I started there. But during that time, something really big happened. And you guys maybe know about it, but in 2008 there's a big event where the marketplace just went, South real fast. A lot of people got hurt. A lot of people, unfortunately, in the commercial real estate world who got hurt, had too much debt, had overpaid for properties, and didn't have a backup plan for a failed 1031 exchange. And that started my journey of how do we help people not make the same mistakes they made? How do we help people not trade in and overpay for properties? Rather diversify, pay off all of their debt, be liquid, and have their cash on the sidelines for when it makes sense to buy? How do we help them escape feeling trapped by capital gains tax when they go to sell their business, as you probably know, a business does not qualify for a 1031 or some can but I've yet to meet someone who's done 1031 with the business. Also primary home doesn't qualify for a 1031 exchange. So that happened in 2010, our manager the office and look guys, we're looking for creative ways to make deals, we had guys who were making a lot of money and making zero we had to figure out ways to think outside the box. And it's a part of that he brought in a speaker who's now my mentor business partner, to seek to speak on the deferred sales trust. And like most people, we had never heard of it. And like most people, we said, This seems too good to be true. Like most people, we thought why hasn't our CPA told us about it? Why don't we know about this, and I have to say I'm more of the tortoise and the hare, meaning I like to poke the bear and just slowly learn about something. But once I learn about it, and once I grasp it, I've been able to help articulate in a way that makes it pretty clear and pretty applicable to commercial real estate owners. So I started learning about it, I got my series 22, my series 63. But along the lines of doing 1031 exchanges for clients. And at that time, we made a lot of sense because it was a lot of goodbyes a lot of forced appreciation opportunities. value add multifamily, especially in Sacramento is one of the hardest-hit cities for the boom and the bust. And to help you make a lot of money. But again, fast forward, we're to the point now where maybe beyond the point of the ‘04, ‘05, ‘06, ‘07 values. Although, most think it's not going to happen again to that severity, there's still a lot of people who want an alternative to a 1031 exchange, who actually want to diversify their commercial real estate holdings and put it with multiple operators and multiple locations. Because as you know, the real estate market is not just sellers or buyers. It's very local. It's very state-specific, specifically neighborhood-specific. So you have to figure out if it is a good time to sell in my neighborhood? And is it a good time to sell in my city or my state and maybe perhaps relocate to other parts? So the big thing is the challenge with 1031 Exchange oftentimes is too restrictive and too challenging. And before we dive into those particulars, I want to give you a kind of the big picture of what's going on.

So according to the American Bankers Association, there are about $17 and $20 trillion, that would 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 planet. In fact, there are 10,000, baby boomers alone, turning 65 in the US alone, and there's 77 million in the US alone, okay, and they're looking to transfer this wealth, and they've made their wealth. And they made their wealth in three primary places high in primary homes, private equity, and businesses and commercial real estate, in fact, that represent 50% of the total net worth of all America. So you get the largest group with the largest amount of wealth, looking to retire from what toilets, trash liability, looking to get out of debt, looking to get diversify, looking to get liquid, you know, they're 11 years older from when the crash happened. And I don't want any of them ever to experience what a lot of people experienced at that point, right, which was a loss, which was frustration, which was blood, sweat, and tears for 10, 20, 30 years before that, just to lose all or even a big portion of that. And so here's the deferred sales trust, I started to learn more and more about it. And it became and it is an amazing solution to so many of the problems.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Mark:

What is a deferred sales trust?

Brett:

Great question, Mark. A deferred sales trust is a manufactured installment sale. You and Scott probably in your listeners know, no seller carry back is an installment sale. IRC 453 is the section of the tax code. But what we do is we insert this trust right before the closing of escrow, which gives so many more benefits and then a traditional installment sale and solves so many more challenges that people are faced with when they're looking at a 1031 exchange. 

And so what we like to say is that most commercial real estate owners, business owners, and high-end primary homeowners, they struggle with capital gains tax somewhere between 30 and 50% of their gain. And it's brutal, they feel trapped a lot of them and then a lot of them are getting older too. And, they maybe want to diversify and choose something that's an alternative to real estate or a different time. And so we use this deferred sales trust to give them tax deferral, liquidity diversification and the biggest thing that I would stress, if you're listening to anything, is the ability to buy an optimal timing into commercial real estate, so that they can create and preserve more wealth, and if it's a business professional, so they can add massive amounts of value to their syndication partners, and or their clients as a financial advisor or business professional.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Dwaine:

Can you please elaborate on the benefits of deferred sales trust?

Brett:

Back to the premise, most commercial real estate owners or even business owners, they struggle with capital gains tax when they go to sell their highly appreciated asset. And we use a deferred sales trust to give liquidity, diversification, tax deferral. And the best thing is the optimal time and the ability to buy back into real estate at any time, all tax-deferred, with a new depreciation schedule, so they can create and preserve more well. So let's compare that to the 1031 exchange. 1031 Exchange does do tax deferral, and it does allow you to buy an investment, real estate, but it doesn't give you a new depreciation schedule. And it doesn't give you optimal timing. So the biggest one is optimal timing. If we generally know Dwaine, as commercial real estate professionals and in so to your listeners, we generally know when it's a seller's market, and when it's a buyers market, right. And given enough time, and given enough space and margin to look for deals, we can find deals in any market. But the challenge becomes when you're faced with that 45 identification period, and 180 days to close. Or even when perhaps on day 170 all the properties fall apart, it doesn't work out, the lender won't lend the seller’s own deal. And you just don't want to overpay for that property, right. And so the 10th deferred sales trust solves that and that we don't have to move the funds into Litecoin property, you can put it into stocks, bonds, mutual funds, and then the key is you can invest it back into commercial real estate at any time, meaning tomorrow day 181 or five years from now when you find a deal. And that's really the key to this. 

But my journey is back in Marcus and Millichap. In Sacramento particularly, it was one of the hardest-hit cities in America for the crash, it was a huge boom, and then a huge crash. And so in the Oh ‘05, ‘06, ‘07 market, a lot of people were trading properties in 1031 exchanges. And they're really happy to get that offer, let's say for $2, $3, $4, or $5 million. And they're excited to be a seller but then all of a sudden, they had to turn around and be a buyer. Why, because they felt they had no other choice except to defer the 30 to 50% in-game. And so what happens is you end up, generally speaking, what can happen is you end up overpaying for a property. So the first thing is the optimal timing and overpaying. The second thing is taking on equal or greater value, which oftentimes means equal or greater debt. That's where people really got hurt in the ‘08 crisis is really how much they were over-leveraged, and they overpaid. And they didn't find value add deals or perhaps in your world, it was single-tenant assets where the corporation just went, you know, bankrupt, and they had no one to pay the rent, right. And it's single-tenant, so they weren't diversified. The deferred sales trust solves that and that we pay off all the debt at closing. And just the proceeds go into the trust. 

So we call it the debt-free plan for your commercial real estate or business. And now the proceeds are sitting in a liquid diversified portfolio. And the diversification can be multiple things. It could be multiple commercial real estate, syndication deals, could be multiple commercial real estate deals that you buy on your own. It can also be stocks, bonds, and mutual funds of your choosing, which creates an opportunity again to diversify versus being in a single asset and a single location and typically a single product type, which as we also know that the United States is there are different markets and some places are buyers markets, some people places are seller's markets, it's ever-changing. It's not just everything's a seller's market, everything's a buyers market. Although generally speaking, we would say it's more of a seller's market today and more than ever. But that being said, if you can diversify, let's say a $5 million asset into three or four different product types with different geographical locations and have the timing is unlimited. You give yourself a competitive advantage to find the right deal so you can create and preserve your wealth.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

William:

Let's touch base on the deferred sales trust, right? Would you call it DST for short? Why and how and when do we use it? If you give us like, you know, like a couple of steps on that?

Brett:

Let's start with kind of the big picture of what's going on. This is kind of the why behind why it's such a popular strategy now. So according to the American Bankers Association, about $17 trillion, will pass from one generation to the next in the next 20 years. This is the largest wealth transfer in the history of the planet. Okay, and in fact, there are about 77 million baby boomers in the US alone. And about 10 million of them are turning 65, I'm sorry, 10,000 of them are turning 65 every day. And they're faced with this large wealth that they've accumulated. And most of this is in primary homes, commercial real estate, and private equity. In fact, that's 50% of America's net worth right there. The other 50% is stocks, bonds, mutual funds, retirement accounts, pensions, but 50% is in what's called illiquid assets that take management that take time liability, oftentimes have debt, and they're looking to retire from the toilets to trash the liability, they're looking to transfer it to their kids and retire, rather than just holding on. A lot of our clients, find this they say, Brett, I might feel real estate rich and cash flow poor. I might, you know, it could be your primary home, it could be their business, I want to retire from my dental practice for my orthodontist, or optometrist or a veterinarian or someone who has professional practice and they're ready to retire. But they're faced with a very low basis, and a very high gain, and of which 30 to 50% is going to be wiped out. So a lot of them are very reluctant to sell and don't have a good quality tax deferral strategy to use. So for example, our primary homeowner, you have what's called a 121 exclusion, which gives you 250,000 for the if you live there to the last five years if you're single or $500,000, if you're married, so again, that's tax-free, right. But beyond that, you owe capital gains tax. And that's where we come in. So we just did a deal for a lady who was selling a $3 million home in Cupertino. This is near Apple, and she bought it over 20 years ago and highly appreciate it. And we saved her $400,000 in tax. So it's not just the numbers that we save her but really what for her she wanted an income stream, where she could sell her house that she was living in. She kind of felt trapped, the kids were gone. And she didn't want to get hammered with the tax. So she was able to sell it, put it to the deferred sales trust, and get a passive income stream, she can put it into commercial real estate or business. But right now she hasn't stocks, bonds, and mutual funds. But the point is, instead of paying that 4000, it's all different, she's earning interest. So the second one would be the business owner, again, they're just selling a business, they have no 1031 option, just like the primary owner has no 1031 option. Those two are probably our top people who would use it because it's true we think the best option for them. All things considered. Now the investment real estate isn’t he has the 1031 exchange when we talked about some of the limitations there. And let's dive into those a little bit more for your listeners who are in the real estate business. So the first one is the 45, 180 sprint. So the intent is to give tax deferral and the intent is to find real estate. But the problem is very low inventory and prices are very high. So when you add a timeframe to that 45 days to identify, and 180 days to close, it often presents or creates pressure and stress. And people often overpay for properties that they otherwise wouldn't have bought if it wasn't for that tax deferral, right. So that's the key. Our parents taught us to sell high and buy low, right? They didn't teach us to sell high and then buy higher again. And unfortunately, that's what 1031 often does, you sell it today. And then 180 days later, you're buying higher. And oh, by the way, sometimes with the higher interest rate. So we call that the candle burning on both ends. And if the candle represents your return, eventually, if the candle burns enough on both ends, your return gets smaller and smaller. So one side that's burning is low inventory, high prices, low cap rates, right, which is not good. It's a high price. The other candle that's burning is your time is running out, right, you're running out of time. And so this all creates this pressure situation where oftentimes in a highly appreciated market, you overpay so that's what we would say don't use a 1031 exchange. If you're going to overpay, make sure you're buying the real estate based upon the intrinsic value of the real estate

Brett:

Regardless of what tax deferral you have, and if for some reason you feel like you're just buying it because of the tax deferral, then we would say the deferred sales trust now becomes the number one reason to use it in a highly appreciated market. So that's number one. Number two is the new depreciation schedule. Okay, so depreciation is one of the top reasons to own investment real estate, it offsets the income that's coming in. So you have a lower tax millage. It's fantastic, right? However, with the 1031 exchange, if you own it long enough, you eventually will deplete your depreciation. And then if you do 1031, depreciation scheduled travels, which is not good, maybe you don't have as much depreciation for the next deal. So the intent is to get as much depreciation as you can. The problem is 1031. Exchange, the depreciation schedule travels, the solution is a deferred sales trust, you can put the funds into the trust and then purchase an investment, real estate through the trust and have a brand new depreciation schedule. So let's walk through a deal. Yes, just say you're selling a deal, Willie, and it's a million dollars, and you've owned it for 27 and a half years. So you have 00 basis, if you were to sell today and buy a 1031 deal, exactly, let's say 3 million, you'd only have $2 million worth of depreciation because that other million you've already used, okay, with the deferred sales trust, if you bought that same $3 million deal, you'd have a full $3 million depreciation schedule, because it's not a 1031, we're buying it through the trust. And here's the last one on 1031. And then I'll open up for some more questions or thoughts that you have is the fact that you have to produce or you have to buy something of equal or greater value with the 1031. That's part of the rules. So what that often means is you're taking on equal or greater debt, right, and when you take on debt, it can be very, very risky and a highly appreciated market. So let's just say you're selling a $5 million deal, and you had two and a half million in debt, you need to buy something of at least 5 million or greater, which means you're probably going to take on that two and a half or more debt. But let's just say you buy a $6 million deal now your three and a half million dollars in debt. But the only reason you're buying that against because you feel pressured to overpay and you don't want to pay the tax into the deferred sales trust. We can sell pay off all the debt at closing. Just put that two and a half into the trust. Now you're debt-free. And we like to say you're on the sidelines and you're in a position to purchase something at an optimal timing, meaning when you find that deal, right, which could be tomorrow, day 181 or five years from now, but hopefully, you found the deal that makes sense on the intrinsic value not just because you wanted to defer the tax.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Alpesh:

So what is DST and why someone should use it?

Brett:

Great question. So a deferred sales trust is simply an installment sale. And installment sales for your listeners may be known as a seller’s carryback. But it's most commonly known as it's based upon IRC 453, which is the IRS tax code 453 that goes back to the 1920s tried and true tax code. And it would be such as, Alpesh, you're selling a property, let's say a multifamily property for $5 million. And you were carrying paper? Well, if you carry paper, you become the lender, you know the tax.

Alpesh:

You're the bank.

Brett:

You're the bank, right? So that's what it's based upon. As far as why someone would use it, we're seeing just a huge, huge shift in demographics and wealth. And I give you a few stats for your listeners, according to the American Bankers Association, there's about $17 trillion that will pass from one generation to the next, and the next 20 years. And this is known as the largest wealth transfer in the history of the planet that we do. In fact, there are about 10,000 baby boomers turning 65 every single day in the US alone, and about 77 million baby boomers in the US alone. And what are they challenged with another challenge with toilets, trash, liability, debt, businesses that they've worked on for 20 30, 40 years properties that they've sent, 1031 exchange for decades, and highly appreciated assets, right, but they want their time and energy to do you know, retirement, or to slow their pace of life. A lot of them do, and they don't want to necessarily 1031 into another property, right. But they got to sell they want to say, but they don't know how to get out without getting 30 to 50% of the game being wiped out. And that's what we're talking about here. Every single day, people pay hundreds of 1000s if not millions of dollars on their high-end primary homes, their businesses, or commercial real estate, when they don't have to they can the deferred sales trust, to get out of all of that out of all the debt and to diversify into multiple income stream assets such as real estate, or stocks, bonds and mutual funds all tax-deferred, and that's really the big secret here. Most folks know how to defer tax using some strategy, but they don't know how to do it to open up the whole options for real estate or stocks, bonds, mutual funds, and then to do it at their own timing based upon their own needs.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com

Ruben:

Let me take a step back, maybe a learning point for myself, what is the DST?

Brett:

Such a deferred sales trust, it's a manufactured installment sale, it's kind of known as a seller carry back. So one way to look at it is and you may know this, your listeners may know, but definitely, their CPA does. If you were to carry paper when you do that, you're in a deferral state. So let's go back to that $10 million examples. Let's imagine not using the DST or a 1031. But I show up and I say, hey, Ruben, I'm gonna buy your business for 10 million. How about this? I'll give me a $2 million downpayment. Would you carry a note for 8 million? When you say, "Sure", now on that 2 million Ruben, you've received that so you're going to have to pay tax on that it's called actual receipt. But on that 8 million, it's in the deferral state. Imagine you did a 30 or 40 or 50-year loan, as long as you don't receive that 8 million you got you're not paying capital gains tax is not triggered. Now the interest payments you'd pay tax on right ordinary income tax on that. So let's take a little shift here. Imagine I gave you zero down payment. I said, Hey, Ruben. Zero downpayment, would you carry a note, for 10 million, you say, "Sure". And that scenario, you've received zero today. So zero is triggered today. Therefore, you're in a deferral state on the full 10 million. The only difference is we have this trust come in and this is what happens. We have a buyer lined up for the full 10 million, they're ready to buy it, and they got the cash ready to buy it, and you're about to accept it. But instead of doing that, you have the trust jump in right in between the close of escrow. And what happens is the trust actually buys it from you Ruben for 10 million, and it turns around and sells it for 10 million. Now, if the trust bought and sold for the same price, Reuben, how much gained is the trust have?

Ruben:

Wow.

Brett:

Answers zero, right. So it has no tax. Now, Ruben, if you received zero down payment, and you took back a note for 10 million bucks, how much did you receive today? Zero, therefore, this zero tax due today? It's deferred, right? It's kind of like an interest-free loan from the government. The government says Ruben, you owe us this $4 million tax liability, but tell you what, we'll give you zero interest. And as long as you take that 4 million and you invest it for business purposes, and investment, real estate and you live off the interest, you can keep that going for as long as you want. So most of our notes are 10-year notes, and at the end of 10 years, they can renew for 10 years, pass it on to your kids, most of them earn about an 8% return net, about six and a half percent after fees. But here's the key, you're building more wealth and you're able to give more, right you're able to help those who are most in need more, you're able to start new businesses and spur economic growth, right you're able to do you can help your family, whatever you want to do. You can live off the extra interest payment and do whatever you want with that money. But the principal must be in it for business and investment. So I'll pause there because I said a whole lot. And I know that can be a bit complex.

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Whitney:

So you are going to help us to defer tax.

Brett:

I mean, that sounds pretty good. Right? That sounds pretty good.

Whitney:

Get us started and tell us what you know, as a syndicator and in the syndication business. I guess to get us started and some things we should be thinking about what this means for us?

Brett:

Yeah, so most commercial real estate syndicators. They have partners and even themselves, they struggle with capital gains tax depreciation recapture when they go to sell their high-end primary home, business, or commercial real estate. And we use a deferred sales trust, which is just an installment sale, creative installment sale, to give them tax deferral, liquidity diversification. And the best thing is the ability to buy or invest in other commercial real estate deals at optimal timing. So they can create and preserve more wealth and as a commercial real estate syndicator. So that you can add massive amounts of value to your partners. And so that you can create and preserve more wealth and attract more capital, while a better way to put it is to unlock the capital that is stuck in an illiquid asset. So to give you some more context, according to the American Bankers Association, there's about $17 trillion that will pass from one generation to the next 20 years. And this is known as the largest wealth transfer in the history of the planet. And this is by the baby boomer generation. In fact, in America alone, there are about 77 million baby boomers, and every day about 10,000 of those turning 65. And they're in what's happening with them is they're, they feel really trapped, we call a perfect storm. And they're trapped because they want to get out of the toilets to trash liability. And they want to be able to maybe retire it from the active management of the commercial real estate and be more passive, right with a syndicator who perhaps is a little bit younger, and is maybe in a different geographical location, and has some value out forced appreciation opportunities, versus their one particular town or city that they're in. The next thing has to do with just interest rates that are hovering near 40-year lows, and real estate and businesses. Appreciate it a great deal. And we call this the perfect storm of what do you do and how do you help that group to diversify and get liquid and then be able to invest in deals that you have lined up?

Whitney:

Okay.

Learn more about Deferred Sales Trust
Visit: www.capitalgainstaxsolutions.com