Selling Your Business Or Real Estate? Save Millions In Taxes With A Deferred Sales Trust – Brett Swarts

 

Maximize your gains and minimize your tax burden when selling your business or real estate with the power of a deferred sales trust. In this enlightening episode, we dive deep into this powerful tax strategy with Brett Swarts, a best-selling author, podcast host, and capital gains tax strategist. Brett, the founder of Capital Gains Tax Solutions and host of the “Build It to Billions” and “Capital Gains Tax Solutions” podcasts, brings a wealth of knowledge from overseeing over half a billion in deferred sales trust, 1031 exchanges, and real estate deals. Discover how a deferred sales trust can help you defer capital gains, optimize investment returns, and achieve true passive income, freeing you from the heavy tax consequences of selling significant assets. Brett shares practical steps and real-world examples, including how this strategy works for both business and real estate sales, and how it can even apply to cryptocurrency gains. If you’re a high-net-worth individual or business owner seeking to protect your wealth and plan your financial future strategically, you won’t want to miss this!

Get in touch with Brett Swarts:

• LinkedIn: https://www.linkedin.com/in/brett-swarts
• Website: https://capitalgainstaxsolutions.com

If you are interested in learning more about passively investing in multifamily and build-to-rent properties, click here to schedule a call with the CPI Capital Team or contact us at info@cpicapital.ca. If you like to co-syndicate and close on larger deals as a general partner, click here. You can read more about CPI Capital at https://www.cpicapital.ca.

#avabenesocky #augustbiniaz #cpicapital

—

Watch the episode here

 

Listen to the podcast here

 

Important Links

• Brett Swarts on LinkedIn
• Capital Gains Tax Solutions
• Build It to Billions Podcast
• Capital Gains Tax Solutions Podcast
• Building A Capital Gains Tax Exit Plan
• Brett Swarts on Facebook
• Brett Swarts on Instagram
• Capital Gains Tax Solutions on YouTube
• Never Split the Difference

 

About Brett Swarts

Brett Swarts is a best-selling author of “Building a Capital Gains Tax Exit Plan”. He is the host of the Build it to Billions & Capital Gains Tax Solutions Podcasts. His insights have been featured at the Best Ever Real Estate Conference, DLP Capital Conference, American Entrepreneur with Kevin Harrington from Shark Tank, and also seen on Fox Business Network.

As a real estate broker, his expertise is one of the few in the world who has closed Deferred Sales Trust, Delaware Statutory Trust, and 1031 Exchanges. He is the Founder of Capital Gains Tax Solutions where he teaches purpose-driven entrepreneurs and investors to build their capital gains tax exit plan to multiply their freedom, wealth, and impact.

He has closed over ½ Billion in DST and Real Estate Transactions and he was the first to help Bitcoin owners exit millions of gains and defer their capital gains tax using a DST.

 

Selling Your Business Or Real Estate? Save Millions In Taxes With A Deferred Sales Trust – Brett Swarts

Welcome back to Real Estate Investing Demystified. We’re going to talk about the most exciting topic, and that’s how to save money on taxes.

Before getting into our show, which is an exciting topic we’re going to talk about, especially with CPI. When you syndicate deals and real estate private equity, most of their profits are made when you sell the deals. Finally, we’ve now got to the stage after being in the business for five years, where we’re getting some reasonable income gains coming in. Tax strategies are always a great way for us to learn, particularly for us being part-time between Canada and the US now. We want to learn more. Our guest is going to discuss that. I wanted to quickly chat about it’s been around four years we’ve been running this show. Close to 300 guests.

That’s insane.

I’ve always worn the same outfit. The idea was I would wear my pink shirt with my white collar and my white cuff links, and I changed my tie, but then I made a decision today.

You looked different.

 

 

I’m no longer going to do that. I’m going to be switching up my fashion a bit. That’s the decision I’ve made. Let’s get into our show. Let everybody know who our guest is, and let’s have some fun and learn a few things while at it.

Brett Swarts Joins – Building To Tax Mastery

Our guest is Brett Swarts, a best-selling author, podcast host, and capital gains tax strategist. Brett is the founder of Capital Gains Tax Solutions and host of the Build It to Billions Podcast and the Capital Gains Tax Solutions Podcast. He’s closed over half a billion in deferred sales trust, 1031 Exchanges, and real estate deals. He was the first to help Bitcoin owners to $4 million in capital gains using a DST. Let’s dive in with Brett Swarts. Welcome to the show, Brett. We’re happy to have you here.

Ava and August, I’m happy to be here. Thanks for having me.

Brett, how did you get into helping people save taxes and making smart investments?

I grew up in Taxofornia and learned about real estate at a young age, building houses with my parents in the Bay Area and Silicon Valley. When you grow a business with family, you tend to have a lot of taxes in California. We had to figure out ways to be creative with our exit planning and our strategy. I was the second to graduate from college, my brother is the first on both sides of the family. We saw how to build, but we also knew we needed to learn more.

 

I went on to study and practice multifamily brokerage at a place called Marcus & Millichap, where we learn quickly about 1031 Exchanges, underwriting, and investment real estate. I fell in love with the commercial side and investment side of real estate. Everything was great for a little while until the 2008 crash, and then I saw friends, family, and clients lose half of all their wealth.

At the same time, I was going through a struggle financially because my wife and I had a new baby on the way. We ran out of money, so much so that we did what every real estate wannabe does. We get a side hustle. My side hustle is Cheesecake Factory nights on weekends, and working at AU basketball tournaments on the weekends. By day, I negotiate with banks to help my clients keep their properties and tax assessments and such. They were losing half or all of their wealth, millions of dollars. We were trying to live off of thousands to try to keep the lights on.

It was this two-year window where I was in two worlds of no wealth and other clients losing all of their wealth. That’s when we learned that the 1031 Exchange is not always your friend. More than that, if you don’t have a clear plan for an exit and how you’re going to build your wealth, you can be building the ladder on the wrong wall, and then you look up and say, “That’s 5, 10, or 15 years. Maybe it’s the wrong wall. Maybe it’s the wrong timing. Maybe the 1031 is not always my friend.”

The 1031 Exchange is not always your friend. More than that, if you don't have a clear plan for an exit and how you're going to build your wealth, you can be building the ladder on the wrong wall. Share on X

We’ve built capital gains tax exit plans to solve a lot of that pain, but we invest right back into real estate anyway. We just do it at an optimal time, so it’s not that real estate is not our friend. It’s our best friend when we make deals that make sense for us, but the 1031, unfortunately, you’re in this 45 to 180 window. I saw too many folks get hurt by that. We said there has to be a better way, and we can dive into what we do and how we do it. The passion behind it is unlocking capital gains to multiply impact for families. It’s living what’s called truly passive income. I think a lot of it gets cut short with financial freedom. We have to go deeper here and unlock what that really means. That’s what we do.

Tax Talk & Capital Gains Case Study

Got it. Before getting to the meat and bones of our conversation, and the mechanics of how these trusts work in the tax savings, let’s quickly make some certain differentiating. We have some Canadian viewers and followers as well. In the US, you have an option for something called the 1031 Exchange. It is the part of the tax code where you can defer your taxes on the gains of real estate that you’ve sold, as long as you buy another piece of real estate of the same value or more within a certain time limit.

When Brett talks about 1031 Exchange, that’s what he’s discussing here. That could be done on the personal level or business level, so it doesn’t distinguish there. We also want to quickly distinguish between capital gains and ordinary income. There are a lot of different ways that governments, both in Canada and the US, and worldwide, tax you.

They tax you on your income. They also tax you on capital gains. Meaning that if you own a piece of an investment property, and then you sell it, the gains you’ve made are taxed at a different tax rate than ordinary income. The strategy that Brett is talking about is particularly about gains that you’ve made from exiting a piece of real estate, a business, and what have you. That’s going to be our focus. Did I get that pretty much right there, Brett?

Yeah. Just to clarify, the 1031 Exchange only works for investment in real estate. It doesn’t work for primary homes, business sales, Bitcoins, or stock. Our strategy works for any asset of any kind. The second thing is the equal or greater debt as well. This is the piece that people miss. They go, “Just buy something equal or greater in value,” but it’s also equal or greater debt, and it’s 1031.

This is where the tax flow, debt flow, and cashflow get mixed up. Most people think about cashflow, and they are not thinking about debt flow and tax flow. In other words, they’re not thinking about it in 3D. They’re thinking in 1D. It’s like investing in black and white versus investing in color. Once you understand how to connect these three and get timing on your side, it’s transformational for families. That’s what we want to teach you here.

Most people think about cashflow, and they are not thinking about debt flow and tax flow. In other words, they're not thinking about it in 3D. Share on X

We covered that. I wanted to do a quick case study with you for the viewers to understand capital gain stocks. Let’s say you sell a clear title property and you net $1 million. What does capital gains tax look like on that $1 million?

It depends on what state you live in and the depreciation recapture. We’ll use Taxofornia for a second, and then New York and New Jersey. Those are the other ones that are pretty punitive. California is like 37% minimum, including Obamacare, 3.8%, Federal of ‘20, 13.3%. Some people get confused. They think it’s like 15%, but as soon as you’re over the $1 million mark, you’re in the highest bracket. Yeah, 37% minimum for investment in real estate in California.

If you add depreciation recapture, I have to say 2% or 3% added on, so you’re at 40%. If you’re selling it through a C Corp, we’ve seen as high as 60% and 70% in California, depending on what nature and what you’ve owned, and how you own the entity. There aren’t a lot of C Corps these days, but I usually like to say that anytime you sell any asset, no matter what state you’re in, 20% to 50% of your proceeds are likely going to be crushed with tax, depending on your basis. On a $10 million exit, at zero basis, that’s like $4 million of tax at 40%, 30% is $3 million, and so it’s pretty painful.

I can’t believe I’m saying this, but that’s worse than Canada because with capital gains, you’re only getting taxed on 50% of your gains. You end up paying around 25% on that $10 million or $1 million example that you use. You’re saying, in California, that’s more than that. We understand that part of it. This also has to do with a business if you’re selling your business or any type of assets.

What triggers the capital gains tax event is when an asset, a business, or something is sold.

Correct. You have to sell something and gain. I’ll share with you the adjusted basis. That’s cost plus improvements minus depreciation. It will be your adjusted basis. That’s the number one key thing to know. Number two is the sales price minus the closing costs, and such will lower that a little bit, then minus your adjusted basis will give you the gain, and the percentage of that.

 

Debt is a whole other piece, too. If you have debt involved, we have to make sure we’re solving for that because if the debt is over the adjusted basis. There are a lot of things there. I liken it to a Rubik’s Cube. People show up to me every day, and they’re asking these questions, and it all depends. We’re always trying to move these cubes around, trying to get the colors all lined up. I can’t quite do this, but my daughter can. She still amazes me. She’s twelve years old, she comes in, and she knows how to do this. I don’t even know how to do it, but we do it for taxes. We try to line this thing up to make it effective for our clients.

Let’s get into deferred sales trust. Talk to us with a strategy that you provide to investors so they don’t get dinged and lose millions and millions of dollars.

Decoding Deferred Sales Trusts: What’s The Real Deal?

Before getting to that, we watched a bunch of interviews you’ve done in the past, and we did research for the show before this episode. I felt that the explanation of what a trust is was maybe not focused on a lot. Let’s talk about that because there are a lot of different entities you can use to do business and to own property, to do whatever you can. You talked about a C Corp. There are S Corps, LLCs, LPs, LLPs, and trusts. There are a lot of these different entities and structures that can be used to hold properties, do transactions, and so on. We’re talking about, particularly, a deferred sales trust, which is some form of a trust. Why don’t we talk about the entity and the structure itself briefly?

 

 

There are three types of trusts, generally speaking. There are thousands of different trusts, but it was three major types. There’s irrevocable, revocable, and business trust. We have a 1.0 and a 2.0 version. Mostly, 95% of our deals are 1.0, and that’s the business trust. A business trust is like an LLC. It’s like a C Corp, but it’s a trust. It typically files a C Corp tax return. It’s a cruel method. There are a number of reasons for this that make it more efficient and more effective.

Understanding that there are different trusts for different things. You might have a living trust that’s a revocable trust, which helps you to pass through probate without having to have your assets with the court, and make sure your kids go to the people you want to take care of them. That’s a revocable living trust. It has a specific type of outcome that you want.

Our deferred sales trust is a business trust that’s partnered with an installment sale method, 453 installment sale reporting, which is a seller carryback. The specific purpose is to defer capital gains to the first income tax and open up total flexibility for investing in any kind of asset at any time. I’m not sure how much more you want to go into that, August.

The business trust.

Yeah, it’s a business trust, and it’s third-party to you. You’re selling it to the trust, and the trust owes you back the minus. This is how it works. This is why it works, because 20%, 30%, 40%, or 50% of the funds are the government’s money. The government says, “I’ll give you a zero-interest loan on the funds, as long as they’re invested into the economy of some sort,” stocks, bonds, mutual funds, real estate, real estate debt, passive-active deals, whatever you want, whenever you want. They want to incentivize the movement of funds to stimulate the economy, to create more jobs, and to create more tax revenue.

That’s the nature of why we have 1031, IRA, 401(k), and deferred sales trust. If you want to dig into that, they’re the biggest winners on this. Otherwise, August, Ava, or Brett, we wouldn’t sell our assets if we didn’t pay all this tax. We would maybe hold on to them, and that stagnates the economy. That stagnates the ability for people to add value to properties, and all of the other things that are associated with why commerce happens.

 

 

Can you break down, so the audience can fully understand, what DST is? Break it down step by step, maybe do a case study on how it would work if somebody were to sell a property for $10 million, let’s say.

What we should do is let’s come up with an exercise. We talked about a million-dollar property, a clear title being sold, and you have $1 million in gains, but that assumes you bought the property for a dollar. Who is the perfect client for this strategy? Are they selling a business or a piece of real estate?

The Ideal DST Client: Who Benefits Most?

It’s both, either-or. It didn’t matter what they’re selling, the question is what’s their dream? What are they trying to achieve? I would say that 99% of our clients are trying to achieve what’s called truly passive income. Let me define that for a second. Truly passive income is what we call Kenny Chesney singing on the beach, no shoes, no shirt, no problem. Maybe they’re in Naples with you guys on this most beautiful beach, guitar in hand, the glasses, and no shirt on. He’s a country singer. He’s not even thinking about the passive income that’s flowing in. No time, no toilets, no trash, and no termites that he’s having a trade. No stress for the durable, consistent income.

The first step for everyone is to define what that truly passive income number is for you. Is it $10,000, $20,000, $30,000, $40,000, or $50,000 per month for you and your family? If you can achieve that, what freedom does it unlock for you and your family, but also what impact does it make for some of the most vulnerable people in this world that you care about, or causes that you care about? We get clear on the family’s mission, vision, and values, and what’s meaningful for them, what’s meaningful for their wealth. Not just their financial wealth, but the wealth of their family, relationships, spiritual wealth, all of these things.

We get clear on that, and then we dive in like a laser and say, “How do we unlock truly passive income for you?” You say, “You have this $10 million asset, and you have zero basis. You get to that zero basis by depreciating, like multi-family for 28.5 years, 27.5 years, you’re depreciating it. You fully depreciate it, and then you go to sell. When you go to sell, you get crushed with the tax, but instead, we can defer that tax and invest it. We like to do passive real estate investments. It’s probably what you guys like to do too.

There are different Investments. You can be active or passive. You can be an entrepreneur or you can retire, so you’re not stuck in one or the other, but then we started doing double-digit cash on cash return. If someone might have an ROE of about $200,000, $300,000, or $400,000 on a $10 million per year, they now have $900,000 to $1 million per year. We’ve doubled or tripled our cash-on-cash return. They have all this excess margin of cashflow flowing in, and they don’t have to trade anymore time, toilets, trash, termites, or anything for that. We say that truly passive income is to your freedom and impact as compounding interest is to your money.

 

 

Once you grasp that and you focus like a laser on achieving that, the big domino falls over, and the rest of it either becomes irrelevant or it solves itself. We think the biggest mistake that investors, real estate owners, or entrepreneurs make is not getting crystal clear on the mission, vision, values, and that surely passive income number, and then doing everything they can to achieve that within a 2 to 3 year period of time, then it frees up everything else to just work for impact. That’s what changed the game for us when we figured that out. That’s the first thing that I would say to start with, and then from there, we can design it out.

Fair enough. That assumes that the original asset that they were in is not fully passive. Whatever we’re involved in, whether it’s an active business or a piece of real estate, there is some involvement and work that needs to be done if we want to turn that into more of a passive income option.

Transforming Income: From Active Hustle To True Passive Wealth

Exactly, August. You nailed it. The reality is that, especially in these higher tax states, New York, New Jersey, and California, the amount of regulation and the amount of burden that they put on landlords and business owners is becoming more and more onerous every single year. Warren and Catherine have a great story of this. They had a $2.5 million multi-family property in Sacramento, California. Next to a zero basis, they had a 1031 Exchange into it, 100% occupied, great tenants, great location, property management, but still, there was something that was always pulling Warren, my client, back to this property.

He likes taking care of the tenants, and he likes serving. It was meaningful for him. It wasn’t a bad thing, but here’s the thing. They had two twin daughters a little later in life. They were ten years old, and Warren and Catherine were assessing their mission, vision, and values of what time they had left for their children. They also assessed that 85% of our time with our kids is spent before their eighteen. They’re seeing these summers, these times, and these weekends go away, where Warren is getting pulled back to the property somehow, someway.

We said, “Warren. What do you want to do?” “I have $120,000 and alive, and that’s our passive income right now,” but he’s still doing the thing. He’s driving the weekends back and forth through traffic. He said, “All I want to do is spend some time on my family. We want to travel. My mind space is to be away from the property.” “What if we can do $190,000 NOI, a 66% increase in cash-on-cash return, no more toilets, trash, termites? You’re fully diversified.”

I said, “Essentially, why don’t we trade the three Ts for the two Ts?” Toilets, trash termites for his two twin daughters. He goes, “Brett, let’s go.” We did it. We sold it and here’s the key. Here’s the mistake. People trade what’s priceless for what’s profitable. The concept that we’ve always been taught, a lot of us, and I’m a part of it, too. I grew up in real estate. I love real estate. I love the 1031. I love to build wealth from real estate, just like you guys do. I love that. I’m not saying not to do that, but at a certain point, you’ve made your millions. There’s a certain point certain certain seasons of life where you’re like, “You know what, I don’t want to trade what’s priceless for what’s profitable.”

People trade what's priceless for what's profitable. Share on X

He sold it and not only increased this cash-on-cash return, but we diversified wealth, and he goes, “Brett, it took about six months, but to be honest, I feel like a weight has been lifted off my shoulders. This has transformed our family. I thought, like my dad, I had to keep owning real estate my whole life. My dad got all this real estate. He’s got $20 million and $25 million, but it has been consuming him all of these years, and he’s held on to all of the control.”

He said, “We didn’t need all of those tens of millions. We have $3 million, $4 million, or $5 million collectively, but we won’t talk with our daughters. Here’s the cool part. I’m also entrepreneurial, and he’s not that old. He’s in his early mid-50s. He’s not that old, but here’s the key, Brett. I want to know that in eight years, when the girls are off to college, that I can get back in the game.” The answer is yes. You can get right back in the game, so you can be an entrepreneur again. That’s the key. It’s not fitting in one box, just the 1031 box, just the deferred sales trust box, just the retirement box, or the entrepreneur. It’s the power of and. You can do both. That’s what we teach people with the deferred sales trust.

That’s amazing. Now I want to talk about how I fully understand it, and then you can stop me, so we can guide the audience as well on how it works. When somebody is selling a property, they’re selling it to John for $10 million. Before they sell it to John, they come to you and they say, “Brett, let’s open up a deferred sales trust.” From there, they sell it to the deferred sales trust.

We’ll get the mechanics in one moment. Just give me one second. As far as the audience tuning in to this, I love the concept, I love the idea. Who doesn’t want to do it? You talked about your avatar. Who is this perfect for? We discussed that as well. We also have a demographic that’s retiring, the Baby Boomers, and trillions of dollars are going to be transferred. This is a great option for them as well. We figured that out, but we also know that this is maybe not the best strategy for somebody who’s just starting out in business, or they’re not even accredited. This is more for high-income individuals or somebody who has great assets who’s trying to exit. Is that fair? Do we realize who the audience needs to be?

Great question, and before we get too far into it, you’re exactly right. The minimum for this is that you have $1 million net proceeds, $1 million gain. These are larger transactions, larger gains for it to make sense. Smaller than that, it doesn’t make sense. One exception is if you two had $500,000 each that we can combine, and you’re going to sell in a short period of time. We made that exception, but this is a larger exit, larger gains.

Got it. That’s another part that’s very important as well to understand. If you’re tuning in, this is a strategy you use when you get rich. Keep going and keep working hard towards where you’re going as well.

The trust created for this strategy is a single-purpose vehicle.

We’ll get into all of that. Give me one more. I know you’re eager to get into it, but give us one moment because I still want to take the pre-steps before jumping in and understanding the mechanics of this all the way through. We understand who it is best for and what it does. We understand what a trust is. We now want to get more into the mechanics of it. There’s a way that this individual who is selling a business, who is selling real estate, wants to have this passive income coming in, to understand, and they know what type of annual income they need to come in to be passive. They come and see your firm, and after going through all their vision and ideas, you get into going through the process.

In a lot of the interviews that you’ve also done, I notice that a lot of your time was spent getting the audience to believe that this is a legal, above-board process. You’ve made your case on that in multiple places. Billions and billions of dollars have gone through this. This is not some idea that you came up with yesterday. This is something that’s been proven, and it’s there. There have been lots of precedents from the IRS on this. Let’s put aside this idea of, does this exist? Can this be done? Is this real? Let’s assume, for the purpose of this interview, that this is 100% above board, 100% qualified by by IRS, and what have you.

Now, let’s talk about the step-by-step process on a $10 million sales situation. Somebody sells a $10 million property. They align with what you say, they want to have this passive income coming. If they want to come back and become an entrepreneur again after a few years, they can still do that. I guess the question Ava wants to get into, let’s get into as far as how it works, and what’s the first step that takes place?

How A DST Works: Step-by-Step With A $10 Million Example

Step one is that a trust is formed, and it’s a single entity trust that only does business with that particular person who is selling. If there are multiple partners, we can do multiple trusts for each partner. Step two is to find the buyer. The buyer with the real estate agent, or whoever you’re listing the property your business with. You find a buyer for the $10 million. We’re not going to finance the buyer. That buyer is going to come with cash.

Step three is you’re going to sell it first to the trust, in exchange for a promissory note for $10 million, then the trust is immediately going to sell to the buyer. Here’s the key. It’s all in one day, one sale, or one second. It’s back-to-back. It’s a simultaneous close. This stops the objection of, “I’m just selling it and waiting around for a buyer.” No. The trust won’t transact unless the buyer is willing to transact. It’s in the same sale, and here’s the key. Since the trust bought it for $10 million and sold it for $10 million, the trust has a zero gain.

Since you, as the seller, are receiving payments and installments, you only pay taxes on the payments you receive. This is known as IRC 53, and you’re right. It goes back 100 years. It’s all legal. Our strategy goes back nearly 30 years, and thousands of transactions, all legal. IRS never rubber stamps some things, so you’re not going to see a rubber stamp, but it’s been through the audits, and they’ve all been noted as no change on it. No change, no findings, but that’s essentially it, and the funds hit Charles Schwab, typically. If you have a financial advisor, we can work with them. If you don’t, we have financial advisors. A lot of our real estate clients just like to go into real estate and go into passive deals.

The proceeds are not just sitting in a bank account eroding away to inflation. They’re being invested in an investment account while they’re there, available for the seller, for the person that this strategy was put together.

They are being invested, but are installments also being paid back to the seller?

Yeah, depending on how we set it up. Both of you are correct. Sometimes, we have entrepreneurial clients who have a very high income. I’ll give you an example. We had one and Palo Alto. He was moving to Nevada. We sold an $8 million luxury home in Palo Alto. He established his residency in Nevada, and once he established residency, he started taking payments. The payments that he received are based upon his no state income tax, instead of Nevada. The principal always follows California, so he wasn’t taking the principal. He’s taking interest from an interest in it. There are some tax efficiencies there.

The second one is that we have clients who are very high net worth and high income right now, and so we can delay the payments from the trust for a couple of years and let it compound. The $10 million and 9% is $900,000; they don’t have to take the $900,000 in year one or year two. Let it compound and compound so there’s no income tax, no capital gains tax, and at the trust level, it is typically operating at a paper loss. There’s no tax at the trust level, the way we set it up.

It’s very efficient to build wealth with. It’s not just an extra 20%, 30%, or 40%. It’s the compounding effect of income tax deferral over time, and then in year three or four or so, we recommend starting some payments. As a part of that, you don’t have to take the full interest, though, but people have partial interest payments. On a $900,000 interest, they might take $450,000 or so.

When you say interests, you’re talking about the $10 million sitting in the trust account that has been invested with some type of S&P index or some type of investment firm. When you say interests, what are you talking about? What do you mean by interest?

The promissory note is what you own, August. Imagine you are the seller and you have sold the $10 million asset. The trust issues you a promissory note. It’s the bank of August, and so it owes you money and will have a 9% interest rate, we’ll call it. The $10 million plus 9% is $900,000 per year. Let’s imagine we go and make that the first year, but you take no payments. There’s no tax year level, no tax at the trust level, and we have $10 million plus $900,000.

The interest on your note has been set from day one. Can that be changed as situations change or your principal changes?

They’re typically ten-year notes, and every ten years, you can refinance for another ten years. Based on the market conditions, it might go higher or a little bit lower, based on where interest rates are.

Ten million dollars is invested. There’s a note given to the seller, the seller is getting 9% on his $10 million. What if the trust investment doesn’t do as well as the amount they all sold? August Bank can’t default on August’s note because it’s the same person.

To clarify, you don’t own the trust, August. You owned the trust, and you sold it to yourself, and it’s taxable. This trust is a separate legal entity that files its own tax return. It gives you a 1099, but you owe all the money. You’re the sole creditor. The trust is also not coming on other accounts, and so you have 24/7 access to the funds online, and the funds never move without your signature approval. We’re the third party under a trustee. Capital gains taxes, just me and my company.

That’s how we keep it working. We’re like a third-party qualified intermediary for a 1031 Exchange. You can’t do a 1031 in your own company. These are ways to keep compliance with these tax laws and these tax rules. You are owed the money, but you’re right. If it doesn’t pay you or if it’s less than the interest, you have the right to foreclose and secure the capital and pay all your taxes.

I see. I was going to ask another question. When you want to draw or you want to take some of the $900,000, that’s the taxable event at that time, right?

Exactly. You nailed it. As you take it in the year of sale or any year after that, the interest that you receive is 1099 ordinary income tax, and then if you take principal, that’s capital gains tax.

 

Can the trust be used to save taxes on multiple exits? If you sold two companies, can you use the same trust if you’re the same person?

Yeah, you absolutely can. You can sell Bitcoin, a business, or a primary home real estate. We call it One Trust Multiple Promissory Notes. You’re collecting all these promissory notes, and you’re consolidating all of this equity. This is the coolest part. We had clients, for example, a $13 million exit in San Diego. They bought Bitcoin at $40,000 a coin because real estate was so high. They shot up to $110,000, and now it’s maybe about $85,000, $90,000 or so, and so it booms. They take a portion of that and buy some more real estate once real estate comes back down.

They kept doing that, then we were in real estate debt mostly. We were like 10%-plus real estate debt while we’re waiting for the equity to come back down. This is the whole part. We call it Netflix, not Blockbuster. We no longer have to do the right kind of investment in real estate right away, and 45-180. We can diversify our wealth. We can sit liquid. We don’t do equal or greater debt. We can get out of debt, and we can be smart and strategic with our timing.

We could also be smart and strategic with the income that we receive from it. This is the Netflix version, where Blockbuster is the old 1031. Unfortunately, those are the challenges. Let me tell you when you use a 1031. If you find a good deal that makes sense for you and you’re in the game, buy it. It’s simpler, it’s cheaper. It’s not saying don’t do the 1031. We have what’s called the Best 1031 Exit Plan. It gives you both options.

Go for your 1031. If it fails, drop them into the deferred sales trust, or even like our client Craig got a $6 million exit. He did a $2 million 1031 into South Carolina, $1.5 million in Oklahoma, and the rest of it to the deferred sales trust. We did three transactions within that, and our deferred sales trust took the rest of the money. This is a powerful way for you to get flexible with your capital, buy the deals you want to buy when you want to buy them.

One more question for you. I mean thousands of questions for you, but one more related to the topic we were talking about. The trust itself is like an endowment because it can make its own investments and have its own diversified portfolio, investing whatever it wishes. Does the client sit on the investment committee? For example, can the client advise on what the trust should invest in, or strategize with you on what the trust should invest in?

Investment Flexibility: Diversifying Assets With A Deferred Sales Trust

Absolutely. It’s a team. It’s a team approach. Here’s the key here. It’s to keep it above board. I have to approve it as a trustee or a trustee company. If it’s yours, August, you do too. Here’s the reality. The odds of my saying no to what August wants to do are one in a million, but that one in a million keeps it all above board. I could say no to August. That’s part of giving up some of what’s called unilateral control. What is unilateral control? That’s 100% ownership. You don’t have to answer to anybody.

Although this is the interesting part. If you own a multi-family property, as an example, and you have a loan on it, guess what? You’ve given up some control because that lender is going to require you to get fire insurance. It’s going to require you to keep 85% or 90% occupancy or more. It’s going to require you to have all these other things, reserves. You’re like, “I’m giving up control there.” If you do a 1031 Exchange, you’re giving up control.

These are things you have to get comfortable with because it’s a big exit, but our team looks at itself as real estate investment advisors that build many family offices and/or big family offices, depending on the net worth of the client. We’re all a team working together. We’re a friendly trustee who wants you to feel amazing so that you do more deals with us and more referrals. It’s not the adversarial thing that you would think of, but on the outside, someone might say, “You’re giving up control.” Yeah, because that’s what makes it legal. Otherwise, you’d be taxable.

That’s what we say to a lot of our LPS when they ask, “You’re telling us you’re going to exit in five years. Who makes that decision?” We’re like, “The GP does,” but they’re like, “Then we lose control.” I’m like, “Yeah, but if I’m a GP that has promised five years over and over to my investors and hold assets for ten, nobody is going to invest with me anymore.” If a trustee is always at conflict with their clients, nobody is going to use that trustee anymore.

Brett, one question for you. What if the investments do better than 9%?

Are you ready? This is probably one of the most amazing parts of this. One of the myths with the deferred sales trust is like, “I just capped at 9%. What if it goes to 50% or 100%? I don’t want to be capped. Might as well be attached and do it myself.” The mindset I want you to think about is the way that we structure a joint venture partnership with the trust gives you the ability to do two things. 1) You can get 80% to 98% of the upside on that opportunity. 2) This is probably my favorite one. You get a brand new depreciation schedule. You could get about 80% of it.

Let me walk you through this. This is so important because without this structure, what I’m about to tell you, the deferred sales trust is still attractive for sure, but for the entrepreneur, it throttles them, and they’re like, “I don’t know. Maybe I’ll take my chances and get better than 9%.” August sells it for $10 million. You defer $4 million of taxes. He imagined living in Florida at this point. He’s living in California.

He’s like, “I got an extra $4 million in here. It can get 9%. I’m feeling pretty good. The market is shifting. I see an opportunity. I want to buy this apartment complex, whatever. It’s a nice deal.” The trust can be a silent joint venture partner. August forms a new LLC. The trust puts up all of the capital. August, you get 80%. The trust asked for 20% of that new LLC in a preferred return. Now, we do the preferred return. We mirror the note, 9 and 9, 9% on the note. Guess what? It’s like August borrowed from himself. The money that went in, because the money is going to pay back, still owes August the money. That’s a wash there, and then we’ve got to keep it commercially reasonable. We’re going to give the trust 20%. Even then, you go, “Am I losing the 20%?”

To simplify this, August bank is sitting there with August money, but it’s for this tax-saving situation. If August has a venture, his bank will lend money to it.

Not lend. It’s important. Lending is when it becomes taxable. I wish it could lend, by the way. It’s like a loan. That’s what we said. It’s a joint venture partnership. It’s an investment, but it has a preferred return that pays back the trust that still owes you the money. This is all taxed deferred. August hasn’t paid a dollar of tax. Trust doesn’t pay a dollar of tax, and you buy that property.

Let’s say you put a $6 million down payment on a $15 million apartment complex. Let’s see an example. That $15 million, you doubled in five years. Now, we’re $30 million. You crush it. You bought it at a great price. You increase the rents in high fives. You sell that? That trust gets its $6 million back. It took you five years to do that at 9% preferred return. You do the math. He gets his preferred return.

It’s yours anyway.

It still owes you the money anyway. Yes, you’re still even. You’re still at high fives. The difference is 80/20. That’s 80% to August, of which you can do a promissory note, number two, and sell that to the trust, and get an additional part of it, or you just pay your tax. The other amount still goes into the trust to the extent it’s a ten-year note, and it’s a compounding 9%. We still have to pay you that net of fees, by the way. We can talk about our fees here in a second.

You’re not necessarily losing that 20%. Some people think that they’re losing that 20%, but not necessarily. Potentially, at the end of the ten-year term, we’ve done compounding 9%, every single year, compounding net of our fees, then, potentially, as a trustee, I have to have an opportunity to make a profit to keep it legal.

The other side of that is you can purchase an option at the beginning of that $6 million that went in. That gives you the ability to carve out a one-time option to exercise that 90% of the 20%, which gives August an effective 98% of the upside. I’ll pause there because I know that’s a ton of information, and it can feel overwhelming. To answer it, we solved that for the entrepreneur. We’ve solved it, but it does take some work and some complexity.

How about in the case of downside? How about in a case of the deal not going well? Is that preferred return a situation where August Bank, run by you, can give August a break on this venture that didn’t go well?

No. This entity is not owned by you, so there are no special deals. We follow the book. We follow the deal, the operating agreement.

As a JV partner on that venture, you actually can’t foreclose on me.

I don’t know if that is a JV partner unless you’re doing something outside of the covenants or outside of something. Yeah, I guess, potentially, I could LP, limited partner. It’s not technically an LP. It’s just a silent joint venture partnership. This is a traditional JV arrangement. I never thought of that through, but I guess it could if you’re messing it up, August. We’ve got to take it back.

Yeah, exactly. If I’m not running it well. You have an option as a bank. Great. We can keep going and talking about this. Do you have any other major points?

Estate Planning & Trustee Insights: Protecting Legacy & Choosing Wisely

Have you guys seen the show Yellowstone yet?

I think I’ve seen one episode.

I’ll give you a little concept. We got Kevin Costner. They are in Montana. They got $100 billion or $200 billion worth of the best land ever. Beth is the daughter. She’s the attorney, smart, finance, tax, all the stuff. Spoiler alert, they’re trying to get the land, and he’s like, “I’m never going to sell the land.” She’s like, “Dad, you have to sell the land.” He’s like, “I’m never selling the land.” She’s like, “Dad, if you’re not going to sell the land, they’re going to kill you, then when they kill you, the death tax is going to kick in and they’re going to take the land anyways because we can’t afford the death tax at 40%.”

What I’m saying here is you’ve got to be aware of what game you’re playing. It’s not just a stepped-up basis capital gains tax. Especially, if you’re a Canadian Citizen and you got a US assets that your exemption as a Canadian citizen for US-based assets, businesses and real estate, is only about a $68,000 exemption, which means your death tax is 40% of your total net worth.

Let’s give an example. Let’s say you have a $100 million business and you’re a Canadian Citizen, not a US citizen, and it’s real estate in the US. When you die. The death tax that the US government is going to take is 40 million out of 100 million. Instead of that, we say, “Kevin Costner, sell your land for $100 million into what’s called the DST 2.0.” This is an irrevocable trust that removes $100 million outside of the taxable state. We eliminate that 40% death tax. You need to be alive. You need to sell it before you die, but we can sell it today. No charity, life insurance, or gifting required.

One day, one sale out. It could be a billion-dollar exit. If you don’t do that, outside of any other planning, and it’s inside your taxable state, you’re going to get crushed with the 40%. If you’re a US citizen and you’re married, you have a $28 million exemption or $14 million for singles. Although in 2026, it’s going to be cut in half. It’s going to be $14 million married, unless they change something, and about $7 million single. Realize what game you’re playing here. We’ve got to solve for for death tax. We’ve got to solve for capital gains tax, and they’re not the same thing.

Fair enough. Got it. Before we get to the next segment of the show, we want to bring you back and do a webinar on this as well. Our audience can jump in and ask some questions. Before that, talk to us about your fees and your compensation. How are you compensated? How do you protect the proprietary side of the business? Can someone who has got a $10 million exit get their uncle to be the trustee and open a trust, instead of Brett? Can they get their uncle to do it? Is there a level of sophistication needed, or certain licensing? Talk to both of those, as far as how you’re compensated and how you have this position.

It is sort of the latter. One of the biggest mistakes or myths that people think is like, “Maybe it’s not my uncle, but maybe it’s my college roommate, or maybe it’s the best man in my wedding, or maybe it’s my secretary outside of my desk that have been my office for the last twenty years. Third party is not just not related. That’s the first thing I would say. It’s not just not related.

Number two, the creator of the structure, CPA, tax attorney, my business partner, is very selective with how we steward this trust and who can become a trustee or not. The key advantage that we have is the thousands and thousands of hours since 2009, working with the creator of the structure. That’s the advantage of speed and doing it correctly. It’s not like anybody can become a trustee.

Technically, if you’re not a related person or you didn’t work for somebody, you may qualify, but the question is whether you’ve ever done a brain surgery. Do you want to try it with that person? Nor would we allow it if it’s somebody who’s not qualified. There’s no securities license. I’m a California real estate broker by trade. I have that license. At one point, I had Series 22 and 63 licenses. I let those go because I didn’t want to practice any security work. There’s no trustee license for this.

Having done it a hundred times before is the biggest. I even asked ChatGPT before the show, and it’s like the most important thing about DST is that it’s structured the right way. You guys have probably learned it through. That’s the biggest part of it.

 

 

Anyone can have the idea. It’s the execution, the organization, and the application of the information. Everything is Google-able, and ChatGPT is making even more stuff, but it’s the execution of that. That’s the answer to that question. The other question is the fees. There are two major fees. Number one is the one-time closing costs to the tax attorney. He charges 1.5% on the first million of the gross sales price, 1.25% for anything above. It includes lifetime audit defense. On a $1 million deal, it’d be about a $15,000 one-time legal fee. On a $10 million deal, it’s $150,000 minus a little bit because you get a break on above $1 million at 1.25%. That’s the one-time legal fee.

Brett casually went over a lifetime audit defense. That’s a big part of it. That should be your insurance policy, and he casually went over it. That’s why I wanted to put aside any concerns about whether this is right or this is legal. Not only that, they are also guaranteeing you that they’re going to have legal support all the way through. Keep going.

That’s correct. By the way, we’ve been through over two and a half dozen audits, and they’ve all been no change, no findings. We never had a single issue with thousands of transactions closed.

In most of your videos, you talked about that a lot, but keep going.

The next part is the trustee fee. It’s what we get paid for Capital Gains Tax Solutions. We’re about 1.5% to 2% of the net proceeds into the trust on an annual recurring basis. We cashflow our fees, so within about 60 to 90 days or so upon closing, that’s when we get paid. We don’t like to eat into the principal. After someone is closing with real estate commissions or whatever, and legal fees. We cashflow it. A good rule of thumb is we’re returning 7%, 8%, 9%, 10% compounding return net of the recurring fees. On 10, we’re earning on 12 or netting 10. You put $10 million in there, you would have 6. Now you have 10 on that $10 million at 10%. That’s $1 million on passive cashflow.

Typically, we need a little bit of an on-ramp to get going on this. We need a 4 to 6-month window to ramp up and get the plane in the air, cruising at a good altitude, then that cashflow keeps churning. That pays for all the things. That’s the model that most of our clients love. They’re like, “That’s great. If they never dip into the principal, if it pays your fees, and it pays me 8%, 9%, 10% compounding, sign me up. It’s truly passive income. Let’s go.” That’s how it goes.

Do you have any upside participation?

Only if it out-earns. We didn’t do that JV LLC. Only if it out-earns. Let’s do that scenario. You didn’t do a JV LLC, and we only put it into Bitcoin, Apple, and Tesla. It made, on average, 20% every single year. You’re 10% would be there, and let’s say 2% would be the fee. Now we’re at 12%, so that extra 8% outside additional planning on the 1.0, I would get that, and I’d be happy. I get an extra 8% compounding every year. I would only get that at the end of the term. Now, on the 2.0 version, we could do that same thing, but the upside all goes to your family, and your children can be the beneficiaries. All of the upside would be for the next generation. We did a $1 billion exit, and I did 20% every year for the rest of your life, and you only live off X amount. The excess is all for your family, your beneficiary, or your children, if that makes sense. There’s no upside to the trust.

Got it. We’re getting to the end of the show. Last question before the second segment, and you don’t have to answer this if you don’t want to. What’s the biggest one you’ve ever done?

We have a $37 million, so that’s probably that. We’re working on a $250 million deal right now, which is pretty sweet.

Got it. You guys fall into this boutique area, and life insurance as well. A lot of these large financial institutions don’t offer these services. This is kept aside. A good friend of mine does life insurance, and there are a lot of high-net-worth people who utilize a similar type of strategy. There’s one out of the Caymans, or what have you. There are a bunch of ways to get some money out of your company as well, and you guys fall into that.

Talk to your CPA, bring him on. We do nothing offshore. Everything of ours is fully reportable. We report it and we say, “Here’s what we did,” and there’s an audit window, basically, like three years or so, for every sale. I always say for those things, “Have they been audited? Who did the audit? Who defended the audit? Who paid for the audit? How many have they been through? How many have they closed? What was the outcome of that?” If they don’t have thousands of transactions and decades of experience, and at least 10, 20 audits, I would be very cautious on some of those because there are a lot of ones that sound incredible, but I don’t want to be the guy who goes for it and the audit fails.

Great. Thank you so much for that information. Brett. Let’s get to the next segment of our show.

Here we go. The ten championship rounds to financial freedom. Are you ready, Brett?

I’m ready.

Let’s do this. First question. Who has been the most influential person in your life?

The most influential person in my life, I would say, is my mom. My mom unconditionally loved me and believed in me. She sacrificed for my brother and me, and it was not easy. She’s been the most influential person in my life.

That’s beautiful. Next question. What is the number one book you’d recommend?

Besides the Bible, I’m a Christian, I’m a believer, so I read the Bible every day. For the business book right now, it’s Never Split the Difference by Chris Voss. However, it’s his master class called The Art of Negotiation inside of what’s called Masterclass. I’ve read the book and listened to the book, but until I took the master class, which the book demonstrates, it’s a whole other level. I probably watched it 60 times, honestly, and it’s hours and hours of content over and over again. It’s amazing.

Okay. Good to know. Thank you. Next question. If you had the opportunity to travel back in time, what advice would you give your younger self?

Learn to work harder on yourself than you do on your job. Work harder on yourself to make a living. Work harder on yourself to make a fortune. It’s a Jim Rohn quote. The idea is not just to make money, although that’s cool because you can help a lot of people, but the idea is to become all that God has created you to be. Have a clear calling on your life.

We all have these certain gifts we’ve been given, and to maximize those gifts. We’re working on leadership, character, personal development, fitness, family, and faith. Some of the ones that come easier, we tend to do as we’re younger because they’re natural, but those other ones that are harder, we have to have a clear plan for that. If you work harder on yourself, you’ll make a fortune, and you’ll have an eternal impact with your legacy rather than a temporary impact with worldly stuff.

I love it. That’s amazing. Next question. What’s the best investment you’ve ever made?

The best investment I’ve ever made was the real estate foreclosure opportunity that we invested in. It was like a 50% bill. This was like 2010. People are getting crushed. We bought it, finished the retail in Arizona, and it was in like twelve months. It was like 56% or something return. It was passive, I didn’t do anything. I found the deal and helped the structure bring some capital, but I like the ones where I’m more passive than active and get paid well.

Amazing. What’s the worst investment you’ve ever made, and what lesson did you learn from it?

It’s probably dabbling in cryptocurrency and some of the stuff. It was Thanksgiving 2019 or 2021. I was going around. It wasn’t a huge money, but it was pretty much thrown out the window to dive into it. I learned a lot. I still have some Bitcoin and still have some major coins. I’m not opposed to that. I have some clients who have $100 million in Bitcoin. We’ve done exits with the DST, but that’s probably the worst one.

Next question. How much would you need in the bank to retire today? What’s your number?

A truly passive income number is $30,000 per month. We have a two-year plan, but $500,000 into a loan that’s going to pay 16%, 18%, and it’ll average out about $25,000 to $30,000 per month, and we’re done. We don’t do the IRS or the 401(k). We’ve closed all those out. That’s the number, $30,000 per month.

He was very clear on that. He knows what’s happening. Next question. If you could have dinner with someone, dead or alive, who would it be?

I think Winston Churchill. The courage to fight when no one else seemed to be leading at that time, in a way that changed the world forever, it’s Winston Churchill.

Next question. If you weren’t doing what you’re doing today, what would you be doing now?

If I feel like doing what I want, and were 6’5” and 45 inches, I’d be playing basketball in the NBA.

How about something else, like something you could be?

Besides a 6-foot White guy, who could dunk at one point, I did play college basketball by the way. That’s part of my passion. I would probably coach basketball. That is part of the dream. I push my son to strive. He’s six years old now and plays basketball in his first year. I’ve coached in the past. Part of the vision, too, Lord willing, is to coach high school basketball or some college basketball. I’ve always loved sports, and I love basketball. I could play it every day for the rest of my life, and it’s not work. It’s a lot of fun.

It’s so much fun. Amazing. My favorite question, Brett, book smart or street smarts?

I can’t say both. Is that what you’re saying?

You can if you like, but which one is one of the other?

If I had to choose one, I would study and practice with the best person and the smartest guy on books that taught street smarts. I know it’s a dual answer, but I would study the guy or gal who wrote all of the wisdom about how to be street smart.

Nice. That’s a great answer. Very interesting.

Last question. If you have $1 million in cash and you had to make one investment today, what would it be?

The one I was talking about before. It’s a land entitlement loan that’s going to pay about 16% to 18%, and it’s either a quarterly or a two-year term. The neat part is that it’s a refundable deposit, and it’s a two-year lockup. It’s a top top company that does this. It’s that durable cashflow. If you can go from a 3 or 5, or even a 7, and you go at 16%, it accelerates the freedom and impact that you can do for your family. That’s the one I would do. That’s what I’m doing.

How To Reach Brett Swarts & Final Thoughts

I love it. Tell our audience the best way to contact you.

You can check out the book if you want to learn my story, Building A Capital Gains Tax Exit Plan. We have Kevin Harrington from Shark Tank in the book. It’s a great place to hear about my entrepreneurial journey and my family, basically going down to no money and then building it all up. I always share that beginning story for inspiration, depending on where you’re at in your journey. If you have a live deal, go to CapitalGainsTaxSolutions.com. We can schedule a time with one of my team members to see if you could be a good fit, and then if you want to follow me on social media and all those things, it’s Brett Swarts.

Thanks a lot. We’ve learned a lot today.

Thank you, my friend. Thanks for sharing all the knowledge.