Avoid the Tax Trap: How Real Estate Investors Can Defer Capital Gains Taxes

Brett Swarts (00:00)
Otherwise the government within nine months of your passing and if you’re married, your spouse passing is gonna assess the estate with 40%. So quick example, say you’re worth 130 million to bubble home parks, you’re free and clear, you’re no basis and you’re like, oh, I just got to step the basis when my kids die. Well, upon your death and if you’re married, 30 million is exempt. So you’re good there on the step up, but the other 100 million, guess what? A $40 million debt tax. So the mistake is people think I’ll buy a bunch of life insurance.

Dylan Silver (01:57)
Hey folks, welcome back to the show. Today we’re joined by returning guest, Brett Swarts, founder of Capital Gains Tax Solutions, where he helps business owners, real estate investors, and high net worth individuals defer capital gains taxes through strategic planning tools like the Deferred Sales Trust. Brett, thanks for joining us again today.

Brett Swarts (02:17)
Dylan, grateful to be here. Thanks for having me.

Dylan Silver (02:20)
Now, we were talking in the green room and there’s some IPOs coming up, specifically SpaceX. How does

interface with the deferred tax world?

Brett Swarts (02:32)
Yeah, I think most real estate investors would love an ability to kind of like 1031 out of stock into real estate or out of a business or out of Bitcoin, but they get stuck and they get trapped by the unlike kind nature of a 1031. And so we don’t use a 1031, we use a different strategy that allows you to exit into for taxing. Because the big problem is somewhere between 20, 30, 40 % of your sale of an asset, depending on what state you’re in and what depreciation or capture you might have.

will be subject to massive capital gains tax. And so imagine you’re a founder of a company, a tech startup, or you have a bunch of SpaceX or open AI stock and Anthropic, and you’re saying, my gosh, like, I’d love to be in real estate, but I don’t get crushed with, you know, hundreds of thousands of millions of dollars of tax. How do you build a strategy that allows you to defer that tax and invest into real estate or any other assets? And so that really, that’s the problem. Our solution is, is an installment sale type of structure. ⁓

we use where basically you can sell stock to a trust and the trust can just slowly pay you back over time and you only pay taxes you receive the payments but until the payments are actually made to you it can invest into real estate alongside of you kind of like a self-directed IRA or self-directed 401k and all tax deferred and that’s really the value of what we’re talking about today.

Dylan Silver (03:51)
Now, when you’re meeting with clients, but then explaining this process to them, this isn’t just a one and done situation. This is a relationship that happens over time because they have to set up the trust, but then when they’re taking the sale of their stock, putting it in the trust and then utilizing what’s in the trust, this is happening over years.

Brett Swarts (04:15)
Correct, yeah, think of it kind of like a long-term IRA 401k or even like a long-term 1031 exchange. This involves a team, a trustee, as part of our role as a trustee, and it involves a mindset of working and giving up some control because the reality is most of the things in the tax code will revolve around some kind of compliance, whether using a third-party 1031 company, a third-party IRA company.

our scenario is a third party trust company. And so we come alongside the investor or the advisor who’s listening to this, who wants their client to be able to, you know, sell and have a momentum on their ex is what we call it. The most mistakes people make is they think there’s not an option to do that. And so they hold onto the stock too long, or they end up selling it as paying the tax and, and or they use the poor man’s 1031 exchange, which is, which can work for smaller amounts. But when you have multiple million dollars of gains,

you know, it’s really hard to just have enough cost seg to offset. So we come in and say, you don’t have to have cost seg, you can use it like basically kind of like an installment sale with the trust to be able to execute on this. And so having a mindset of cashflow, taxflow and debt flow is kind of the thought, you know, if you were able to sell in the peaks of some of the real estate markets like 2021

2006 and be able to diversify your wealth into liquid investments and pay off all of your debt.

and buy back into real estate at what we call optimal timing. That’s really the nature of it. We know most of the time when the real estate market’s at the top or at the bottom, because it moves like a big ship, like a Titanic ship. You can kind of see it. Stocks and Bitcoin move very quickly, right? And so how do you time this in such a way where, let’s say, Anthropic or OpenAI goes way high, well, it might be a good time to sell. Well, guess what? Real estate’s still kind of low right now. Maybe it’s the bottom right now. mean, most commercial real estate folks would say either last year or this year is the bottom.

So now’s a great time to sell one thing, meaning the stock, and buy the real estate, and then you wait a few years and vice versa. The problem is 1031 keeps you in that same real estate market, right, in that 45 day window. So your timing is off, right? So our strategy eliminates the timing restraint and eliminates that have to be like kind restraint. And that’s what opens it up for the entrepreneur, investor, or advisor who’s listening to this to really.

really makes some big momentum plays on the exits.

Dylan Silver (07:20)
That’s one of the things that I’ve often thought about 1031 exchanges in real estate is you look at that 45 day window, there’s people who are reviewing dozens or a hundred plus deals a year and they may buy, you know, one, right? And so now you’ve got a 45 day window to find something ideal to roll your money into. In many cases, that time constraint can lead to maybe not the most optimal investment.

Brett Swarts (07:47)
Too often that’s what we find, right? People have too much debt, non-loft equity or diversification, and they get crushed by the tax man if they sell or if they miss the 1031. This is part of why we have what’s called the best 1031 exit plan where we can save a failing 1031. And so if you are going for the 1031, we love that. We started out, I started out on commercial real estate at Marcus Millichap in Sacramento, California during the 2008 crash. And I saw the first firsthand of what it means to basically fail as a real estate broker because my clients were failing at the same time.

and had to work multiple jobs and weekends at a cheesecake factory. during that time, I still stayed at Marcus and Milichap helping people work through this crisis. And what we learned was debt is not always your friend, especially in a downturn. Well, guess what? History repeats itself. Right now, for those who paid or didn’t fix debt, paid in 2021, 2022 plot of property, paid maybe too much for it at that point, which prices were pretty high, especially in the multifamily world. And their debt is now resetting. Debt is sinking their ships. Even if their properties are occupying at 95 percent,

The rents are either above or slightly where they were before and insurance has kind of come down. The whole ship is sinking because their debt flow, that’s the mistake. People don’t have a debt flow mindset, they just have a cash flow mindset. They don’t have a tax flow mindset, they just have a cash, they don’t have a tax flow mindset. So you’re gonna have all three, cash flow, debt flow and tax flow.

Dylan Silver (09:03)
Now, when folks are making mistakes with setting up trusts and then how they’re administering these trusts, what are some of the most common mistakes or what immediately comes to mind as a common mistake in this field?

Brett Swarts (09:19)
Yeah, the

biggest mistake is not starting with what called the end in mind. Stephen Covey talked about that and he coined that. And I’d say, I wrote this down, ⁓ you want to start with time being the end in mind. In fact, if you, and we all have probably read the Rich Dad Poor Dad, the Purple Book, right? And the fourth quadrant, the cashflow quadrant is the, I call truly passive income. Most people get stuck in one and two, second and third, which is still taking up their time, their energy.

and they never get to that fourth quadrant. It’s this elusive thing that if I just buy a hundred more units or if I just get a hundred houses, if I just get this, you know, 500 mobile home park, you know, pads and all of these things, they never get to that fourth quadrant. And that’s part of the challenge, right? So you got to start with, do you really want truly passive income? And we define that as no more toilets, trash, termites, rent control. You know, don’t have spending it pulled away into properties.

And when you can unlock that, we believe that that’s the, that’s kind of the holy grail of passive income. It’s actually truly passive income. Cause I think passive income gets thrown around too easily these days.

You’re still managing the manager. I have a story with Warren and Catherine, there’s a client who had a two and a half million dollar property in Sacramento, California, multi-family property, by like great tenants, great location. They did multiple 1031 exchanges, but they had multiple millions now in value of their assets. And they had about a hundred thousand, 120,000 of cashflow.

Well, we built a plan that freed up all of their time because the problem was Warren, the husband was still spending the weekends there. He’s still getting pulled away from his kids and his family. Well, we built a plan where he said, Warren, you can get your time with your family back. Plus we can increase your cash flow by 60, 70 percent. He’s like, Brett, where do I sign up? Where is this been? And that’s where most people get stuck. They get stuck working with the advisors that don’t have the solutions to their real problem. Number one. Number two, they don’t have clarity on like, why did I start this in the beginning with? Like, yeah, I want it truly passive income.

Well, truly passive income, believe is to your freedom and impact as compounding interest is to your money. And most people trade what’s priceless for what’s profitable, right? Their time with their family, the travel, that new entrepreneurial dream, whatever that thing may be, that’s priceless versus profitable. Oh, the property’s still doing well. The rents have gone up or, you know, I was able to make a gain on the 1031. Okay, well, is that really what you want? Right? And when you get real clear on what you want and you hire a team to help you get to where you want to get, it can be transformational. And that’s what we’ve done with clients across the country.

Dylan Silver (12:13)
Now, does this mean potentially scaling out of real estate for folks that are heavily invested?

Brett Swarts (12:20)
Yes, it does. And here’s the thing. You can scale out of the active side, but then go with passive and you can go into passive debt funds. I’ll give you a story on this. We had a client, they built a $13 million car wash. Well, they built it for 4 million, but it went to the value of 13 and they’re in San Diego and they felt, and we felt that the market was at a high. This is about 2021. And so they sold, off their debt and then diversified into passive real estate. lot of hotel deals that are doing really well right now. But mostly real estate debt funds that have been consistent.

Debt has been the preferred method the last couple of years, while equity has been challenging. So we’ve been in a tax-deferred state going into real estate debt funds that are very safe and paying double-digit returns. And so we sold equity high, went into mostly real estate debt consistently, but guess what they’re gonna do? They’re gonna now go back into real estate, all tax-deferred. And this is what we’re talking about. The solution is ⁓ trust that allows you to have flexibility of timing of your timing, whether it be for timing for your family.

or timing the actual real estate market. Now they’re gonna buy more land in San Diego and they’re gonna build more car washes. Now, where the values finally went down, that’s the whole concept of this entire thing is how do you get time to be your friend and not leverage against you like the 1031 exchange. The second part is the demographics that baby boomers are, know, turning 65, about 10,000 every single day, is about 80 million in the US alone, the 120 trillion transferring in the next 10 to 15 years. And this is the largest real transfer in history of planet.

of which the top 3 % of all wealth in America owns commercial real estate. And so they are going to get out of the active ownership of this and or they’re going to hit with this state tax, which is going to take him out of which is a whole nother concept we could talk about here, which gets lost in the 1031 stepped up basis world. And so understanding like what you’re solving for and ultimately how to how to like achieve this a Rubik’s Cube of owning real estate, estate tax, capital gains tax. That’s the type of mindset you have to have. Otherwise, the government’s going to crush you or

Perhaps you’re not gonna be doing the things you wanna be doing the rest of your life.

Dylan Silver (14:16)
Now, when we talk about managing ⁓ car wash, you mentioned, right? This is something that is almost outside the wheelhouse for a lot of real estate investors. Is this like a cookie cutter thing that you can transition into or do you have to have some experience managing that kind of a business?

Brett Swarts (14:32)
Great question. They had done first gas stations that had the mini car washes, right? And so they were familiar with that type of service world. And so they found a piece of land and they saw the model. And so they said, let’s just build one from scratch, right? Let’s just do this on scale. And so I would say it was kind of a, there was some basic knowledge of the service business. Then they went to the membership model and they got X amount of people to sign up within a short period of time, which increased their EBITDA very high. And so,

But I do think that perhaps if you have experience or someone with experience within the gas station world, that you could perhaps transfer that type of skill set into the car wash world.

Dylan Silver (15:54)
pivoting here, you mentioned real estate debt funds on a granular level, break this down for folks who might not be familiar with what this is.

Brett Swarts (16:03)
Yeah, so the one that we like is a group called DLP Capital. And what they do is they invest through a fund and they loan to those who are first position mortgages, senior secured against the properties, average loan to value is 55%. They’ve never not paid 10%. And they are ⁓ the average net worth of the person who’s personally guaranteed is around seven to $10 million. They’ve never had to write off a single dollar in all of their track record. I think it’s over 12 years now.

And so they’re mostly lending to multi-family operators and developers and some smaller apartments, a lot of larger apartments as well. And so very safe. And the fact that that’s 55 % loan to value, right? So the value would have to drop by 45 % before we would even potentially lose anything. And so they’re about 30, 60, 90 day liquidity. So depending on when you raise your hand and how much liquidity they have, and these are six, 12, 18 month loans that they’re making. So they’re kind of like bridge debt.

for entrepreneurial real estate folks that are like a lot of people listening today. So that’s what I like because I know that. I grew up in the Bay Area building houses in California, went to Markets Millichap, sold multifamily property. So that’s my world that I understand nearly clearly. And I think the demographics are very favorable long-term for multifamily.

Dylan Silver (17:16)
I would like to dive in there. Speaking about multifamily, we’re in different areas of the country. You’re in Florida, I’m in Texas, and then you have, of course, experience in California. And so there’s different multifamily dynamics that are impacting all these markets. I’m in the greater Austin Metro, and it’s almost like there’s been too much development. You’re seeing rents come down and vacancies go up. And then I’m very familiar that in areas of the country, there’s still not enough.

know, multifamily housing. What are you seeing as a whole, you know, throughout these markets?

Brett Swarts (17:51)
Well, I think you’re spot on. It’s definitely micro, you know, subject local market. And what we’re seeing is different for different markets. Now, Texas was such a boom. Florida was such a boom. Well, guess what? It’s kind of pulling back with the challenges of the interest rates, maybe not as many people moving into these places. But mean, Austin, Nashville, parts of Florida, it was such a boom so fast that it’s only normal to see kind of this pullback. You have to be really aware of

how wide that the city allows people to continue to build. So Sacramento always had this challenge because the Bay Area and in LA and San Diego, they had the ocean and then you go out. Or Sacramento, it’s in the middle of kind of California and it can go all four ways, right? And so just when you saw this big bump, we would see another thousand, 2000, 3000 units built and it just keeps getting wider and it softens. so you’re…

The waves tend to be lower waves and maybe comes up some, whereas I have clients in San Jose and Mission San Jose, Fremont, that area, the Bay Area, Palo Alto, and it’s just landlocked. There’s nowhere else to go. You got to keep going that way. So just understanding just the very nature of location and demographics and how much land is locked. Places like Murfreesboro or even UC Davis, they have these zones where they say you cannot build outside of

this zone and that naturally creates a ⁓ extra demand because of a lack of supply. And so those are some of the things that you definitely want to think about. But yeah, you’re right. Austin is taking taking some hits because it grew so fast.

Dylan Silver (19:31)
We aren’t coming up on time here, Brett, any new projects that you’re working on, and then also anything you’d like to mention directly to our audience.

Brett Swarts (19:38)
Yeah, so let me think the new projects that we’re working on are really focused on helping real estate entrepreneurs and investors and advisors, financial advisors, unlock the capital to really serve their clients. I don’t know if it’s new in the sense of like what we do, but it’s new in the sense of most folks still don’t know about how to do this. And we want to come alongside like a wingman to help them out. So whether you’re a real estate fund manager, a financial advisor, CPA, and you have clients that are exiting highly appreciated assets, I’d say this is really for those that have a million dollar net proceeds, million dollar gain.

So these are larger exits, right? The larger they are, the more we can really help. And the second thing is estate tax. Most folks aren’t focused on the estate tax. They maybe mistakenly think that a stepped up basis is gonna solve all of your tax problems. And it’s not, it’s only gonna solve the capital gains tax problem. But the estate tax, known as the death tax, is 40 % above 30 million married or 15 million single. And so if you’re above these limits, you need to have an estate death tax plan.

Otherwise the government within nine months of your passing and if you’re married, your spouse passing is gonna assess the estate with 40%. So quick example, say you’re worth 130 million to bubble home parks, you’re free and clear, you’re no basis and you’re like, oh, I just got to step the basis when my kids die. Well, upon your death and if you’re married, 30 million is exempt. So you’re good there on the step up, but the other 100 million, guess what? A $40 million debt tax. So the mistake is people think I’ll buy a bunch of life

I’ll gift it all the way to my kids or give it all the way to charity, but they run out of kids. They’re not necessarily that charitable. ⁓ life insurance is really expensive for $40 million, right? So our solution is sell while you’re alive, eliminate the estate tax by selling it to an irrevocable trust right before the irrevocable trust sells it to the ultimate buyer who’s lined up over here.

And that 130 million is sitting outside of your taxable estate, which your kids can be the beneficiaries. And now you can invest in it and diversify it into stocks, into real estate passive funds, into your own deals. You can go back in your own deals too, if you want to. And that is really the big thing you’re solving for. Like the estate debt tax. You’ve got to be aware of what it is and way to solve it. And we can do it without any charity life insurance or gifting required. And we can do it all in one day, all in one sale, but you have to be alive when you do it. And you have to set this up prior to closing.

Brett Swarts (21:49)
So you can go to CapitalGainsTaxSolutions.com to learn more about this or check out my book, Building a Capital Gains Tax Exit Plan, which is on Amazon. We have Kevin Harrington from Shark Tank in the book. We would love to sit down with you to see if we could be of service to you.