Industry expert Brett Swarts is here to help and he’s back with us to talk about the power of Deferred Sales Trust. This time, Brett shares how to use DST in the crypto space and gain more cash flow by deferring capital gains tax.
Brett Swarts is the founder and CEO of Capital Gains Tax Solutions. Whether you’re selling a business, real estate, or a crypto asset, he and his team are dedicated to educating individuals and solving capital gains tax deferral limitations to unlock financial freedom.
[00:01 - 07:47] Crypto and Capital Gains Tax
[07:48 - 17:45] Deferred Sales Trust Explained
[17:46 - 19:54] Capital Gains Tax and Beyond
[19:55 - 21:37] Closing Segment
“... the opportunity to defer that tax and to be able to diversify that wealth is one of the best ways for crypto millionaires to create and preserve more wealth.” - Brett Swarts
“We're told all the time, Robert Kiyosaki, and all of us who love multifamily, investing in real estate, it's cash flow, cash flow, cash flow. But I'm here to tell you, it's not just cash flow, it's tax flow.” - Brett Swarts
“....let's face it, the most expensive things that we're ever going to pay in life, one of them is taxes.”
- Brett Swarts
Connect with Brett on the Capital Gains Tax Solutions website. Follow them on Facebook, LinkedIn, and YouTube, and listen to their podcast, Capital Gains Tax Solutions Podcast. Check out Crypto DST Mastermind webinar and the book Building a Tax-Deferred Exit Strategy: The Proven Playbook for Unlocking Your Ideal Wealth Plan When Selling Assets of Any Kind for Yourself Or Your Clients by Brett Swarts and Ken Harrington.
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Want to read the full show notes of the episode? Check it out below:
Brett Swarts 00:00
We'd like to say is we're unlocking that freedom, like Robert Kiyosaki on the right side of the quadrant, right? Getting on the business or investment side of things. It's like how do we use tax flow in this situation and using the deferred sales trust to unlock what someone's really trying to accomplish, whether that be moving closer to family, selling their big primary home, exiting their GP positions and not wanting to pay a bunch of tax, exiting their crypto and wanting to start a business venture, building investment real estate, the deferred sales trust unlocks that once you understand it.
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson 00:39
Brett Swarts is the founder of Capital Gains Tax Solutions. Each year, he equips hundreds of business professionals with a Deferred Sales Trust tool to help their high-net-worth clients solve capital gains tax deferral limitations. Brett, that's a mouthful. I know you've come on in previous episode, I think this is last July 21, episode 234 that you came on, we really dove deep into the deferred sales trust. So if you're listening and going, "Hey, I don't even know what that is," hit pause, go back and listen to that episode again. 234 on July 21, of last year 2021. Get an understanding of that, because we're gonna kind of take a different spin on this today. Brett, welcome to the show.
Brett Swarts 01:17
Sam, great to be back, excited to add some value to you and your listeners.
Sam Wilson 01:21
Hey, man, absolutely excited to have you. One of the things that you and I spoke about here recently, we were both at the Best Ever Conference. And we really started digging into the crypto slash real estate conversation. And that's really what I'd love to spend the bulk of this episode talking about. Tell us, I mean, can you kind of just, the floor is yours, take over wherever you want. But that's what I want to talk about. Tell us what you guys are doing in that space, and really, why and what need you're solving or what problems...
Brett Swarts 01:48
Absolutely. So you know, most crypto millionaires, they struggle with their capital gains tax when they go to exit their highly appreciated positions. And in fact, a recent study was done, there's about two to $3 trillion, depending on you know, the year that you're looking at these numbers of cryptocurrency in the world. And these are highly appreciated assets, I mean, talking thousands and thousands of percent returns. And so when they go to exit, they have a huge capital gains tax. And so we believe the opportunity to defer that tax and to be able to diversify that wealth is one of the best ways for crypto millionaires to create and preserve more wealth. And with that, connecting with the apartment syndication world and/or commercial real estate syndication world, it complements this whole strategy of what I'm calling tax flow versus cash flow.
Sam Wilson 02:36
Can you break that down? What do you mean when you say tax flow versus cash flow?
Brett Swarts 02:40
Yeah, so most of the time, we were told, you know, we're told all the time, Robert Kiyosaki, and all of us who love multifamily, invesing in real estate, it's cash flow, cash flow, cash flow. But I'm here to tell you, it's not just cash flow, it's tax flow. And now, of course, it's always been both. But more and more important today, because of the highly, let's say, accumulating debt in America, especially over $30 trillion, that the government is running out of options except for to raise taxes. And that is a big problem. And so it's more important as we as entrepreneurs, as business owners as cryptocurrency and multifamily investors, that we look at our tax flow strategy, and not just the cash flow because let's face it, the most expensive things that we're ever going to pay in life, one of them is taxes, if not the most, that's the one you're paying the most out of anything anywhere. And so you've got to figure out ways using the regulatory framework to have tax-efficient cash flow, not just highly appreciated assets.
Sam Wilson 03:40
Right, yeah. Because what’s the good in having a highly appreciated asset that you're paying a ton of taxes on? And I know you've kind of specialized or found a way to do this with the deferred sales trust. How are you doing that with crypto, just use the word crypto millionaires, how you doing with crypto investors have made a whole bunch of money?
Brett Swarts 03:55
Yeah, well, we'll start with the story of August 7, 2021. And that's the one we broke the four-minute mile. And if you saw that Roger Bannister story about the person who broke three minutes and 59 seconds, he broke what many thought was impossible to break? Well, for us, that happened on August 7 to 2020 21 for a client of ours who owned a Etherium. He and his wife bought it for about 100,000 and went to 13 million, and they're living the, you know, 50-60 hour workweek in the tech industry. And she's an attorney and two kids and, you know, making a good salary but they lived in California, and it's very expensive, and they're looking at this huge amount of appreciation. And they're looking at exiting that pain, millions of dollars of tax. And so for the first time ever, we help them exit out of crypto all tax-deferred and anyone with the deferred sales trust for that matter. Over 25 year track record the traverse sales just been around and they were able to retire from their day to day job, travel with their family and then invested into in this scenario, they've invested into securities at this point, but they're waiting for the real estate market to shift and they're looking for opportunities to buy that. And so that's providing here, an opportunity to exit, get some freedom, get some cash flow, get some tax flow, and also defer millions of dollars of tax. So they need a $5 million deal. And we deferred about 1.8 5 million of tax then they liked it so much about three months later, Etherium had another high for what they're looking for. They exit two and a half million. And that's within one hour each. And that's the beauty of what we provide. It's so fast, so instantaneous, and but it's a huge impact for the families that we're serving.
Sam Wilson 05:26
Yeah, that's really interesting. Is there while we're on this topic, are there any assets that you can't put into a deferred sales trust?
Brett Swarts 05:34
No, it's worked for just about anything you can think of. It works for artwork, collectibles, public or private stock. We've done it for apartment complexes, self-storage facilities. We've done it for a dentist, I visited a dentist deal for a client out of New Jersey that was looking at a huge tax, we helped him defer $600,000 of tax and about a $1.5 million exit. It works for primary homes, luxury primary homes, as opposed to the 1031 exchange, which only works for investment property, or even the Delaware 1031 that only works for investment property. So the deferred sales trust really has zero limits on what it can defer, captive insurance, it can work for general partnership interest, LLC, LPs, anything you can think of now here's the key, it needs to have a $1 million net proceeds and a $1 million gain, it's got to be big enough in order to hire us right to pay for the services that we provide.
Sam Wilson 06:19
Right. That makes a heck of a lot of sense. You said 1 million net proceeds slash $1 million net gain. That makes a lot of sense. That's really intriguing. How did you figure out or how did you find clients that have made money in crypto and say, "Hey, guys, let's all put this into a deferred sales trust"?
Brett Swarts 06:35
It's a great question. We started talking about it, right? We start talking about the challenges that many of the crypto millionaires are facing, right? We actually started investing in it, ourselves, you know, in cryptocurrency. I started investing in 2017. My wife and I, we buy these, we call them Etherium rigs, that is supercomputers that we put together with our kids. And we start, we talked about Robert Kiyosaki's cash flow and getting on the right side of the quadrant. And we said, like, these are little cashflow producing machines as we sleep, they're producing some cash flow. Etherium, right? We also want to buy rentals, or it's a part of immersing ourselves into that world, and then trying to feel some of their pain, right, because all of us had friends or family who invested and went high and maybe went low or lost everything and we're going there's got to be a better way. And that's the same story that happened with apartment complex owners in Sacramento, when I was at Marcus & Millichap, same exact thing happened in 2008. And part of it was at 1031 Exchange chasing that deal in deferring that tax, but doing it in a way that put them in a poor position financially because they have too much debt and on less liquidity. And so we focus like a laser on what's something called, what's called optimal timing, sell high and buy low. And we just apply that to the crypto millionaire space. And we started a mastermind, we started podcasting about it. And now there everyone's finding us mostly on YouTube and podcast.
Sam Wilson 07:48
Right. That's really interesting, for sure. So inside the deferred sales trust, I’m just gonna make sure I understand this, it is not time-bound, like a 1031.
Brett Swarts 07:58
Exactly. So the deferred sales trust is amazing in that it's not time-bound, like a 1031 exchange. We call the 1031 exchange, 45 day, 180 timeframe the shotgun wedding. We all had friends, maybe a family who got married really quickly, right. And sometimes those things don't work out. And so the idea of optimal timing is being able to sell when you have a certainty of conviction that it's a good time to sell, exit that position, and then be on the sidelines and be ready to pounce on to opportunities, whether that be real estate, whether that be securities, whether that be back into cryptocurrency, whether they've been to hard money lending, all tax-deferred, using the deferred sales trust. I'll give you another example. We just helped the client, she bought Bitcoin for about $50,000. And she's working for a big tech company in Silicon Valley. And she had our $50,000 investment turned to $50 million. And I get this call and I'm going, "Oh my goodness, like you have a huge gain." She's like, "I'm lucky I never sold," and I go why didn't she sold. She's like, "Part of it because of the tax. I'm in California, I'm gonna get hammered. Part of it, I believe in the long-term future of Bitcoin. But the third part is I don't have a great place to invest it. Like I don't necessarily trust a lot of different things." She goes, but she goes, "I'd like to invest in this business venture. Can I go into real estate or another business venture with this?" And I said, "Using the deferred sales trust?" I go, "Yes, absolutely." So she exited the first 5 million when Bitcoin hit 54,000 a coin. And she deferred about 1.8 5 million in tax. And she's invested into a startup company for her the freedom was she could retire from the big tech company, but she could also build another company with her college roommate. It's an educational platform. It's what, like Robert Kiyosaki on the right side of the quadrant, right? Getting on the business or investment side of things. It's like how do we use tax flow in this situation and using the deferred sales trust to unlock what someone's really trying to accomplish, whether that be moving closer to family, selling their big primary home, exiting their GP positions and not wanting to pay a bunch of tax, exiting their crypto and wanting to start a business venture, building investment real estate, the deferred sales trust unlocks that once you understand it.
Sam Wilson 09:58
That is awesome. Love that, that's really cool. Talk to us. And I know, again, we'd probably dug into this a little bit, but on the previous episode, but just these questions are coming up in my mind, much like, you know, let's say you're a self-directed IRA investor, all the proceeds have to go back into the IRA. Is that the same story with a deferred sales trust where even though, maybe you're deferring tax and things like that, you still really can't access the money? Or what does that look like as income-producing real estate throws off cash? Where does that cash then go?
Brett Swarts 10:30
Yeah, how was the deferred sales trust like a self-directed IRA? And how is it not? Well, first of all, it's like a self-directed IRA. So when the funds are in there, it's in a tax-deferred state. And the growth in the cash flow can typically grow tax-deferred. Why? Because it's able to expense what it owes to you in a given year, even if you haven't received payments out. Right. And that's a really cool thing. So it's growing income tax deferred and capital gains tax. It's unlike self-directed IRAs, there is no required minimum distributions. Although we do recommend, and how we structure our promissory notes. And for those who are wondering the deferred sales trust, you're lending the funds to the trust in exchange for a promissory note, and the trust is paying you back over time, we do like to see some payments coming out within the first two years. Some amount of payments coming out where you will pay some income tax on. But there's no like other things that as far as if you're partnering with the trust, you can partner with the trust, and you can buy investment real estate and the way we structure it, you can become an owner of an LLC, and you can partner with the trust where you can get the traditional cash flow, and that's appreciation. And not all of the cash flow has to roll back into it. And so it's much more flexible, Sam, for sure. Yeah,
Sam Wilson 11:34
That's, I mean, that's getting into the weeds on how you structure those things. But that makes a lot of sense. I guess the answer to the question is, can you keep all of the funds inside the trust and leave it there if you want? Can you also take money out? And it sounds like if you take money outside of the deferred sales trust, it just becomes taxable ordinary income?
Brett Swarts 11:50
Yes, define "taking out." What is a taxable event with the deferred sales trust? The answer is if you take it personally into your personal account, or you use it, you spit it in, like a primary home or your personal expenses, right? So the government gives us these tax deferral options, in order to incentivize us to do the things that they can't do very well as part of why they encouraged us to build and manage and own multifamily properties, because they're not very good in being in the housing business, right. So they give us depreciation, this is back to the tax flow concept here, right? So the deferred sales trust, likewise, based upon IRC 453, which is an installment sale, goes back to the 1920s. They're giving us this tool to incentivize someone to exit cryptocurrency or another business. And as long as those funds are put back into the economy, ie business ventures investments, which is going to spur economic growth, which is what's going to spur job creation, which is going to spur income tax, right? So they're winning here, we're winning. And that's really the goal, like where are the funds going? And how are they taxed? So let's play that out. If you partner with the trust and buy investment, real estate and build that for a client, I just did that for $2.6 million business sale in Tennessee, and he's building 72 multifamily units in partnership with the trust, you do it in a specific order. It's a tax, all of this tax is deferred. Okay. But the moment he wanted to put into a primary home, should he do that or take it personally, then it's taxable. Does that make sense? Sam?
Sam Wilson 13:11
Yeah. 100%, that answers the question entirely. That's really, really intriguing. Talk to me about timing on this. I mean, I think if everybody knew capacity or the capabilities of a deferred sales trust, it would be a very different environment for a lot of business owners, for a lot of people exiting things, you know, especially on the real estate side, you know, we see a lot of owner financing, especially on smaller deals, anything sub 10 million, if it's a mom and pop owner, most of the time that, you know, they'll want to do a seller carry-back just so they're not getting hammered with taxes all in one year. But this would be a unique strategy, of course, where they could plug it into a deferred sales trust. Where in this process is someone have to come to someone like you and say, "Hey, I need to employ your services." Is there a wrong time to do it?
Brett Swarts 13:55
Yeah, when is it too late for the deferred sales trust? It's too late if the buyer has removed all contingencies. And that means there's nothing remaining, and that's what's called constructive or… and a couple of days or a week, and there's nothing remaining between basically you and the seller, being able to say, to force the sale, they can say "You must transact Mr. Buyer." And because there's no contingencies remaining, that is when it's too late, unless you're an investment real estate property owner, and you can send the funds to a qualified intermediary, and then we can save a failing 1031 exchange on day 45 or day 181? These are the things that we work through with people all the time. In fact, we have an entire system and I would highly encourage you to never use a company that will not allow you to use a deferred sales trust. Make sure your accommodator is willing to accommodate and we have those but I literally have had two or three calls millions of dollars on the line for a very, very large, large exchange accommodator that is not allowing and will not move the exchange and they're putting these people in a terrible position. And they'll never use them again. And so you got to be very cautious, 1031 exchange companies don't want you to know about this. Most of them know, your 1031 Exchange broker or commercial broker. Most of them don't want to know about this, by the way, I'm a commercial real estate broker, started Marcus & Millichap. I love 1031 exchanges, but I love options. But more than that, and letting my clients to make the options for them, what's best for them, so you got to be very educated and prepared and have the team ready to go. Okay, so that's the timing aspect. Now, everything else is not 1031 eligible. We've got to do it before the buyer remove all contingencies, or before you have exited your cryptocurrency to cash. Even if you have Etherium, or Bitcoin, or different coin, and you're moving those coins. Remember, if you move to a different coin, it's taxable. Right? So to set up a deferred sales trust, for cryptocurrency owner, what we do is step one, we set up a trust. Step two, we open up the trust account at a place called Kraken. It's one of them that we use. It's like a coin base. Step three, you transfer the coin to the Kraken account and the name of the trust, right. So you haven't transferred it to your own name. It's the trust account, you can exchange a promissory note. And from there, the trust account can sell the cash, and then it can go to a bank account, and then it can start paying you. So these are all the steps that we help guide you through every step of the way. So hopefully that answers the question, Sam.
Sam Wilson 16:09
Yeah, absolutely. When is it too late? That's the summary question. Because I'm certain people have come to you in the past. And you're like, "Hey, I'm sorry, you're too late." And that's got to be a really disappointing conversation. Is there any golden parachute at that point, somebody can pull out that's different than a deferred sales trust?
Brett Swarts 16:26
There's an opportunity zone, if it's within 180 days from the time they closed, right. And so opportunity zones are one of our good cousins that we like here, Capital Gains Tax Solutions, they're like the trusted cousin. And, by the way, 1031 exchange is the trusted cousin, too, if you could find the deal, it makes sense. So you got, you have Delaware 1031, which we use for mortgage over basis. The cool thing, you know, for capital gains tax, which is for a plug for us is we're agnostic, as long as the thing is absolutely the best fit for you, right, and it's helping you clarify that. So we're called Capital Gains Tax Solutions, plural. And we're going to assess, and sometimes it's a mixture of both, like I'm closing a deal in Colorado, it's a $4.5 million deal. And this particular client has what's called a mortgage over basis. And we're using a partial Delaware statutory trust to extinguish and we'll replace some of that debt over bases, because what the deferred sales trust cannot replace mortgage over bases, cannot defer that. So we got to replace that debt. We have a unique zero Amazon coupon deal, where they're able to put a partial amount into that small amount of equity, get a huge amount of debt replacement, non-recourse out of their name. And then the rest of it known to the deferred sales trust. Well, guess what , this client wants to get into some cryptocurrency. And he's been an apartment complex owner and syndicator for years, and he's looking to diversify a little bit, because he's not seeing enough yield in some of these apartment deals that he would like to see. And so that's the cool thing about what we provide. And the key is which option or options, plural, is best suited for you.
Sam Wilson 17:46
That's really awesome. It just sounds like there's so many tools in the toolbox, you know that you guys have to help out people who are facing a tax liability situation. And I think that's the summary of the show is that even if you're in crypto, if you're in business, and again, there's a little bit of a rerun of the first episode, but no matter what you're in, that there are ways to reduce or eliminate your entire, you know, largest liability, which is your taxes.
Brett Swarts 18:11
Can I add one more to that too? By the way, so we're called Capital Gains Tax Solutions, but we're also an estate tax solutions, okay. And so I want to make this, give you guys a little extra bonus here. So we had a client that was selling a $5 million asset in Colorado, it's a different client. They're selling apartment complexes about two years ago, and they were 25 million. And their challenge wasn't just capital gains tax, whether they had zero basis, and they had a lot of gain there. Their challenge was the estate tax. And that's 40% of anything above basically 22 million married, Sam, or 12 million single, and it has nothing to do with a stepped-up basis. The 1031 Exchange does not solve this, you know, the swap until you drop does not solve this. You have to get the funds, the equity, the assets outside of your taxable estate. So generally speaking, most folks are either buying a bunch of life insurance, they're doing a bunch of gifting to their kids as fast as they can, or they're giving it all the way to charity as much as they can. Right? Well, guess what we provide? Without having to do any of those first three, they exited their asset into what's called the deferred sales trust 2.0. It's the DST plus is what is known as. And they completely eliminated that 5 million outside of their taxable estate. Now, they're still pretty young, their late 50s, early 60s, and they're looking at growth on this $25 million dollar estate to probably 50, potentially. 75 million. Well guess what they just did with 5 million of that? They exited outside the taxable estate which is what it eliminates 40% of the debt tax. Okay, so that is huge to for anyone who has ultra high-net-worth clients and is looking for an elegant solution upon an exit of an asset. The deferred sales trust plus is got to be one of the things you're looking at because it's amazing what it can do.
Sam Wilson 19:54
That's awesome. Brett again, you know, certainly enjoyed it. Thank you for coming on today. This was a blast to learn, again, all the really cool things that you can do with a deferred sales trust and the other options that are certainly out there. If our listeners want to get in touch with you or learn more about you, what is the best way to do that
Brett Swarts 20:08
There's a couple options. Number one, go to capitalgainstaxsolutions.com, or search that on Instagram, Facebook, LinkedIn, and YouTube. There's our big place where we provide a ton of free content, we have a ton of playlist, how to save a failed 1031 exchange, a 1031 exchange versus the deferred sales trust, the deferred sales trust versus the Delaware statutory trust. And then we have our cryptocurrency series as well, where we break down how to do this step by step. And then we have our mastermind every Friday at 10am Pacific Standard Time, 1pm Eastern is the Crypto DST Mastermind. We bring on clients, we bring on people learning about it for the first time, I bring on experts to talk about all of these things. And it's like a classroom. We're all hanging out. I'm on there, my team members are on there. My strategic alliances are on there. And we're just talking all about these types of things for, in frequently asked questions. And the last thing is we have expert tax secrets. We're coming with a brand new book, Kevin Harrington is going to be in the book, which is pretty cool. He's from Shark Tank and a bunch of other people. And so you can check out that new book. It's called Building a Tax-Deferred Exit Strategy.
Sam Wilson 21:07
Love it. Brett, thank you again for your time. Have a great rest of your day.
Brett Swarts 21:10
Sam Wilson 21:11
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.