On today's episode; Steve sits down with Brett Swarts, Founder/President of Capital Gains Tax Solutions to discuss Deferred Sales Trusts, 1031 exchanges, and Delaware Statutory Trusts!
Episode Transcript
Intro:
You're listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Welcome, and thank you for joining us, and it's my honor to have Brett Swarts joining us. He's considered one of the most well-rounded capital gains deferral experts and informative speakers in the country. He's founder of Capital Gains Tax Solutions, and I'll ask you to give us your phone number a little bit later. And he is an exclusive Deferred Sales Trustee. He's host of "Capital Gains Tax Solutions Podcast", and a lot of other things. He has great strategic alliances and clients, and he's created and developed tremendous tax areas where we can go ahead and do all kinds of wealth planning.
One of my favorites is DST, Delaware Statutory Trust. Recently, I was quoted in the Wall Street Journal about Delaware Statutory Trust, so you know how I feel about them. And he goes ahead and he's gonna create and preserve all kinds of wealth for you. He's passionate about what he's doing. His experience is tremendous with the DSTs and the 1031 exchanges, and commercial and all the real estate brokerage. And formally, he was with one of the largest brokerage firms, and now he's in Sacramento and he lives in Roseville, California with his wife and their five kids. So we know that he has to be making lots of money to make this work. And without further ado, I'd like to open the floor. And let's begin, tell us about transformational exit planning, versus transactional exit planning.
Brett Swarts:
Thanks Steve, a pleasure to be here. And yes, so Brett Swarts, founder of Capital Gains Tax Solutions.
So transformational exit planning I like to kinda define in a couple different ways, and it can be transformational for different people in different ways, but we've all heard about financial freedom, right? You have enough income to pay for our expenses, and maybe perhaps we don't have to work anymore. We have enough passive income doing those things where we can free up some of our time freedom, which is kind of the second part of a transformational wealth plan or financial plan. The third one has to do with what's called entrepreneurial freedom, right? The ability to start a business or start a new venture or buy some real estate and doing that at what I like to call kind of the fourth freedom, which is optimal timing. And collectively, you have to look at multiple things and I actually have this, a Rubik's cube here, Steve, and I actually bought this on Amazon. And sometimes people show up to us and they have these different colors on different ends, and it's kind of outta whack and different ways of adjusting what's called tax flow versus cash flow planning.
We try to create something where it's as congruent for life, for freedom of time, energy, entrepreneurial freedom. The last one has to do with location freedom, right? As at the end of the day, a lot of people are moving out of California. A lot of people are moving out of their business transactions, moving out of these high end primary homes. And our overall goal is what? It's freedom, freedom with their capital, freedom with their time, freedom with their finances, freedom with entrepreneurial ventures and then freedom with location. And then collectively, if you can bring these together with the right set of professionals, you can achieve what's called a transformational exit plan or wealth plan.
Steve Moskowitz:
And I can say that in practice, we see the client, so just leaving California in droves, and it's so important because California is an extremely aggressive state and people think, "Well, I'll just move and that's that, "and I don't have to pay those taxes anymore." But what they find out much to their chagrin is, well, wait a minute, sometimes California says, "You know what, you're not a prisoner. "You can go ahead and leave California, "but you still owe the taxes here." But that's the topic for something separate. Tell us, this comes up all very recently too, how do you sell cryptocurrency all tax deferred invest into commercial real estate?
Brett Swarts:
Great, great question. And it's using something called a Deferred Sales Trust. And not to be confused by the way, with the Delaware Statutory Trust, which are both DSTs, same acronym, just a coincidence. And for those who are familiar with Delaware Statutory Trust those are just a form of a 1031 exchange. I like to call those the Hollywood Video to the Blockbuster 1031, and they have their place and they have some usefulness certainly. We just closed a partial Delaware Statutory Trust last week for a client who had what's called a mortgage over basis challenge for an apartment complex he was selling in Colorado. Then he is able to put the rest of the funds into the Deferred Sales Trust and just realizing that certain things work for certain asset types. So for example, the 1031 exchange only works for investment real estate. It doesn't work for high end primary homes. So we did an $8.3 million sale in Palo Alto for a client who wanted to sell and felt trapped, wanted to move to Nevada and had a big tax above and beyond his 121 exclusion, so we used that. But it also works, Deferred Sales Trust also works for cryptocurrency. And so we had a client, she works for Google and she bought Bitcoin for about $50,000 and she got a big gain, Steven. In fact, it was up to 50 million at one point, and it's really high and she's riding a lot of the waves and she's looking at a big tax. And so instead of selling and paying about 30% or so, or 37% or so in tax, she's looking at exiting using what's called the Deferred Sales Trust. And so we set up a trust and it's kinda like an IRA, it's kinda like a 401 , it's kinda like a 1031 exchange. And instead of taking all of the capital at closing, she was able to exchange it for a promissory note and sell the asset, the Bitcoin to or transfer the Bitcoin to the trust and the trust ultimately sells it to the market. Smoke clears, and she's in what's called an installment state or she's a lender. And by doing in these certain orders with a third party unrelated trustee, that's our rule, she's able to achieve tax deferral. So I'll pause there, Steve, and then we can talk about how do we go back into real estate.
Steve Moskowitz:
But is there some way to eliminate a need for a 1031 exchange?
Brett Swarts:
So, yes, it's also the Deferred Sales Trust, right? So what is a 1031 exchange, and what's the purpose of it? Well, it's to sell and defer tax and buy something else within a short period of time. So the need is to defer that tax, and also the need perhaps is to invest into some real estate. Or what if you could sell, defer the tax, but you didn't have to do it at any certain time? In fact, our parents taught us to sell high and buy low, Steve.
Steve Moskowitz:
Bernie Baruch, I remember that.
Brett Swarts:
Yeah, they didn't teach us to sell high and buy higher, buy low or sell high and buy higher 180 days later, right? With properties that cap rates are very low and inventory is very low and prices are through the roof. They taught us to be smart with our timing of our sales. And so this is what the Deferred Sales Trust allows you to do. In fact, the best story for this is for a gentleman, I call it the Monday morning quarterback, Steve, and he's in Minnesota, and this guy's worth a lot, a couple hundred million dollars at the time. It is 2006 and he's got his 1031 goggles on, but everything is just really, really fuzzy. He's like, "This doesn't make any sense. "This looks scary out there." He didn't know 08 was happening or could happen at the extent that it would, but he thought something might be on the horizon. And so instead of selling in 1031 exchange like he always did, he decided to use the Deferred Sales Trust. And so he moves all of the equity into the Deferred Sales Trust, defers millions of tax, and puts it into a conservative portfolio of liquid investment grade securities. And this is where the fun starts. Five years go by, and the market takes a hit on both sides, but he stays pretty conservative on his holdings, okay. And this is why it's the Monday morning quarterback. The bank calls him back and says, "Hey, you know that property you sold?" He goes, "Yeah." "To that crazy 1031 buyer in California?" He said, "Yeah." "Well, we just foreclosed on them and we're wondering, "do you wanna buy it back from us?" He goes, "Well, maybe, what's the price?" And they say, "60 cents on the dollar." So it sounds like a pretty good deal. So the trust eliminates the 1031 exchange in that he was able to partner with the trust, purchase this property, all tax deferred, not using the 1031. So he sold high and he bought low, and that's what our parents taught us to do, Steve.
Steve Moskowitz:
Absolutely, so how do you attract high net worth partners?
Brett Swarts:
So by unlocking something that provides more value than what they're providing now. As an example of this, Steve, I was at Marcus & Millichap early in my career, I was asking the question, how do I attract high net worth individuals to hire me to sell their multi-family property? In other words, how do I compete for these listings when everyone else has more experience has more of a track record? And he gave me some words of wisdom, Steve, and the wisdom was this, he says, "Brett, "the more you know more about their property, "the moment you know more about their property, "properties in the area, ways to add value." And here's the key, "Ways to solve their problems "than they know about their own situation "is the moment you start adding value.
