Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli. Well, I have an exciting show today. Why I’m excited about the whole topic of taxes. Not because I want to pay more taxes, but I’m always looking for strategies and ways to reduce my tax impact. Whether I can defer, eliminate whatever the case may be. We all should educate ourselves when it comes to taxes and how to be more efficient with our tax strategy so we can defer and eliminate taxes. So I have a very special guest today. Someone who I’ve known for a number of years, his name is Brett Swarts.
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Brett is a capital gains tax deferral expert. And he’s also the founder and CEO of capital gains tax solutions. He’s a sharp business person and an advisor and a really good guy all around. Brett, welcome to the show.
Marco, thanks for having me excited to be back on the show.
Well, it’s great to have you on, we’re gonna talk about something that I find exciting and I hope people get excited about it as well because let’s face it. Most people don’t like to talk about taxes and tax strategy and whatnot. It’s something that probably gives them a little bit of brain damage, but that’s why you hire experts. But the important thing here, I think for most people to understand is what are the tools that we have at out there that we may not even know about that we could use and implement in our investing strategy and in our business and whatever else we’re doing that can eliminate, defer and reduce our taxes. And that’s exactly what I want to talk to you about today, but let’s find out a little bit more about you and your company, capital gains tax solutions. Why don’t you just share with our audience, what, what that’s all about?
Thanks Marco. Yeah, so I grew up in the real estate business in the bay area with my mom and my dad, my brother building custom homes and, and having rentals and cash flow. So I fell in love with real estate at a young age, had a chance to go to college and study and take an internship at a place called Marcus and Millichap or learn the brokerage side of and multi-family and underwriting side and, you know, cap rates, cash flow, IRS, you know, all of negotiations structuring deals. And, but it wasn’t always that great. You know, in fact, 2006 was really good and then it went really bad, pretty fast by 08. And I went from making a little bit of money to like nothing overnight. And that began, oh my gosh, what I’m gonna do help to keep the lights on with my family, my wife at home with her new baby daughter at the time, like, how are we gonna keep this dream of being in commercial real estate alive?
And so I did whatever good entrepreneur commercial real estate, real estate investor wannabe does, who wants to be full time in it? You get a side hustle, right? And that my side hustle was at cheesecake factory. And so nights and weekends, I worked at cheesecake factory and by day I’d make cold calls or negotiate with banks and try to help my clients solve problems. And that was my kind of my my journey, if you will, of being in a season of life that says, do I really love commercial real estate? Do I really love solving problems for clients enough to push through the pain and the pain on the other side is, you know, like anything, enough pressure and enough pain, it can create like that the diamond and the diamond being my business partners who are really, really smart pressuring on me to become an expert in deferred sales trust in 1031 exchanges and help people to navigate the whole options, like what to do, what not to do.
And I didn’t anything at the time, but in oh nine, my manager at Marcus & Millichap brought in my business partner who spoke on the deferred sales trust. And I started to imply it to my business. My business started to grow fast forward. I retired from the cheese cake factory, my wife and I have five kids. We live here in Sacramento, California, and I help people still do 1031 exchanges, but mostly I’m educating CPAs, financial advisors, commercial real estate, syn crypto currency experts on how to exit highly appreciated crypto real estate business, primary homes save a fail 1031 exchange using the deferred sales trust.
Beautiful answer. Okay. So let’s start with the basics. I always like to start with the most simple of questions and that is this people are asking what is a Deferred Sales Trust. So can you explain that in plain English?
Yes. A deferred sales trust is just an installment sale. You might know it as a seller carryback whereas if Marco wanted to sell cryptocurrency for 5 million to believe he is a real estate deal, apartment complex for 5 million, he could finance the buyer, right? He could finance all of the 5 million or just a portion of that. And to the, that he hasn’t received any down payment. He can he’s in a deferral state. Okay. The difference is we form this trust separate from the buyer initial buyer and, and separate from you. And it’s the third party that creates the magic and that you sell your asset to the trust first. And then the trust sells it to the buyer and the smoke clears and your left at the promissory note. So versus like a Delaware statutory trust or a 1031 exchange when you’re trading an apartment complex, let’s say for another apartment complex and you’re maintaining ownership. And this scenario you’ve become the lender, but what’s neat is you’re not financing the buyer. And the cash has freedom, freedom to move into different deals at different times and different product types, different asset classes, you know, doesn’t matter the deal size, very flexible. So we help people execute that. Hopefully that answers the question, Marco.
Yeah, it does. So for clarity and I’m, I’m gonna kind of keep trying to dumb this down. So people understand it with clarity. So rather than having a two party transaction, you essentially have a three party transaction, the third party being the trust and that trust, I would assume has a trustee that you would point. So maybe talk about that before we go any further.
Yeah. And that’s actually my role. So our capital gain tax solutions, we’re a third party, unrelated deferred sales trust, exclusive trustee. And so we provide that service. It’s not unlike an IRA company or a 401k company. It’s kind of like a 1031 exchange accommodator. It’s kind of like a lot of these, these different and things, but I’m kinda like the custodian or the manager of the trust. I’m the actual trustee. So remember what’s happening, you’re trading your ownership of an asset to become a lender of an, an owner of a promissory note. And so you become the bank. And so the trust itself is owned by capital gains tax solutions. And it’s operated by a trustee necessarily just like a 1031 exchange. Combinator is not owned by you. Right. It can’t be because that would be constructive receipt. It’s gotta be third party. So that’s how we keep the tax deferral intact.
So how much direction does the seller of the asset be? It real estate crypto, a business or whatever, what kind of control do they have and direction do they have with that trust? And I guess that would be through the trustee, but how much control do they have?
Yeah. Great question. It’s one of the most important questions. First of all, the funds never move without their approval and their funds are never invest in any investment without their approval. Okay. So they’ve gotta approve everything. And the analogy we use is kind like a CEO, a COO, and a CFO. And there’s these three parties. And you let’s say market was your deal. You would be the CEO. I would be the COO- chief operating officer, and there’s a financial advisor, third party that we work with across the nation. And they’re the CFO and collect actively. We, our goal is to pay you back. Let’s say that initial 5 million plus 8% over a period of time. And we gotta bring investments and we’ve gotta make investments decisions, but nothing will move without your approval. So you don’t have unilateral control is what we’re used to as owners, meaning we can just click the buttons.
We don’t have to ask anyone’s permission. We just go to, we can go do it. Here’s the thing. If you had unilateral control, it’d be taxable. It’s in fact, that single point there, which keeps the tax deferral again, not unlike a 1031 exchange, you gotta work with an accommodator. Who’s gonna help you follow the rules and do all these different things to make sure that you’re not in constructive receipt. So that’s our role. So as a team and I’m here of a friendly trustee, right? I’m not here to, to say no, oh one necessarily. I’m here to say yes, within the bounds of the guidelines, which have been laid out by the tax attorney and CPA who created this. And we work as a team. And so day to day, it’s something like this. The financial advisor says, Hey, 5 million bucks, Marco, what would you like to do?
And you go, Hey, you know, Brett, I like to invest in these, you know, fourplexes and the different rental properties outta state. You know, I like to do that by myself. In fact, can I do that and answer? Yeah. In fact, up to 80% of the funds, the next gate can go to an LLC at which you are the owner and manager of, and you open up the bank account and in partnership with the trust, it can fund your purchase of those properties. In fact, we just did a deal in Alabama for a client. He had a $2.6 million business sale, and he wanted to build 70 multifamily units with a partner he’s like, Brett, I don’t necessarily want to get more debt of a bank. I don’t necessarily wanna bring in a partner. Can I partner with the trust? And so the answer was, yeah, so he formed an LLC. The trust put up the funds and the funds went into a bigger LLC and they’re building the project right now. In fact, they’re selling out of a lot of the units right now, and they’re rolling it back into the trust. And so these are all the little steps that we follow, but it’s a team effort. Right. And that’s how that works.
So it sounds like there’s a lot of creativity and flexibility in what you can do, because I would imagine that trying to do that in your example, any other way with any other vehicle would be disallowed because it wouldn’t be looked at as an arm’s length transaction.
Yeah. So a couple things, if you wanted to do a ten thirty one exchange, right, we call that blockbuster and we’ll talk about the arm length transaction part in a minute. But if you even just try to do this, even with like a charitable remainder trust, they’re pretty much limited, generally speaking to just like securities and very, very conservative, you know, funds that are not active real estate folks like we are. So with the deferred sales trust, it’s very flexible with no timing restrictions. You know, you can dollar cost average into the stock market. You can dollar cost average into real estate deals. You can even go back into cryptocurrency. If you sell out a cryptocurrency, there’s a number of things that you can do. And yeah, the key is in partnership with the trust us, not, you know, cashing out and paying the tax and how do we structure that? And that’s where our tax team and that’s where it’s been through the audits and everything else. We help you. Perfect that. And so that’s how we keep it from being non arm’s length.
Okay. So let me drill down to one thing here a little bit, cuz I would imagine some people are wondering how the promissory note piece works. So you sale the buyer takes over the asset. The trust is holding the proceeds from that sale, correct? Correct. And you as the original seller are holding a promissory note with the trust. Correct. What kind of terms can you, and can you not put in that promissory note so you can get an idea or at least me asking the question and get an idea, what kind of benefits can I get from that sale? So I know that I can either live off of it or reinvest it or do whatever I choose to do with it.
Great question. Before anything happens, by the way you fill out, what’s called a risk tolerance questionnaire. And if you’re married, your spouse will as well. And that determines how and where, part of how and where you, the funds are invested. And second the interest rate of what’s gonna be owed back to you. So our notes are typically six, seven or 8%. Okay. Compounding net of the recurring fees, which are about one and a half to 2%, depending on how and where the funds are invested. Okay. And so net of that, we’re gonna try to earn that eight. Okay. That’s the goal, not a guarantee, not a promise. That’s over a 10 year period is the general term. Okay. So now client might take some payments. They may not take payments. You’re in California, I’m in California. We might delay the payments for a few years or years and turn it on when it has a little more favorable for us.
So we can get some income tax referral. We might move to Nevada and establish residency and then turn the payments on some definitely flexibility. But at any given time, there is a promissory note. I would say 5 million set to pay you back at 8%. And a payout could be flexible, could be a five to 6% payout. Now the goal is to go make enough money where the trust is never dipping into that 5 million initial principle. That’s the goal. And that’s where most of our clients will just keep the entire amount deferred. So let’s say it’s a zero basis, $5 million sale. So imagine it was crypto currency Ethereum or Bitcoin or something else. And you would’ve paid about 1.8, 5 million of tax instead of paying that all in the trust. And now it’s invested in some different investments and those are reducing cash flow goes into the trust. Now you may not take cash from the trust for a year two, two, but if you start taking cash, you’ll pay tax on that. Right? If you dip into principle after extinguishing your interest rate, you’ll pay some Kim capital gains tax, but most will just live off interest, only payments. And then every 10 years they’ll were new for 10 years and we can pass it to your kids and keep it going.
Okay. That was a great example. I mean, obviously you made, you know, some assumptions as to what the asset will was, what the sale price was and what is left in the trust. So when you take those distributions, I guess the interest would be taxed as interest income at the personal level, the 10 40 level. If you have distributions, you mentioned 5%, whatever that distribution is, how is that taxed? Is that taxed as interest or is that taxed as ordinary income or what is it?
Yeah, there’s two levels of tax for the note holder. You, and then we’ll talk about the level of tax for the trust itself. Okay. So, okay. If you, most of our clients just take interest only payments. So they never dip into that principle. If they were to dip into that principle, they’d pay capital gains tax, but most will take just interest only payments. So that interest is, is accruing and it’s paying out okay, as it pays out, you’ll get a 1099, right. And you’ll report it as ordinary income tax and you’ll pay tax on that. Okay. To the extent that you don’t have depreciation, you might have some depreciation that you built up somewhere else, right. Bought a new property, or did some cost se over there. And there might be a way check with your CPA to wash some of that out in a given year, which is kind of nice.
So that answers that should answer the interest amount. And then the principal amount now out for the trust, the trust is really interesting, right? The trust operates in a very tax neutral state, typically, meaning it might be earning eight or 9%, 10%, but remember it has expenses of about 2% per year. And then it also owes you about 8% per year. So even if you’re not taking payments, it’s able to expense what it owes to you. And therefore often operate at a, at a loss every single year, cuz day one, it’s compounding at 8%. Right. And that thing is never stopping. And so the investments are trying to catch up and oftentimes it just carries forward a loss every year and it just doesn’t have to pay tax. Does that make sense?
Yeah, it does. So I’m gonna go much deeper down the rabbit hole here with you on this next question. I’m sure this is pretty basic to you, but I’m learning as I’m listening and I’m hoping, you know, my audience here is also learning from this as well. So let’s just say, use your hypothetical example. Let’s just say we sold our real estate or whatever asset. And now the trust is holding whatever $5 million in your case could be a million. We’re gonna call that the principle that was the net proceeds from the sale. Now, if we took those proceeds and invested those in another investment, it could be real estate. It could be whatever. And maybe that’s in another entity. Let’s use that as the example. So we’re holding those new assets in another entity that I assume is owned by the trust. And the proceeds came from the trust. Is the income or profit from that new investment taxable or is it not taxable because it’s still in the trust and if it is taxable, how is that taxed?
Okay. So let’s take it active role, right? Let’s imagine you put 5 million to the trust and you go buy a 15 unit apartment complex for a million dollars in Florida. Okay. Okay. Like I got a nice deal. And so step one, the five million’s in the trust it’s compounding at 8%. Step two is you form a brand new LLC. The next day, step three, you amend the operating agreement. It’s a partnership agreement between you and the trust. And the trust puts up all the million dollars. So Marco put up no money, but Marco is the majority owner of that LLC. Okay. A million bucks. And you go and buy that property. Well, how is that structure with depreciation? To the extent your ownership is in that LLC, you get the depreciation personally, which is awesome. Part of this because you’re the active owner of the sweat equity.
You’re the general partner, you’re the managing member. You’re doing the work. The trust is a silent equity partner that put the money in. It’s gonna ask for a preferred return and we have a way that we structure this to make sure that’s all commercially reasonable and this business purpose and all these different things. But the end result is we, you as much upside as possible without having to put any of your money into the deal right now, the 5 million is technically owed back to you. But it’s the trust money. That’s, it’s your money, but the trust owes it to you and it’s in a deferral state. So it infuses the money into it. And when you see it broken down on these little boxes, it makes a lot of sense, but just think of it like a partner down the street. If you said, Hey, I wanna go buy a deal and I need to equity partner, anyone have any money? And they’re like, yeah, I got a million bucks. Like you could partner with that person. And they could be, they could be a, a partner with you and do none of the work you do all of the work. And then you split the depreciation in accordance to your, your ownership. Does that make sense?
Yeah, it does. And this is why at the very beginning, I said, there’s a lot of ways to get creative with this. There’s a lot of flexibility. I guess the important thing here is for people listening is to understand that the trust you need to look at it as a third person, it may be your profit sitting in there, you know, your proceeds from your sale. But you treat that trust as if it’s a, a separate person, another entity and you have control over it.
Yes, technically a business trust and what you’re the cured lender. So nothing moves without your approval. And yes, you do have a level of control. You don’t have unilateral control, cuz that would be an ownership and be taxable, right? So, so just like a bank, a bank says, Hey Marco, all loan on your house. You own the house, Marco, but we’re the lender. So you gotta make sure you make the payments. You gotta make sure you have fire insurance. You gotta make sure you have this and this and this, whatever. Right. Do all these things. And we won’t foreclose on you. So this is what’s happening. Most people, the biggest thing to get over is they’ve never really been the lender before. So you gotta realize that you’re trading ownership hat for a lender hat, right? And you have secured lender control, which arguably is more power than even ownership.
Like as a lender, you have all these rights, right? The richest people in the world are banks. So you’re becoming a bank. But then the next best thing is the next day you can become an owner again by partnering with the trust. And that’s why I started the company. If it wasn’t for that reason, it would be kind of like a, maybe like a three or four outta 10. You know, it be, it’d be cool and stuff. But the fact that you can go back into real estate and be an owner again, and we call it lender ship, you are a lender first. And then you’re an owner again and buy deals when it makes sense. Right? And invest in hard money lending or crypto or stock market or never go into real estate ever again, if you don’t want to, that’s where the magic is. That’s where the power of the deferred sales trust is unlocked.
Okay. So let me throw this at you. Does it matter how the assets are held before the sale and before the trust is set up? Because some people hold real estate in their own name personally, which they probably shouldn’t. Some people hold real estate or assets in an LLC or maybe even in, in another trust, but the assets are held in something or by somebody, does it matter how those assets are held, but four, you go and procure that sale and set up the trust.
Yeah. Who does this work for? And what’s the best time let’s talk about who does this work for? Who does the deferred sales trust work for? It really works for anyone who’s selling an asset that’s worth at least a $1 million net proceed and $1 million gain. It could be cryptocurrency. It could be business, it could be NFT. It could be an LP interest. It could be GP. It could be LLC. It could be limited partnership real estate. It could be, yeah, it could be real estate at primary home artwork collectibles. Okay. There’s really no like limit to that. Okay. A B timing is very important. We gotta make sure that we set up the trust prior to the close of escrow, which means you need to get with us early, ideally. Right. And even prior to the buyer removing all contingencies, unless you’re in a 1031 exchange, then we can save a fail 1031 exchange. But here’s another thing you wanna make sure that you’re working with our accommodators, that we strategically align with to make sure you have both options. So hopefully that answers the question, Marco.
Yeah, it does. Actually. That was gonna be one of my questions is who is it for? But I think you answered who it’s not for. And I have to assume it’s someone who’s selling assets that are under an million. Is that kind of the cutoff?
Who is the deferred sales not for? So basically if you don’t have a million dollar net proceeds or a million dollar gain or two assets at 500 each that can combine to hit that. So you could have 500,000 of crypto and a $500,000 duplex. You can combine it into one that you’re gonna be selling in a short period of time. That is who the deferred sales trust is for everyone else at really is for as long as you don’t wanna spend the money right away on a primary home or a boat or personal use, you wanna put into a business and an investment that deferred sales trust, you might as well use because you can defer all that tax and keep the money going for you.
So I’m curious, why is there that $1 million, is that like a IRS related thing? What’s the reason?
Let’s say I review a thousand deals over since 2009, just, just the 10,000 hour rule and all this stuff here. Right? Honestly, we have found that if the pain’s not big enough Marco, then our cost of our fees and the, the setup and everything else, it just doesn’t make sense. We want it to be a home run a 10, a 10 for all of our clients. Doesn’t mean we haven’t done deals at 800 or 700. Sure. Right. Especially if they’re in a higher tax state, but generally like a California or New York, but generally speaking, we want a million dollar nets, a million dollar gain on a per transaction basis. You might say, well, Brett, I have 20 cryptos in different coins that all add up to a million, five or a million. Can I still do it? Yeah. We would form an LLC. You would assign the crypto, the coins to that LLC. Then we would sell at that point. And that would be, we’d able to do that kind of one transaction, or if you had like 30 homes at 3 million, right. Where any individual one would and work. But if you put it all new in LLC and sold it to one buyer, then it could work there too. So, but generally speaking, we wanna make sure that the pain’s big enough to match the value of the trust.
Okay. So we’ve talked about or mentioned 1031’s multiple times here. And a lot of people listening to this are familiar with a 1031 tax deferred exchange. And we work with a lot of clients who are doing 1031 X deferred exchange. How does this compare to a 1031? I know there are pros and cons, but maybe paint the picture so people understand what the differences are. How it compares and when they actually should be using a 1031 exchange?
Yeah. So why use a 1031 exchange versus why use the deferred sales trust? Like what’s the best thing to do there? So we found that the 1031 exchange for first of all is a continuity strategy. And what that means is you’re just, you remember, you’re trading one asset for another. Whereas the deferred sales trust is truly exiting that position. And when you exit that position, you are becoming the lender, right? So that’s the first you understand. So one’s an exit plan. The other one’s a continuation plan. They both provide capital gains tax deferral. The 1031 gives you an O old depreciation schedule, which is not good. Cuz your old depreciation schedule travels, right? And depreciation is one of the number one reasons selling in real estate cuz it offsets the income. The deferred sales trust gives you a new depreciation schedule. If you are active in partnering with the trust, which is better, right?
The ten thirty one exchange, we call it the shotgun wedding. You gotta get engaged in 45 days, married in 180. Whereas the deferred sales trust, there’s no timing restrictions. You can dollar cost average. You can go in whenever you want. You can truly sell high and buy low, right? The 1031 exchange doesn’t deal with the state tax challenges. In other words, you get a stepped up basis. However, that only deals with capital gains tax versus the deferred sales trust. You can move funds outside your taxable estate. So for the ultra high net worth, you can save 40%. Those are the main ones, oh, the other one would be income tax extra for the deferred sales trust can defer income tax. You can delay payments. Whereas if you’re in a 1031, you’re having to receive cash flow. And to the extent that you don’t have any depreciation, you’re just paying tax.
And so we always like to say, just draw a line down the middle of a piece of paper, find out what your goals are and then figure out what you want to do. Some of our clients though, a lot of our baby boomers, mark, and they’re just like you. What, why would a baby member wanna use the deferred sales trust? Well, they’re tired of the toilet, trash and liability. They’re tired of the phone calls. In fact, we just close a deal in Arizona for 2.2, 5 million, a multi-family owner, student housing in Tucson, Arizona. He’s like Brett, I get calls all the time for random stuff. He goes, you know, the reason I really like to deferred sales trust is a, I don’t have to start over with new toilet, new trash, new liability B I don’t have, have to overpay for property, but more, more than anything like I’m just ready to be done. I just want conservative putting me in the biggest companies in the world, in the stock market. I’m fine with that. Like just conservatives giving my payments. I, I don’t need to go make another couple million. I just wanna make sure that I have preservation and I get cashflow and I have time and energy with my family for the years that I have left. And so that would be some of the main differences, Marco.
All right. So since we’re talking about comparisons here, let’s do one more comparison. I think this is one that probably confuses people because they’ve heard of something called a DST, which is, is the same acronym as the Deferred Sales Trust. But it’s referred to as a Delaware Statutory Trust. And I, I, there’s gotta be a percentage of people who get confused between the two cuz they share the same acronym and they’re both trusts. So how do those two compare?
It happens all the time, right? You go to your CPA or, or your, your 1031 company or your broker like, Hey, you know, DST. And they’re like, oh yeah, I know DST. But what they’re talking about likely is a Delaware statutory trust, which is just another form of a 1031. It’s just like the cousin to a 1031. It’s a 1031. It’s what it is a better name for. It would be a Delaware, 1031. Basically in that scenario, you can sell your property investment property. Remember investment property to you only works for or 10 30. One only works for investment property. Doesn’t work for primary home cryptocurrency, a business sale stock deferred sales trust works for all of those assets, including investment property. But what you’re doing is you’re selling an asset, a real estate property investment property, and you’re moving the equity via a Delaware, statutory trust into an interest of a bigger portfolio property.
It could be one or two or three or more than that, but essentially you are 1031 to like a fund, but it’s not a fund. It’s really, it’s actually properties that someone’s managing the downsides to it. As you give up all control, you give all liquidity, you give up all diversification. You’re tied in for seven to 10 years, huge fees. And by the way, I was securities license and I did a couple of these in the past. Still have their good positives, their positives of our class, a operators class, a locations, you know beautiful properties. You don’t have to worry about the [inaudible] trash liability anymore. It’s non-recourse debt. So it has a lot of really good things for people who are a hundred percent wanna be in real estate. But the biggest thing for our entrepreneur real estate, you know, smart crypto clients, all of us, we wanna sell high and buy low.
We don’t wanna sell high, give up all control, all liquidity, huge fees, by the way, as much as need to ask in this of every dollar I put into this Delaware deal, how much is actually hitting the real estate? And I’ve heard generally speaking like 85 cents on the dollar is hitting the real estate. There’s like 15 cents at every dollar is actually going to all these fees. And so you gotta be very careful with what you’re getting into, right? And also clients want to be able to buy a deal when they see a deal, right? Like Marco, that’s why we’re in the game of real estate. Like we wanna be able to execute, but if all my funds are tied up with somebody else, I have no control over. How do I do that? You don’t, you have to just wait. And that’s where we don’t really like Delaware’s unless they’re seen debt over basis. Which is another scenario where the deferred sales trust cannot solve. That’s where we use the Delaware to do a partial replacement of the debt. It’s a partial ten thirty one. We call it a by fracture, ten thirty one. And then the rest of it goes into the deferred sales trust.
So when we talk about a deferred sales trust, I mean, I’m kind of focusing on the word deferred. Is there a defined period of time that the trust has to hold the funds or distribute all the funds kind of like a, a retirement account? Are there time limits or time restrictions with anything related to the deferred sales trust?
No. So there’s cuz there’s no 45, 180 requirements, right? I mean I had clients sit during the COVID 19 crash. Right. And everything waiting along, I had, ’em sitting in the, in the bank and just waiting for the market to shift and ideal and for them to feel comfortable. Right. And we just sat and waited and we were patient. So there’s no time restrictions. The only side would be inflation, starts to eat up your dollar and that eight percents compounding and you know, the money doesn’t come outta the money. Doesn’t come outta thin air. We gotta go invest it and make money. Right. Otherwise we’re eating up into the principle. Right. And, and so there’s so there’s that, you know, invest it when it makes sense when it’s suitable all of those things that we help to build the team to execute.
Okay. all right. So since we’re on the topic in terms of limitations or restrictions, are there any other limitations or restrictions related to the deferred sales trust?
Hmm. None. None that I can think of right now, no.
Okay. So I’m trying to think of, there’s so many benefits to this. I mean, I don’t wanna say it too. Good to be true cuz I know it’s it’s true. What downsides would you say there are with a deferred sales trust and maybe that question should be phrased in a different way. When should you not use it? But you could either you can answer both.
Yeah. When should you not use the deferred sales trust? I mean, so first one would be your, your liability’s too small, right? So we touched on that. That’s why we want a million dollar net proceeds a million dollar gig, a per transaction, unless you have two or more at 500 each or two at 500 each, not anymore than that. And that means you just, you pay your tax. There’s definitely different times where we talk to people and say, just do an opportunity zone. If you can find one, it makes sense. Just do a 1031. If you can find one, that makes sense. But we don’t want you to do a, a two small of a deal, not have enough tax liability to offset the fees. That makes sense of this. Okay. So that, that’s usually the first time, you know, you want to know that the bank, the, the financial advisor, the tax attorney, the law from the trustee, you want to get to know us, right?
You want to get comfortable with us. You want to hear from our clients. A lot of times, Marco people are learning about this and it’s, you know, 15 days before they clothes and they’re closing their largest transaction they’ve ever done. And emotionally it’s like, it’s a lot on their shoulders. Their CPAs already told them, who’s been advising them for 20 years that they’re gonna have to pay the tax in their mind. They’ve already paid it. And they look up on find us on YouTube or listen to a podcast like this. And all of a sudden, their whole world’s like throw on a kilter. And then they go to their CPA and their CPA is like, well, I’ve never heard of it. I heard of Delawares, but I probably wouldn’t do it. Cuz the CPA has no upside to say yes. And so it’s that CPA saying?
No. And you have to be willing to like, I don’t say fire your CPA, but just say, you know what? CPA agree to disagree. There’s some really smart CPA’s tax attorneys over here that had done this for 25 years. Thousands of closes billions under management. It’s faced the IRS over a dozen times. All no change audits. And I’m gonna trust them on this because they’re the brain specialists on this. You’re my, you’ve been my general practitioner doing my blood work my whole life and taking care of me. But now for brain surgery, you’re not the guy eye. Right. And they gotta be willing to do that. Now the better way to approach it is to say, bring the CPA in, bring all the people to the table and let ’em all, let us all, we all do a no cost, no obligation due diligence, sit around and talk and bring up their objections or their thoughts.
Now nine outta 10 times, Marco, to be honest, they join us. They’re thanking their client for introducing us to them. Right. And they’re bringing more referrals to us, but we don’t give our secrets away. Right. We have everyone sign NDAs. We’re very cooperative. We don’t wanna replace your CPA. Keep your CPA for all your personal tax returns. The deferred sales trust is separate, right? And we will report to your CPA, what you get the income off of that. So that’s usually the biggest thing. It’s just people aren’t either planning. They’re not pre and they don’t have time to get to know us in time. But honestly, now that we have so much content, that’s less and less these days, like people are hearing about us, they’re drawing our mastermind. It happens every Friday, it’s free at [spp-timestamp time=”10:00″] AM PST and they can learn and talk to clients. And, and stuff’s on the internet now, right? I mean, this is there. They just have to have to do the homework and get comfortable with it.
Sure. Probably my last question is leverage. I know that with mortgage lending, it’s hard to get financing. If you have real estate in an entity already, unless it’s commercial, are there any rules or regulations or restrictions about leveraging the principle in the trust to acquire additional assets? Whether it be real estate, crypto businesses, whatever else it might be.
Yeah. Good question. So the trust can partner with you into an LLC and go buy a property or build apartments or whatever. And to the extent that you can get financing, you know, your credit, your track record, all those things they’re gonna look at. They’re gonna look at the trust as a silent partner. If some banks might want certain percentages inside of the LP or inside of the GP, right? So there’s, there’s kind of each deal specific. So think that answers that you cannot like just use it as a loan to go fund your, your, your personal use. That’s it’s a taxable event. That’s constructive receipt. So it’s gotta be legitimately joint venture partnership with you on that next deal. I know banks do like this, see the interest accruing and then the interest paying out as well. And you get a 1099 and you report that on your tax return.
And it’s the monthly statement there. That’s coming into your personal bank account. I had some clients that sold a, a 1.4 million commercial property in Walnut Creek and they bought a million, $2 condo in San Lu Obispo. And that’s part of it. They were trying to get that loan. They hadn’t turned on the payment yet. And so we readjusted the promissory note to turn the payments on and they started taking payments out of the trust to qualify for the loan on the property. And then later on, once they close on the property, they, we can, we can adjust the payments to make, ’em go back down again. So it’s really flexible, but it’s deal specific. And that’s where we come in and we try guide you every step of the way.
Okay. So I have a follow up question to that then. Can the investment made using the principle within the trust? Can that be equity and debt or does it have to be equity like a down payment or purchase on whatever the new investment is? The, the other assets?
Yeah. We’ve had clients do both. Right? Some people buy it all cash and then they go and they do value add and they refinance and, and then pay the trust back. Some, some people use it as a down payment and then get debt on the side too. So it’s a mix.
So you’re okay. Issuing a loan from the trust, using the principle and having a promissory, no out set up where that new investment is, repaying that note back to the trust.
No. So I think that, yeah, so if you’re in the business of doing like hard money lending loans and you send a funds to an LLC that does business loans to different individuals, not a personal use stuff, that’s okay. But you’re not gonna use the trust. That’s collateral to secure something else, right. That that’s can be taxable needs to be a joint venture partnership with you into a business deal. So yeah, that is a limitation for sure what you’re saying.
Okay. All right. Well, what did I not ask you about DSTs that I should have asked you because obviously for me and a lot of people, this is a newer tax strategy.
Yeah. I would just say the crypto currency. I think that’s the number one opportunity for, for folks who, who want to exit crypto and get into more active or passive real estate deals, get some cash flow, get some tax flow going for you so that you can get some depreciation to offset some of that cash flow and, and then be able to sell high and buy low, buy back crypto, low buy real estate, low, do all of these things. And it’s like riding a bike, right? Like it does take some time to get to know us and ride this bike. And it’s always gonna be wobbly. The first time you, you did a syndication or you did an apartment complex remodel, or you bought cryptocurrency, like it was shaky, but we’re gonna guide you and you’re gonna get on the bike. And before you know it, you’re gonna be racing down with us or, you know, a hundred miles an hour. It takes some time, but you’ll be there with us, but we do it all at no charge, no obligation due diligence. So join us, join the movement, right. Of, of capital gains tax nation, helping you to defer tax or helping your clients do the same.
Okay. Well, on that note, tell our listeners how they can find you and get more information.
Yeah. I wanna pitch my book here. It’s coming out here in next 30 days, The Building a Tax-Deferred Exit Strategy, you can go to capitalgainstaxsolutions.com and look, look for this on Amazon as well. We have some cool people in here like Kevin Harrington from shark tank and a number of other folks. And it’s gonna talk about and give you the proven playbook for unlocking your ideal wealth plan. When selling assets of any kind for yourself or your clients. You can also search on YouTube, Facebook, Instagram, just look up Capital Gains Tax Solutions, Twitter, all of those places, and then join our mastermind by going to capitalgainstaxsolution.com. It’s every Friday, [spp-timestamp time=”10:00″] AM Pacific share time. I’m [spp-timestamp time=”1:00″] PM. Eastern.
Cool. Brett, thank you for taking the time today. This has been enlightening and certainly an eye opener for a lot of people. So thank you for your time.
My pleasure. Thanks Marco.
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