057 | How to Manage Big Capital Gain Tax Bills: Brett Swarts Breaks Down Deferred Sales Trusts

Have you ever thought about how to unlock the value of a highly appreciated asset while deferring capital gains taxes and gaining more financial flexibility? If so, this episode is for you. Welcome to the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and today we’re diving into an exciting conversation with Brett Swartz.
is the number one bestselling author of building a capital gains tax exit plan. The host of build it to billions podcast and an expert in helping entrepreneurs and investors navigate the complexities of deferred sales trusts. In this episode, we explored the strategies behind using a deferred sales trust to maximize financial growth by deferring the capital gains tax and truly living life on your terms.
Whether that means building generational wealth, pursuing impactful investments, Or living a laid back, no shoes, no shirt, no problem lifestyle. By the end of this conversation, you’ll have the tools and insights to decide if this innovative approach could be a game changer for your financial strategy.
Let’s dive in. Brett, you are an Amazon number one, bestselling author of building a capital gains tax exit plan, and also the host of building it to billions and capital gains tax solutions podcast. I’m excited about this because we have a number of clients that own Uh, very valuable businesses and they’re looking forward to an exit at some point.
And I think the, uh, the strategies that you talk about and help your, uh, clients employ is, is wonderful. So thank you for joining us here today.
Patrick, grateful to be here. Thanks for having me.
Yeah, very good. So I’m, I’m just wondering if you could get in and start to explain what a deferred sales trust is, how it works.
Uh, can we just start with the basics and then we’ll, we’ll dig into, uh, we’ll call it a little case study before we. Um, before we’re done,
yeah, so, uh, the deferred sales trust, the way I like to put it is, is that it, it helps to unlock what we call an irresistible capital gains tax exit plan and an irresistible for our clients.
We have found that they want flexibility, they want diversification. And they want time and they want, you know, what we call truly passive income. And these are some of the big kind of ideas that we work with now, like any, any strategy or any structuring or any, um, you know, product, if you will, service, it comes down to the experts to execute the service, right.
In a way that is customized and it fits the goals and the risk tolerances and all the different things that are associated with that. Um, but at the, at the core of what the deferred sales trust is, Um, it’s a tax deferral capital gains tax strategy based upon IRC 453. Um, most of your listeners might know it as a seller carry back where a seller can.
Uh, defer, um, uh, tax by deferring payments. In other words, they can become a creditor to a sale. And so we work with people that have, you know, big business sales. They have large Bitcoin exits. You know, we’re recording this. We’re close to a hundred thousand a coin today. Pretty incredible. Um, and real estate are our main three that we work with and people really want flexibility and be able to defer that tax and to be able to diversify with groups like yourself, Patrick, to, to, you know, balance out their, their financial wealth.
Yeah. Okay. So this, this is really interesting. You talked about it. We’ll call it an installment sale where, uh, the typically when I sell that way, right, I don’t get all my cash upfront. I have to wait until, you know, the dollars are sent to me. Can we talk a little bit about, uh, how this, this all works and I don’t necessarily want all my dollars up front.
I, especially if I get to spread the tax out, I’m most of the time I’m looking at this, this windfall going, okay, I need to invest these dollars and, uh, utilize it in a particular way. I just don’t want to leave the cash with the, the potential. Or with the buyer, cause if they don’t run the business very well, I might not get all my money.
So can you talk us through how, how we combine this, this idea of, you know, a lump sum of cash and the, um, installment sale together?
Yeah. So, so what you, you, you nailed the old school installment sale. What’s the old school one? I call it the blockbuster installment sale when you have to finance the buyer.
And why, why is that not great for you as the seller? Well, let’s imagine you owned a business for five, 10, 15, 20 years. This is your entire, you know, uh, life’s work. If you have a career work, it’s a big sale. It’s the, you know, the legacy and the financial futures on the line here. And you want to retire and, and, or do something different.
The worst thing that could happen is you sell it for what you call a good price, make a good deal, but you finance it. And then two years later, the buyer is run the business or the real estate into the ground, and you’re having to pick up the pieces. And just when you’re getting what we call truly passive income, you’re now having to jump back in and start the career or build, pick it all back up.
And so that’s why a lot of sellers are hesitant to finance a buyer, but they understand the concept of if I delay receiving payments, I delay, I can delay my tax. And so a good way to think about this is like a delayed tax trust. It’s kind of like an IRA or a 401k. Um, here’s the difference though. We eliminate all of that negativity in the sense of we de risk the, uh, uh, in fact, we eliminate the foreclosure on the old buyer of the old business.
And here’s how we have a trust jump in right in between seller and buyer and do it like a simultaneous close. It’ll buy from you, Patrick, if you were the seller and turn on immediately and sell it to the buyer. And so the trust itself bought and sold for the same price. Uh, we’re not going to finance the buyer at all, right?
They need to come with all cash or get a loan from somewhere else, but you will finance the trust and the trust will owe you back the money. And this is where the magic opens up because now they can put it into a diversified portfolio of liquid investments or businesses or real estate or a mixture of all of the above.
And, and it can be secured against the biggest companies in the world. Right. And, and wow, all of a sudden my collateral is, is some of the biggest companies in the world versus. The business, which I’m sure was a great business and did well. And you’re comfortable with that, but do you really want to foreclose on it if, if the buyer doesn’t actually perform?
Yeah. All right. I love this. So let’s step back for a second and just talk about the tax. So let’s say I have a 5 million sale. Okay. I think the first tax we think about is the federal capital gains tax. So, um, I live in Iowa. I got to, I start off and I pay that federal capital gains. So at 20%. There’s a million dollars that, that just goes out to the IRS out of my 5 million, uh, dollar bucket.
Right. And then, then we start layering on state of Iowa. I pay ordinary income tax on those dollars that come in. So I think we’re at 5. 7 percent this year. So there’s another, uh, quarter million dollars that are going out the door. And then we also have the, I’m going to call it the Medicare cert tax, which I think is, 3.
9, 2. 9, uh, 3. 8. Thank you. Uh, that also needs to come off the list. So it’s like, before I know it, I’ve got a third of my, my proceeds have just gone to tax. Is, is my math about right there?
Yeah, you nailed it. Right. And that’s, that’s the brutal part, right? I mean, in fact, what, what I, Iowans and all of the other Americans, baby boomers are facing is what’s called the largest wealth transfer in the history of the planet.
It’s about 84 trillion, and it’s tied to mostly high end primary homes, businesses, and commercial real estate. It’s 50 percent of all the net worth in America. And there’s about 10, every single day. And there’s about 80 million in the U S alone. And so they’re facing this exact scenario. They’ve built up this wealth and now they’re looking at.
You know, 50 percent of their proceeds being crushed by capital gains tax. And I say proceeds because sometimes these sellers have debt on these assets. Right. And they might be selling something for, let’s say 5 million, but they have, let’s say a million or two of debt. And so after they look at, after paying the tax, they go, well, why would I even sell?
And they end up just having to feel like you have to keep working and keep going. And, and, and so we want to unlock time freedom and what we call truly passive income. By being able to sell and move on to the next chapter of your life, uh, to whatever that means for you, making more of an impact, spending more time with your family.
Building the mission, vision values for your family, uh, in a very intentional way, but until you can unlock a lot of what’s holding you back and get past that barrier, that capital gains tax, a lot of people will feel trapped.
Yeah, I love it. So I’m going to use some round numbers and just to, to get a little better understanding of how, uh, the deferred sales trust works in my, my favor.
So if I have a 5 million. And I get to move all 5 million into the deferred sales trust. And let’s just pretend for a second that I earn 5 percent on, on that. That portfolio. Okay. Uh, that’s my, my interest. I assume I’m paying, I get that distribution out to me and I pay the income on the, the income tax on that distribution.
Is that, is that a fair statement?
Yeah. As you receive payments back from the trust, um, if you receive just interest at 5%, let’s say that’s what you’re receiving. Um, and the note is written at, let’s say 5%, although we have notes written at six, seven, eight, and nine, and sometimes 10%. But let’s imagine it was written at 5 percent and it just made 5 percent and, um, and, uh, you, and you receive 5%.
And we say that 5 percent is net of fees, but just keep that simple that you would just pay a tax. Uh, you get a 1099 for what, for 250, just pay tax on that.
Okay, great. Where if I compare those same dollar figures, if I have three and a half million dollars, because I, I gave a third of it to the, You know, the IRS, uh, and I’m at that same 5%.
Now I’m getting 175, 000. I took a 75, 000 haircut every year because I decided to pay the tax up front versus, uh, moving into deferred sales trust. Is that, is that a fair assessment of, of how I get to earn on the total balance versus the lesser of the tax proceeds? Okay. That is, that is a, a beautiful thing.
So. Now, can we talk a little bit about the, the principle? Okay. The, this capital gain that I’ve deferred. Can we talk about how that gets pushed out of the, the trust? Can I leave it in there forever? Is it something I have to take out over a period of time? Uh, what happens if my heirs inherit it? Can we, can we start walking through some different scenarios with.
Uh, the, the capital that’s left in the trust and, uh, what the, what my options are with that.
Yep. Great question. So some of the most common questions are this, like, how long does the DST, how long is it open for? How long does it last? Can I pass it to my kids? How does it work with my estate plan? What happens to the principal I receive it?
Let’s kind of go through a lot of this, right? So first of all, these are typically 10 year notes. And every 10 years, you can renew for 10 years and you can pass it to your kids and they can continue to renew for 10 years. And you can basically go out for as long as you and your kids want to go to defer all of the principle, right, of the capital gains and, uh, a tax, right?
So all the capital gains tax, all principle. And most clients in this scenario will keep the 5 million in tax and they’ll just live off the cash flow. And so you can defer the capital gains tax for as long as you want, as long as you don’t dip into the 5 million principle and just live off the interest.
And that’s literally what 99 percent of our clients do. But let’s imagine you do want some money to spend on something personal, like a primary home or you want to buy a boat. And by the way, that, that interest that’s coming out, you’re gonna get taxed on it. You can spend it on whatever you want. But really, you only get taxed on the principle if you dip into the principle.
Right. And we can schedule a principal payment and we can adjust the promissory note over time. And so it’s not, you never set in stone for the payments. Um, and then the, uh, the, the, the kids themselves, you have multiple kids. They, they can step into your shoes and continue the tax deferral, not a stepped up basis, right?
Just step into your shoes and continue to tax. So let’s say you had two kids. Right. You want it to go 50, 50, 125, 125, you know, from the payments, uh, when you, and let’s say you’re married, you and your husband or wife die, boom, then they can step into your shoes and then they can, they can make the 120 or they can take their 2.
5 million, just pay the tax on that. Um, it kind of just depends what kind of, how you set up your living trust and what kind of, you know, terms and, and, and conditions you put inside of that.
I love it. So one of the things that you discussed earlier was I can go invest this, the, these proceeds into, I’m going to call it a stock and bond portfolio, right?
Let’s say I want to be in the S and P 500 diversify my risk largest companies on the planet. Now let’s say that portfolio performs at, uh, 7, 8, 9%, uh, exceeds my, I’ll call it my note payment. Uh, is there, is there a payment? Like I can set up 5%, but if my. Portfolio performs at eight or nine, what happens to the difference in those proceeds?
And can we talk about it the other way too? So, yeah,
exactly. So, so keep, keep to make what’s called, uh, make the trust, uh, commercially reasonable and have some business purpose that, that, uh, the trust itself owes you the money, the 5 million. And if you want the note at 5%, It owes you that in net of fees.
Okay. And let’s say fees just generally speaking are about one and a half to 2 percent includes the financial advisor includes the trustee. That’s our role here at capital gains tax solutions. So let’s say we’re going to try to earn about six and a half to 7 percent to net about five, generally speaking.
Okay. Um, so let’s say we earn exactly seven and net five, then there’s no overage, right? No overage. And they got the five and it’s a 5 percent compounding as well. Okay. Okay. Now let’s imagine we earned eight. So it’s one extra point there, right? Well, outside of any additional planning, that 1 percent at the end of that 10 year term would go to the trustee.
Now our goals in our intention is not to get that upside in that scenario, but to keep it, what’s called business purpose, because this is a business and you are selling your there’s business purposes because you’re selling the asset to the trust and exchange for a promissory note, which leads into the next question.
Well, who owns the trust? Some people think, well, I must own this trust. Like a regular revocable living trust. No, no, you don’t own the trust. The reason you don’t own the trust is because if you sold it to yourself, it’d be taxable, right? So the government’s money is that 1. 5 million. Your money is really the 3.
5. But the government says, you know what? If you sell it to a third party trust and we have a third party trustee, you run it, that’s our role. And you work with, you know, the financial advisor to invest the funds and all those things. Basically, you can build something that you can live off of it, right?
But you are the sole creditor, right? So nothing happens until and if. It pays you, uh, pays you the interest, pays you the, uh, the principal, uh, less the fees that are happening every single year. So you still have some protections in place, but that’s, that’s the long, long short of it. We do have a second structure that the children can be the beneficiaries.
This is for large, you know, 10, 20, 30 million exits, and people have huge taxable estates where the children can get the benefit of the upside. So let’s imagine someone’s listening to you. I have a 50 million estate. It’s all inside of my taxable estate. And they were to sell and use what our 2. 0 version, we call it our 2.
0, DST 2. 0. Now, if they were to use that, we can eliminate the estate tax. Their children can be the beneficiaries. Okay. No charity life insurance or gifting required. But what’s neat is let’s say it performs like, you know, 10 or 20 percent or whatever, right? Over, over the course of 10, 20, 30 years on average, we do really great.
And the note is only 5%. Well, that excess. The beneficiaries, their children, right? Get the remainder capital gains tax free and a state tax free. Although it does depend on when the parents set this thing up and when they die. And the last piece of that is when they receive payments from the 2. 0, they’re going to be paying some capital gains tax and some ordinary income that’s different than the 1.
0 traditional installment sales. I know it’s a lot of information there, but. You really got to clarify, like, what are you trying to solve for capital gains tax? Yeah, but maybe also a state tax. Okay. So you might have one or two trust. You wouldn’t have any more than two per family. But when between those two, we can do a lot of, uh, great planning, uh, and a lot of tax efficiency.
I love it. I love it because really we look at the entire financial universe and there’s so many options out there for our clients. If I understand the client’s goals really well, it’s easy to align up and start stacking up strategy that is going to help them accomplish those goals. And, and you’re, you’re outlining a perfect example of that.
What are our goals? Is it estate tax? Is it estate planning? Is it just capital gains planning? How do we want to manage this? And once we understand those, now we can start looking at how we’re, we’re building out the structure.
And can I add to that, right? I’ve been really thinking about this and like, you know, like kind of studying and work with my clients.
I was just at a recent conference with 11 of my clients and we were walking through like what’s been meaningful for them. What, what matters the most to them, right? And, and, and kind of getting a feel for what we’ve been able to unlock with the deferred sales trust. And what I’ve come to, uh, kind of realize in a, in, I guess, a more clarified way is that what really most people who are listening to this potential podcast and they’re, you know, they’re between 50 and 65, they built the business, the real estate, they have substantial five to, you know, 25 million net worth.
And they’re going to be exiting what they’re truly looking for is what’s called truly passive income, right? We have this, this, this, this concept of passive income is, you know, financial freedom, right? Is I have my passive income passive in quotations here. That’s paying my living expenses in my lifestyle, but it’s really not passive because there’s property management, there’s toilets, there’s trash, there’s time, there’s energy, there’s stress, there’s debt, there’s regulation on and on and on.
It goes, especially in the States like California, New York, New Jersey. Right. And it becoming more and more challenging to own and want to want to own these things during this stage of life. And so, um, or even if you’re the entrepreneur, you’re ready to go to that next chapter, but you’re not quite sure how to get on the other side of it to be truly passive.
And so. What I, we have a saying around here that truly passive income, um, is to your impact as compounding interest is to your money. And what I mean by that is they want to be able to free up their time, the energy, their space. You know, and they really want to focus on the impact for their family and their legacy or that next chapter of their entrepreneur journey.
And so a story of this is really captured this. We have a client Warren and Catherine, they owned multifamily properties for like 25 years. Well, they had kids a little bit later in life. Okay. They had two twin daughters and they’re finding that they have basically from 10 to 18 to spend time with them before the kids are off to college.
And they’re saying, wow, well, Warren’s driving two to three hours a weekend. By the way, the property is a great property. It’s performing, they’re multi millionaires, right? And it’s, they have good tenants. They’re taking care of the tenants. They have some joy in taking care of some of the tenants, but they’re saying, what are we really trading?
Like we’re not passive as we want to be. We’re trading the time and energy with our daughters, but we only have this small window of time here. And, and we really want to have more impact with them. And so fast forward. They use the deferred sales trust. They went from 120, 000 NOI cashflow to over 190.
They’re coming to these events where we’re building out their mission, vision, and values, and we’re about to go overseas with them, uh, to Uganda to start putting in clean water wells. Right. And they’re going to bring their daughters with my daughters and our family and their family. And it’s going to be, it’s going to pay eternal, you know, impact versus just the temporary cashflow.
And that’s really the mindset that I want to encourage people to think about is like, Instead of thinking of ROI return on my investment, I want to, I want you to think of the true ROI return on impact.
Right.
And what that can mean and do for you and your family.
Yeah, I, I love this. There’s so many things that I want to unpack here.
So the first thing is I love what you’re talking about. We, we like this acronym called REACH. Okay. And it’s the most valuable things in life. The R’s for relationships, E’s for experiences, A’s for advancement or growth. For advancement and growth C’s for contribution. It’s better to give than receive. And then, uh, H is our health and that’s.
Our spiritual, emotional, and physical health. Right. And so you just touched on almost all of those factors, right? I’m going to go spend time with my family, create amazing experiences. We’ll learn and grow in that process. We’re going to contribute to people’s wellbeing. You know, we’re going to make an impact on the planet and all of that’s going to be good for our mental, spiritual, and emotional health.
So, uh, or physical health. So that is, that is beautiful. I love the way you’re, you’re thinking about that. And I appreciate, you know, taking this, this, this idea of like, let’s just move the, the dollars off the balance sheet and go experience those dollars, right. And, and, and get to enjoy those. So that’s beautiful.
I think another thing I want to tack on is the average real estate investor lasts for about three years before all of the things that you just talked about. It is real estate is not a passive income source. It is a active income source because it’s like owning a small business. I have to spend time, energy, resources going to manage this thing.
Now, there are ways to go make some real estate investments that can really be very close to that passive side of things, but, uh, it’s still not the same as, uh, a stock and bond allocation. So I
did that real fast, you know, thank you so much for sharing that. I love the reach acronym, right? And I, and I love, I love that you’re focused on helping your clients, you know, uh, holistically look at their wealth and all areas of their life.
And not just the financial side of things, which is important, definitely important, right. But, but just one of the, we call it the five major wealth, wealth categories. Um, truly passive income. We define it as equaling something like this, right? No debt, no liability, no tenants, no hassles, no lost time. And I don’t know if you’ve ever heard that song, uh, no shoes, no shirt, no problems.
Right. By Kenny Chesney. I want the listeners to be thinking about that, right? You’re, you’re Kenny Chesney and you’re sitting in on a lake or on, or at the ocean and you have no shoes, no shirt, no problems, like, and you’re playing that guitar and you’re living your, you’re at a very, a peaceful, intentional, impactful life.
And it’s not just about retirement. Right. That is a part of it. Right. That’s cool to be out ahead of that free time. But it’s really like, what are the things that are giving you fulfillment? What are the things that are going to move your legacy in a way that you’re going to be a steward of the legacy versus an owner of the assets, right?
Stewardship is like eternal, multiple generational focus. Ownership is like, Oh, what can I hold on to now? The things that I think are going to give me the temporary stuff. And so it is, it is truly passive income is going to unlock that return on impact. And it’s kind of being like Kenny Chessie. Uh, who doesn’t want to be like Kenny Tesney,
right?
I love it. I love it. That’s beautiful. So I think there’s, there’s another, I’m going to get into a technical question now. So if I own real estate, you know, I think the, the most common tax capital gains, tax deferral strategies, a 10 31 exchange, like. Okay. I’m going to take the proceeds from this one and move it into the next.
Right now we’ve alluded to why that isn’t a great idea, but can you talk about how the Deferred Sales Trust is a great 1031 alternative?
Yeah, let’s talk about the, uh, client live, uh, actual deal, client store, success story. His name is Peter. Okay. And his Peter and Peter actually made a whole YouTube channel on my YouTube channel.
He made a whole, um, uh, video on this and Peter’s driving from Marin, California. And this is where I grew up in tax a fornia, now in Florida, by the way. Um, and, and so he’s faced a lot of tax. He’s driving from Marin to Sacramento, two or three hours in traffic both ways. And he’s trying to take care of these tenants.
He 1031 exchanged into this property. He’s a full time real estate, uh, owner. I mean, he, he lives in breeds it. Right. And now he’s approaching 65 and he’s finding himself spending more and more time and energy there than he wants to. In fact, at one point he parks his car, he walks up to the, to the tenant to talk with the tenant and there’s a drive by and his car gets sprayed with bullets.
And he’s like, start scratching his head and going, I live in Marin. I’m, you know, I’ve got, you know, it’s somewhere between, let’s say, you know, two to 5 million net worth. Why, where am I doing right now? You know what I mean? Like, this is not what I want anymore in my life. It’s not bringing me joy and fulfillment.
It’s actually putting me in danger. Um, okay. So I have 18 problems. This is what he told me. And I asked him that exact question. I said, what? I said, Peter, like before we get started, I usually try to really flush out the alternatives for people. I say, Peter, why not just do a 1031 exchange? You know, why not just do what you’ve always done?
He goes, you know what, Brett? Here’s why. Over there was 18 units. He goes, I have 18 problems. He goes, I don’t want to have 36 problems. I have 18 problems. I don’t need an, you know, I don’t need to double my problems with new toilets, new trash, new liability, new management. And sometimes that’s the hardest thing for people.
They’re, they’re, they’ve been swimming in the, you know, it’s like the frog inside of the inside of the bucket, right? And they’re, and they’re churning and they’re trying to make it to make it butter and they’re, and they’re, and they’re just comfortable there because this is what they know, but sometimes they got to like, stop, look around and say, is this really what I want?
And, and also what is over there that if I just. Just had a way to get there that would actually be what I want. Right. And that’s, that’s really the heart of this. And so, by the way, does that mean a 1031 exchange can’t be what you want? Not at all. Right. Like we love 1031 exchanges. In fact, I started my career as a multifamily broker at a place called Marcus and Militap helping people do 1031 exchanges, and we love a 1031.
When, what, when, when everything lines up. Uh, the property makes sense, meaning like he would have bought it regardless of the, uh, of the tax deferral, the, the location, the time you find joy and fulfillment and pouring into the tenants, um, and solving the problems, having that small business or that large business, like you’re finding joy and growth and fulfillment and achievement and teaching your kids how to do all of these kinds of things.
Like, that’s an amazing thing to be able to have. We don’t want to take that away from you, by the way, the deferred self trust. What’s beautiful about it. Is you can still do that, like back to Warren and Catherine real fast. The kids can go to college for, you know, the 18. And by the time they’re 25, mom and dad are sitting in the deferred sales trust.
They’re diversified. They’re getting the cashflow. They’re living their best life. Then their daughters are like, Hey dad and mom, I want to start a business. I want to buy the property. They’re like, awesome. Guess what? The trust can put up the capital to do it. You don’t have to go to the bank. You don’t have to go to a private equity.
You don’t have to go to a hard money lender. You can do that all tax deferred so you can get back into the game. So what we’re saying here is have flexibility for the seasons of your life. When wealth is serving to help when those, those five areas of the reach, right. And not subtracting from it, but have the flexibility to go back and forth with that.
Like let wealth be your, the tool you’re using, right? Not the compass of where you’d have to stay. Right.
Right. I love that. And, and you just highlighted a key point, like a 10 31 exchange has all of these timeline restrictions. Like I’ve got to identify a property. I’ve got to buy it within so many days, like all of these challenges where.
I could move to deferred sales trust five years from now. I could go, Hey, my kids want to buy a property. Cool. Let’s, let’s reallocate these dollars into, uh, the next project. If I heard you, correct. Is that, would that be a fair statement? Yeah. Let me give you
a real technical, real fast, right? No 45 day window to identify no like kind of replacement to identify or to buy, say 45 180, no debt replacement to re to re to replace that’s the biggest one people mostly miss either replace the debt, equal greater value, or Right.
Um, you don’t have to have to face a seller who’s negotiating. Uh, basically you’re playing blackjack with your poker, with all of your cards out there, they’re probably not going to give you a great deal. You’re likely not, you’re probably selling high and buying higher. Right. And that’s the reality. A lot of people are doing.
Um, and then you’re, you’re, you’re forced to make these decisions under the gun. And, you know, I call it the blockbuster. You have to return the video in three days, you know, to rewind it versus the Netflix, when you can just take your time and go whenever you want. Right. And, and so this is the leverage we want to give back to people.
The other one too, that people miss is in a 1031 exchange, the whole entity must move. Like we did a 13 million exit for our client. They had four partners. They bought it. For about 200, 000, the land, they built it for about 4 million, the carwash. And they sold it for 13 and a half million in California. So for them, they had four different partners with different risk tolerances, time, horizons, needs, and wants.
Well, one person just pay the tax. The other three just did a deferred sales trust into their own trust. Right. They didn’t have to have separate, you know, commingled money. But at 1031 exchange, the whole entity must go to the next deal. And all of a sudden you’re like, I was good with this for two or three years, but I didn’t want to do another three or four years.
And so the partnership can be seamlessly separated, which is key. On our scenario, we can get completely out of debt. So we’re called the Dave Ramsey debt free plan for your, for your large commercial real estate or business sale, right? You can be truly diversified. You can go into stocks, bonds, mutual funds, real estate, and we have clients that went into Bitcoin at a low price, which is doing pretty good right now.
Uh, and you can also be an entrepreneur to go back into your own deal. A 1031 exchange only works for investment real estate. It doesn’t work for business sales. It doesn’t work for Bitcoin. It doesn’t work for publicly traded stock. Doesn’t work for primary homes. Guess what the deferred sales trust works for everything, all of those.
Right. And we’ve done it with all of those. Right. So, uh, the last word I would say is to the, to the point of the 1031 exchange, they do have a stepped up basis. Okay. So it’s important to understand that that is a great thing for people, as long as it’s still around, we think it will be, but you know, you can’t definitely count on that, but at the same time, uh, the deferred sales trust, you can, you can pass it to the kids to step into your shoes.
Right. So, um, that’s just a little bit more context on, on the compare versus contrast. Now, someone might say, well, Brett, can’t I just do a 1031 exchange into a Delaware statutory trust? And the answer is yes, you can. Those are package 1031 opportunities that are large corporations that put them together.
Here’s some of the downsides. One huge fees, sometimes 10 to 15 cents on every dollar is, is, is fees. Two, you have no control, no liquidity, no diversification. And you’re typically tied up for seven to 10 years. Right. And the returns are typically around 5 percent cash on cash. Right. So that’s not necessarily great.
Now, these are beautiful properties that are packaged well, but at the same time, like, again, does it really serve what you want? Right. Does it really serve what we want? Now, the good news with us is we actually help on all three of these. a regular 1031 exchange, Delaware statutory trust and a deferred sales trust.
We’re one of the few in the whole country that’s actually done all three. Um, but we find that 99, uh, 95 percent of our clients are just choosing the deferred sales trust for everything we’ve talked about. But the other ones do have their place, but just depends on the fact pattern and what people are trying to accomplish.
Yeah, no, that, that’s so interesting. And, and we’ve seen some tenant in common structure where, uh, people sold out in 10 31 into, uh, we’ll call it the tick structure that I will say blew up in a way similar that the DST could, the Delaware statutory trust could like if, if the person running that project, isn’t great at it, you know, if, and we saw some, some problems there with people.
Like you said, they were, they were selling high and buying higher, right? This was in an appreciating market and they, they moved into assets that when the market fell off was a problem. And, uh, this was 2008, nine, 10. And so, uh, when we look at all of those factors, it’s like, this looks great on paper, but at the end of the day, I’m still.
In real estate, I still maybe am buying it very high valuations to recognize my, my gain in my, my project. And this, the deferred sales stress just offers us so many different options in regards to what kind of asset class I move into. And when I move back into real estate, if I want to, uh, yeah, I appreciate that, that overview.
That’s, that’s fantastic.
Absolutely. I’ll add to that too. Some people do as these absolute triple net deals, right? When they go into these Walgreens or they go into these auto zones or they go into, uh, CVS stores. And the challenge with that too, is typically all of the equity is all into one deal in one location and into one business.
And you go, really, is that really what you want? No diversification, no liquidity, all tied to this one asset, this one location. And, and, you know, I just go, what are you, what are you trying to accomplish? Are you in wealth creation mode versus wealth preservation? And they go, well, I’m in preservation mode.
Oh, okay. And, and I want some creation. And of course I want some cashflow, but you go, okay. So what makes more sense for preservation to diversify or to be all into something that’s illiquid. And by the way, if you’re putting on debt and the debt expires on the, on the rate lock and now the debt doubles, this is what we’re seeing.
And people are losing half or all of their wealth and they built it all up. And they’ve done these 1031 exchanges and they’re going to get crushed. And so we say, really, instead of thinking absolute triple net, let’s You know, I want you to think absolute TPI and absolute truth. TPI is truly passive income.
And, and basically we want to teach everyone who’s listening, how to unlock TPI, um, by being able to diversify and diversification is not just asset class. It’s also a dollar cost averaging on time. It’s also the ability to flex with the market, right? T bills maybe for a few months until you get a roaring stock market, which we’re seeing a pretty good gains after this election here, right?
And, and, you know, that, that’s a diversification of time, right. And the ability to be nimble and move, um, which by the way, the real estate market is also some good buys. Now we’re buying some stuff at some discounts now because of all the people who overpaid before. And then, and then what we’re going to do is we’re going to ride that up.
We’re going to sell it again, defer the tax again, and then we’re going to go back to other things that are a little more conservative. And so just the ability to flex. Your mind and your expertise within investing and work with people like Patrick, um, unlock so much truly passive income and truly passive peace of mind is what I call it.
Yeah, I love it. Now, just geeking out over all of the, the capital gains tax strategies. I think another one that comes to mind is the charitable remainder trust. Now I, I generally have to have some, some charitable intent to make the economics work out there at all. Um, And, and just a quick overview of charitable remainder trust is the dollars go into the trust.
I received the income off of that. And then when I pass away, it goes to the charity. Okay. Like, um, pretty cool thing if it aligns perfectly with all of my goals. And I think I’ve heard you say this before. This is like a charitable remainder trust without the charitable component, right? Like I I’ve got maximum flexibility with.
With this strategy as compared to, to that one, because we’ve had clients try to shove the charitable remainder trust into the solution just because they didn’t want to pay the tax. And it doesn’t, it doesn’t work. Thoughts on that. I’ll
touch on that. Yeah. So absolutely right. The chairman of your trust is amazing for a times where you are wanting to be basically a hundred percent charitable is the way we call it.
Right. Um, but the deferred sales trust. You have the option to be charitable, but you don’t have to be. And here’s why I think this is so important, like as stewards of the capital and the wealth that each of us have earned, and if people listening have earned, right, the, the last thing we want to do is to give it to a charity that perhaps in 10 or 20 or 15 or 30 or 50 years after we pass away.
Their values are not aligned with what mom and dad, what we had in mind. And so we believe that the stewardship of giving to charities starts with the family building mission, vision, and values into their children or their brothers and sisters or the nephews. And however, if they don’t have kids in a way in which the charity can be turned on and turned off.
So the deferred sales trust really simply can give to charity. That’s great. But guess what? If the mission, vision, and values are not aligned anymore, it can be turned off, right? So it’s not going to irrevocably, um, transfer the assets at death to the charity. Now, there’s also donor advised funds that are actually much more flexible, which are, which are also, we love those actually, those are probably our favorite.
But they’re not going to solve for the capital gains tax or the estate tax, right? So a combination of like a deferred sales trust and then a donor advised fund, you know, funding it every single year as the payments are made out to you, um, can create a great flexible, um, impact giving efficiency as well as flexibility for investing.
And so you combine those things, yeah, most, most folks, once they see the deferred sales trust, they go, yeah, the CRT is really blockbuster. We prefer Netflix.
Yeah. Yeah, no, I, I love it. Okay. So we’ve, we’ve talked about a number of things. There’s, there’s a few things I want to touch on. So as far as the IRS is concerned, is this, is this somewhere off in the gray and I’m going to end up in, in big trouble when the IRS comes, looks at, at the structure that, uh, that we put together?
No, I’ll start with this statement, uh, and this is from the creator of the structure. He’s a tax attorney and a CPA. He’s my business partner. And basically he says, look, this is the most vetted tax deferral strategy you’ve never heard of is the way we stick it. We, we, we usually, uh, start with, okay. And we’ve had national law firms, Newark CPA firms.
Uh, we’ve had, we’ve been through close to over 30 audits. All no change, no findings, formal audits, promoter audits, state level audits. One of the biggest audits was over 120 million asset sale in California. And not only had there’s been no change, there was no findings. Like this is, this is like perfect audit tracker to date.
And it goes back to over 28 years. And there’s been thousands of transactions, billions and billions and billions of assets sold using this. And it’s batting a thousand, right? So that’s the first thing to understand. Um, that we have a perfect track record. Now, there are those that don’t want you to know about this.
And there are those that don’t understand this. And there’s those who haven’t signed the NDAs and there are those that have competing structures and strategies like the CRTs and like the 1031 exchanges. That you know, they’re, they’re, they’re saying what they have and what they try to try to do. Right.
And that’s great. Like we think those are blockbuster strategies and this is Netflix, but be that as it may, um, we have those that still don’t think this thing works and you’re going, okay, well, we keep closing them. We keep passing all the audits. And so this is not something you’re going to find the IRS tax code.
This is not something that is a, is on a watch list. It’s never been on a watch list. It’s never been on a dirty dozen lists. This is not a reportable transaction. Mike. It’s all of that is completely clear and clean. It’s great. Um, and the reality is it’s because it’s a hundred plus year old tax code called IRC four 53 for most of these sales, and this is a seller carryback.
Like when you say like, Oh, we know that we’ve just figured out how to do that with a third party trust and a third party trustee, that’s our company or capital gains tax solutions. And, and that’s really the key. Like it’s like, as if you’re a chef, you know, making something that’s extraordinary, everyone has the same ingredients.
The question is, what order do you put them in and how do you execute it? And that’s what we’ve been figuring. We’ve, we’ve, we’ve perfected that. We’ve perfected the way to make the, uh, the outcome of this. Stealth stay within the conservative guardrails of the tax code and also how to present it to the IRS to show them what we’re doing.
I love it. This is great. So we’ve talked about all of the fantastic benefits of the deferred sales trust. Now with. I’ll say any strategy, there’s generally some strings involved, right? Like I think the clear string is, is I can’t just take all my capital and use it any way I want. Right. I can’t go by the boat without paying the tax.
So can you talk to us a little bit about what are some of the, some of the downsides, some of the reasons why somebody would consider. Not doing the deferred sales.
Yeah. What’s the catch here. Right. And, uh, we just talked about the legal one. Like some people, it’s, you know, it seems too good to be true. I haven’t heard about it.
Is it legal? Am I going to have to report it? I mean, the audit and all that stuff. By the way, all of these audits were no trigger audits too. It’s a very low audit risk. So that’s the first one. So also the lifetime audit defense provided as a part of the structure, no additional costs for that lifetime audit defense.
For the deferred sales trust. So you, you’re covered there. So let’s just assume you guys feel great about the legal part. Awesome. Right. By the way, bring on your CPA, bring on your attorney, your broker, bring on all the people we educate them. They sign the NDAs. Okay. And we have a very high close ratio with those folks as well.
And they start sending us referrals. So if you’re a CPA or a real estate agent. Financial advisor broker, listening to this, please be encouraged. You’d see it to come in and do your due diligence. We work on a no cost, no obligation basis where we will walk you through the trans your transaction needs to be a live deal.
Uh, and with NDA signed, uh, we’ll, we’ll work through it. Okay. But we’re not here to like give our secrets away just because someone signs an NDA. Okay. That being said, that’s, that’s the legal part. The next thing that people have to, you know, I think really get comfortable with is understanding that they are giving up control, right?
Are they giving up all controls? No, but they are giving up control because they don’t own the trust. The trust owes them the money. They’re becoming a lender. They’re becoming a bank is a good way to think about it. But as a bank concern, Patrick, if you don’t pay your home, if you have a mortgage on your house, are they concerned that they can’t just foreclose and take the asset?
No, they’re going to foreclose and take the asset if you don’t pay. So as a lender to the trust, you have all the rights and protections of a bank. You also have to approve of the collateral. So nothing moves without your approval or your signature. Okay, right. And then what can we secure it against? Well, Patrick will probably put together some of the biggest companies in the world, a diversified portfolio that you approve.
Now the trustee, that’s my role, our company, we have to approve it as well. So that’s some of the control piece, right? To be honest, my approach to this business is a real estate investment advisor to balance out the wealth teams with the financial advisors that are focused on the securities mostly, right?
Stocks, bonds, mutual funds, insurance. Or I’m, I’m, I’m in the real estate aspect and we build this kind of dream team. So I become a asset to the team, um, not a subtractor to say no. So my odds of me saying no are like one in a million, but if I didn’t have that one chance to say no, then the chance would, the trust would not be, um, would not be legitimate.
Okay. So this is a control piece, by the way, funds are typically like a Charles Schwab or, you know, wherever you’re clear at. Right. And then, um, funds you 24 seven access to view the funds online. We also have third party tax preparers and do the PNLs and do the full trust tax return. You get access to see them and be a part of all of that.
So there’s everything is transparent. Everything is shared. You get to see everything and be a part of all of it. Number two, the last one is fees, right? So Brett, how do we make sense of this one and a half to 2 percent of the fees on an ongoing basis? Well, Patrick might charge 1 percent on a million or one and a half on a million on 5 million, he might charge one or one and a quarter, you know, I’d be a little bit lower, you know, at the end of the day, we like to say how to make the DSC an investment and not an expense, and that’s number one through tax deferral on the capital gains tax, but number two, when people miss sometimes it’s the income tax deferral.
You might sell that 5 million asset and have a 5%, um, you know, earnings, but you may only take 125, 000 out. You know, you may only take a partial interest and let the other 125 accrue and earn, right? And so you can defer the income tax too, for a period of time. We like to say about two years at least, but you also don’t have to take the full interest payment out.
So we might have a note at, you know, six, seven, eight, or 9%. And you might take a 5 percent payout with the other amount accrue. So you have some income tax deferral. Um, one fee I do want to mention is the one time legal fee. That’s upfront. That’s based upon the gross sales price. 1. 5 percent on the first 25 or anything above that.
So keep that in mind as you’re looking through this ROI, which, uh, leads to the next piece of the ROI, which is the ability to partner with the trust to form a new LLC and buy investment real estate or buy a business, which establishes a brand new depreciation schedule. And it’s, it’s huge. We call this tax flow depreciation, right?
Um, you want to increase your tax flow depreciation to offset your cash flow. Okay, and so picture this, you own Bitcoin right now, and it’s at nine. It’s almost a hundred thousand a coin. And let’s say you have 10 million of it and you have a very low basis, well guess what? Bitcoin, you cannot depreciate or you own Nvidia stock, right?
Or you own, you know, something like an apartment complex that’s fully depreciated. Well, you could sell, defer the tax, get a note, let’s say for, you know, let’s call it 8% on 10 million, 800,000, and you can partner with the trust into a new LLC. And that trust could buy, let’s say it puts 5 million down on a $15 million apartment complex.
Now you get a full depreciation schedule on that 15 million about 80 percent the way we structure it on that LLC to keep it commercially reasonable. But this is like, so all of a sudden you say, wow, this is an investment and not an expense. And once you get over, once you overcome the legal part, you overcome the controls and the trustee giving him some controls and you overcome how to make the DST an investment on an expense.
And We call it the big domino falls over and people are like, Oh, we’re all in and we’re ready to go. Here’s the key though, to qualify, you need to have a million dollar net proceeds, million dollar gain on the transaction means it needs to be big enough. Okay. So if you’re saying, Brad, I’ve only got two 50 or five, you know, 300 or 200.
It’s too small. One exception. If you have two assets that you’re exiting, I have 500, 000 each, you can combine it into one trust and you can make it work. Right? But we need to have at least a million dollar gain between those two and a million dollar net proceeds. That’s our minimum to make this thing really make sense.
I love it. So Brett, one of the things that you just mentioned, I’ve got a meeting this afternoon with a client that was, they’re looking at selling their current space that their, their, uh, businesses run out of, and they want to build a new space. And they were like, can we 1031 into that new opportunity?
And I was like, maybe, but part of the problem there, there’s, there’s more some nuance to it, but I’m like, this might be the best option. Yeah. To sell into the DST and then sort of restart all of the depreciation and all of those other factors that, uh, uh, cause they, they like all of the tax benefits that comes along with owning the real estate.
And, uh, this would be a fantastic opportunity to. You know, run a new cost segregation study and sort of reboot all of those, uh, those things out of basis that we, we lose when we do the 1031. So
let me get some context and just make sure everyone’s catching what you’re saying, Patrick. Okay. So in a 1031 exchange, the old depreciation schedule travels.
Okay. So that’s not good, right? Cause you need less depreciation. That means you have less write off. Okay. So what Patrick is referring to is if his client, let’s just imagine they have a 5 million building, has zero depreciation left. If they were to sell that and buy another 5 million property exactly, guess what?
They have no depreciation. If they were to sell that 5 million property to the trust in exchange for a promissory note, and then turn around and have the trust partner with them into a new LLC, put up the down payment, buy that same property, the fresh depreciation schedule. So we call this, uh, you know, I guess DST, uh, you know, ninja work right here.
Right. So we’re getting into like the really nitty gritty, but that is the reality. And so you got to look at your numbers and look at this thing and go, man, like this makes a lot of sense to me. If it does, we’re happy to help.
Yeah, this is beautiful. And I think one last thing when we are looking at strategies for our clients, we’re always comparing the, the setup costs to the tax, uh, set up an ongoing administration.
And we just consider like those fees in the tax, they’re an expense, right? Like period. And it’s. I look at the expenses here. They’re actually not very high, not very high at all compared to the tax and the ongoing setup. We, we see some strategies that have 60, 70, 000 a year at administrative costs to just keep them all running.
And that’s sort of a fixed fee. So it’s like, if you put a half million dollars in or 10 million in, you know. Your, your numbers there. And it’s like this strategy, I love how it’s percentage based and really the performance is going to soak up a lot of that fee, especially considering
we also cashflow our fees.
Right. So meaning like if a sudden closes at 10 million, let’s say that, you know, let’s excuse me, he’s a million to keep it simple. Let’s say it’s a million. It’s 15 for that first year fee. Right. On our side, and it includes you, Patrick, right. For, for whatever percentage you have on our side, we would cashflow our fee.
We’d wait about. 60 days before we collect. And so the principle comes in that tax attorney takes the one time fee. But our goal is to not eat up that principle and essentially like we, most of our clients, they say a win win when they can look up for 10 years to live off the monthly payment that they were looking to achieve after fees.
We still have the original amount. And like, that’s like a huge one. They’re like, wow, this is great. Using compound interest in our favor. It’s an interest free loan from loan from the government and zero interest on, on the amount that you, that’s deferred until you take the principal payment. And that’s, That’s it.
We’re just using compound interest. We call it unlocking the eighth wonder in the world. When you exit, and we want to help you have the TPI. I can give some action steps to people might be wondering like, what do I do now? Do you mind if I just take a couple of minutes to talk about what, what to do?
That’d be great. That’s exactly where I was going next. So let’s do
this. So number one, we want, we want to encourage you, Patrick and I, to reevaluate your rental properties at least once a year. Okay. And it could be your rental properties. It could be your Bitcoin. It could be, uh, your, your primary home.
Okay. It could be your business, like basically reevaluate those properties. And here’s what a couple of questions I want you to ask yourself. Calculate the return on equity, the return on equity. Okay. What is return on equity? It’s pretty simple. Like whatever your cashflow is, and you’ve got to also consider what the appreciation might be as well.
Um, and, and basically what the value of it, if you were to sell today and kind of calculate that, then, and then you divide that it’s going to give you a return on equity amount. A lot of clients, they’re like at three or 4%, which is pretty low. You know, pretty low. In fact, the client that I worked up in Placerville and Sacramento, their return on equity was about that three or 4%.
And then we immediately increased their cash on cash return by about 65%, right? And so all of a sudden their ROE goes through the roof, right? Plus we get to do the return on deferral of income tax because they lived in California and they’re not taking the full payment at least for a couple years. So they’re deferring all of that income tax.
They even had one client. We sold an 8 million property in Palo Alto. He moved to Nevada, established residency. And as he receives payments, it’s just non Nevada, right. For the principal, for the interest, not the principal. Okay. So calculate your return on equity, calculate your cash on cash return, and make sure you, even though you love that property or that business.
Like, are you maximizing, uh, what you could be if you were able to earn, let’s say seven, eight, 9 percent on average per year with, uh, working with Patrick or I on this. Okay. Number three, determine, um, um, yeah, to turn what’s producing. Right. And also, uh, your return on your time, right? So your ROT, so how much time and energy is it taking you to make all of that?
And what happens if you could free up that time and energy and, and, and have the passive income increase, truly passive income. Okay. Maybe you want to go start something else. That’s cool. And you could, you can make even more over there, right? So you’ve got to be evaluating these things. And the last thing is take action, right?
You hear a lot of this information, you’re digesting a lot. We want you to take action. We want you to get the book. It’s called building a capital gains tax exit plan. And it breaks down my story of learning how to do this from basically working side hustles to keep the lights on when I was a brand new real estate agent.
So the first baby at home, leaving my brother in a small condo to learning about this strategy and helping my clients who are also struggling with losing half or all of their wealth and the 2008 crash, and then landing on this strategy, going all in and sharing our secrets. We want to share our secrets, speed up your time to where you want to be by leveraging this information and our strategy.
So. That’s it. You can find me at capitalgainstaxsolutions. com. You can check out our YouTube channel, our, our, our, our, our book on Amazon, uh, building a capital gains tax exit plan, and also brettsports. com to get kind of the whole ecosystem of what I’m doing.
I love it. And for those that are driving, listening to this, can’t write it down.
We will have all of that information in the show notes. So you can go, uh, find all the resources Brett was just talking about. So Brett, this is, uh, Amazing. I feel like we’ve just scratched the surface on the opportunities here. I think Bitcoin is another opportunity. I think there’s, uh, lots of different ways that we can look at this and, and I’m excited about that.
So thank you very much for, for joining us here today. This has been a pleasure. I love how our, our thought process is aligned with the most valuable things in life aren’t a, aren’t a big bank account. It’s, uh, some of these intangible things. So, uh, I just appreciate all your wisdom and guidance.
Thanks. It was my pleasure.
Thanks for having me.
Thanks a lot, Brett. Bye bye. As we wrap up today’s episode, I want to leave you with a valuable opportunity. As we’re getting our year end tax strategies implemented for our clients, we wanted to give you the tools you need to save big money on taxes this year. To access the resources that can help you create a tax strategy, head over to vitalstrategies.
com forward slash cornerstones. We’ll give you free access to tools that our clients have paid tens of thousands of dollars for us to implement. These tools are designed to help you pay less tax, build more wealth and live a great life. Again, that’s vitalstrategies. com forward slash cornerstones.
Remember, your dollars are better off in your hands than the government’s. Thank you for listening and for being a Vital Entrepreneur. You’re vital because you’re the backbone of our economy. Creating opportunities for your employees and driving growth. You’re vital to your family, fostering abundance in all aspects of life.
And you’re vital to me because you strive to build wealth, make an impact through your business and live a great life. Until next time, I’m Patrick Lonergan, and thank you for listening to the Vital Wealth Strategies podcast.