Keep More Of Your Gain: How DSTs Help Real Estate Investors Defer Taxes and Build Wealth

Ray (00:00)
Not advising your client about a DST. The reason is, is because if you’re a somehow assisting him somehow in the transaction and he later finds out he could have saved 250,000 bucks, he’s going to look at you and say, why didn’t you help me in this transaction? And so people need to be educated on that because you know, you can’t offer something you don’t know anything about

Scott Bursey (01:59)
Welcome back to the real estate pros podcast.

The podcast dedicated to giving you the cutting edge insights you need to dominate your market. I’m your host, Scott Bursey. And today we are deep diving into risk liability and the crucial role insurance plays in protecting your real estate career. Joining us is a true heavyweight in the legal insurance fields. Ray Johnson. Ray is a senior officer at a major insurance company, a published author and a highly sought after legal expert.

and a witness and a litigator whose career includes a landmark. 152 million Plains of Judgment. Ray, thank you for being here.

Ray (02:44)
My pleasure. Happy to visit with anybody about these things because they’ve always been interesting to me. What can I tell you about?

Scott Bursey (02:53)
This is an honor having you here. And before we dive into the how, I want to talk about the who. For those just meeting you, tell us about the path that led you to real estate and the core vision that drives your work today,

Ray (03:14)
Well, I heard early on when I was younger that they just should invest in land because they don’t make it anymore. And so it always ⁓ rises up in value. so when I got a little bit of chunky money, when I started working, I put it down on a fourplex and ⁓ learned the trials of, ⁓

you know, being a landlord on that sort of thing. And ⁓ it was an education, but in addition to that, it made some money. And that seemed to work out well. So then I got further involved in other real estate transactions. And then…

You said I was a senior official at the insurance company and that’s true. It’s in the past 10th cent since because I retired. And when I ⁓ retired from there, I was sort of ⁓ wanting to do other things besides manage real estate and, you know, fix toilets or hire managers or whatever was required to take care of that. So, in.

selling real estate, I realized there was going to be a big tax problem. And I’ll give you an example. It doesn’t necessarily be totally what I occurred because I had a large number of real estate ventures. But my first one was a fourplex that I purchased for $140,000. And let’s just assume that 20 years later, it was worth a million.

And, uh, as you know, from the accounting side of things, you get to depreciate the building out, but not the land. And so I attributed the land to the $40,000 and depreciated out the a hundred thousand dollars over the next few years against taxes. And so when it came time to sell the property, let’s say it was worth a million dollars. The only basis in the property was the land of 40,000 bucks. That meant when I sold it.

I would have a $960,000 taxable gain.

That was disturbing to me to realize that I was going to lose maybe a quarter of the investment to taxes. So I explored what could I do because in life people make money, but money makes money. So you got to keep the money making money when you sleep at night. Otherwise you have to have a job. And so, ⁓

I learned about the 1031 exchange option, is the section of the IRS code, which allows for these kinds of transactions to roll over and defer taxes. There’s only one way, and I’ll ⁓ address that later, how to avoid the tax on that. And it’s not a pleasant way, but you roll the money over, which means when you sell the property for

million dollars now you have to go buy another piece of property worth more which puts you into a higher bracket yet eventually potentially and so what I did was I didn’t want to do apartments anymore really and I still wanted my money and so I searched around and found a

IRS approved device called the Delaware Statutory Trust. And over the years that I’ve owned Delaware Statutory Trust, commonly called DSTs, I learned real estate professionals, accountants, lawyers, commercial people. In fact, one study showed that only 11 % of them have ever heard of a DST.

And, the advantages of it. And in my years of owning them, I’ve talked to a lot of people who should know. fact, I did a previous podcast with somebody that was a commercial real estate ⁓ broker. And he didn’t know about it. And he had been doing that for 16 years, if I recall correctly. So it comes down to what is a DST.

Well, it’s a legal entity that’s created initially under the laws of the state of Delaware called a statutory trust. And it’s been operative for some 25, 30 years. ⁓ So the IRS approves it. And essentially what it is is in your money rolls over not to another.

Piece of property that you own outright, but it rolls over into a trust where other people aggregate their money together. And so there are some real advantages and disadvantages of doing things that way, which I will cover. ⁓ DSTs are functional in all 50 states. And ⁓ while Delaware may have been the one that initiated it, other states

have also come up with their own statutory scheme. And so it’s approved. It’s not some slide around the corner device of avoiding taxes.

And in fact, ⁓ it defers taxes because someday, you know, all that’s going to get liquidated. And I will address that you may pay taxes on it if you take it at that point in time. And it may be a bigger amount because, you know, ⁓

The government always seems to win on taxes with one exception. And that is if you own it and die, kind of an unpleasant thing about ownership. If you die, your heirs get a stepped up basis. Now, most people will understand that. can cover it if it’s not clear. So it all comes down to the government approves this scheme and, ⁓

The essence of it is that you keep more of your money working under the theory that money makes money than if you pay the taxes and lose that amount of money. And so ⁓ I listed for myself ⁓ some of these things. In fact, I’ve written a book about this that I’ll publish. because it’s, but it’s all over the internet. You don’t need my book. You know, just get in and do the research there. It’s a…

tax-deferred strategy, it’s because when people sell real estate, they’re probably gonna face one of the highest tax bills they’ll ever see. For example, I was saying if that $140,000 piece of property inflated to a million dollars in 10, 15 years, then I was gonna face a

$160,000 tax occurrence, which would be in say a 25 % range, somewhere around 250,000 bucks that you lose the taxes right up front. So the other thing that’s great about a DST, and maybe I should describe what happens to the million dollars.

You find a sponsor and they’re all over. These are all financial people and ⁓ people, you know, like to have a little bit of the money spill their way when it passes through their hands, which is fair. ⁓ But ⁓ DST is approved in all 50 states. It’s a federal law ⁓ that’s governed by state property law. And ⁓ Delaware started it, but

many, many States have them and there are many so-called sponsors out there. Go on the internet, put in DSDs. There are probably 50 of them that’ll prop, uh, prop, uh, pop up for you. As a matter of fact, the last time I looked at it, which was like 2024, there were actually 50 active DSD sponsors out there. So, and big major, you know,

financial organization. So this isn’t your neighborhood guy with his latest deal. So ⁓ what happens is you take in the example I’ve been using of having the million dollars, you give that to the sponsor. The sponsor aggregates that and as an example ⁓ with let’s say 30 other people that are doing the same thing.

So now they have $30 million and the trust DST, the Delaware Statutory Trust goes and buy, let’s say a $60 million property, which is a 50 % LTV. And then they’re managing that for you. And so you basically have a fractional ownership and a prepackaged investment. You don’t have to go hunt something down.

And it’s institutional quality assets generally. And with all investments, none of them are 100 % guaranteed because there’s risk in every investment. But the point is

take the $30 million and let’s say they buy a $60 million property. In their operation, they’re paying off the $30 million loan. And then…

The trust exists for a period of years, depending on the management, maybe three, five, seven years, when the trust may flip the property. Let’s just take as an example, a five-year flip. Well, during the time that they’ve been paying you your, let’s say, five or 6 % on your million dollars every month, which at 6 % on a million would be somewhere around…

$5,000 a month, which is spendable. ⁓ then, ⁓ if they flip it in five years, they would have paid down their $30 million loan. Some, I don’t know how much, let’s just say $3 million. Well, that $3 million accrues to your benefit and

then the property probably inflated, which is why they’re selling it. Say it inflated to $70 million. So there’s a $13 million gain that gets shared back basically to you and your interest. And then you can roll that over into another DST, which is again, a tax deferrable deal or by the way, I have some DSTs so.

it’s experience not guessing, you can take part of the DST out, pay the tax on it, and put the rest back into another DST if there’s a change. So ⁓ one of the problems that happen if you don’t do a DST, if you’re trying to do a straight 1031 exchange is you’ve got very precise rules, and if you violate the rules, it’s like,

football game, you know, you get penalized. And so what those are, the basic rule is if you’re doing a straight 1031 exchange and a DST meets all these requirements, like kind property, 45 day identification and 130 day closing period. So you have time pressures, you got to find the suitable property and now you’re back into managing new property again, which is what I wanted to avoid.

So 1031 exchanges are great for retirees and professional busy, busy people are just, you know, going from active involvement into passive involvement. And there are big assets like apartment complexes, medical offices, distribution centers, even government buildings you own there. Some of the DSTs I have are actual

ownership of producing wells, not exploration, which is risky, but they know what the production is. So they’re producing and, so you own part of the production, which also gives you a depletion allowance tax credit. So there are different things that you can do that. They’re all pre-structured offerings. So, you know, you don’t have to go invent something. It’s there.

Debt’s already in place. You’re not personally liable on the debt. You get regular distribution and usually it’s a stabilized asset. ⁓ Some things about it is you don’t have to negotiate the loan. ⁓ That’s done for you. ⁓ You just don’t have a management problem there. ⁓ You also, it’s illiquid.

Now it’s not a stock that you can buy and sell. You, it’s not a market out there for that. I’ve always wanted to create a market, but you know, there are too many. It’s so difficult to do. ⁓ but, but you can sell them because there are people that will buy your interest. I’ve had offers on mine and, and, ⁓ so, but it’s not like a stock market. can’t easily sell the.

things, you’re also outside of the decision-making authority when you do that. so ⁓ that’s basically the outline of how DST works. And ⁓ from there on, you just educate yourself. And it isn’t like there are one or two of them around. think ⁓ I was talking with

one of the sponsors and he thought there were ⁓ over $80 billion in DSTs already existing. So it’s a significant amount. The other thing that we were talking about earlier is ⁓ I’m surprised that it’s not well known in the financial area.

Scott Bursey (21:00)
That is an excellent breakdown.

I am too. And I gotta ask you Ray, given your experience in high stakes litigation, what is the single biggest liability risk that you see real estate agents consistently underestimating in their daily operations?

Ray (21:29)
Well, it is such a complex area to talk about. They all have risk. Now, the greatest risk.

Well, from the standpoint of what we’re discussing here, the greatest risk is probably advising your client.

Not advising your client about a DST. The reason is, is because if you’re a somehow assisting him somehow in the transaction and he later finds out he could have saved 250,000 bucks, he’s going to look at you and say, why didn’t you help me in this transaction? And so people need to be educated on that because you know, you can’t offer something you don’t know anything

And if you’re holding yourself out as a

real estate professional, then perhaps you should know about the tools of a real estate professional.

Scott Bursey (22:31)
Absolutely, and I gotta ask you this as well. It’s been on my mind since we booked you, How should real estate professionals evaluate their current heirs and omissions policy to ensure that they are covered against major claims, especially considering the president set by large judgments like the one that you secured?

Ray (22:54)
Well, ⁓ you know, I was ⁓ one of the things that we didn’t talk about earlier was I do a lot of expert witness work or did. ⁓ And ⁓ the reason is, is because there’s always the coverage issues that come up ⁓ under facts of the policy.

Because if you could sell a policy that would cover everything, nobody could afford it. So every policy has conditions. These are the things we’ll insure. And then they have exclusions. We’re not going to insure this stuff. And ⁓ so that falls heavily into litigation. And so how do you… ⁓

How do you as a real estate ⁓ person, you know, protect yourself in that area? You have a good agent that explains it to you and you talk to him about your concerns and the risks. Because again, a policy can’t cover everything. so, ⁓ insurance is, you don’t buy it because… ⁓

you’ve liked it in that sense, you buy it because you can’t afford not to have it.

Scott Bursey (24:19)
Sure, understanding policy language is clear. Clearly, that’s something to gloss over,

Ray (24:30)
Well, when I was employed with the insurance company, they asked me to ⁓ make coverage decisions. And so I would write that. I recall I wrote in the space of, think, I don’t know, two or three years, whatever it was, I probably, I think I wrote 950 coverage opinions on what is covered and what isn’t covered on, you know, all kinds of

policies, liability to property coverage, because there’s a lot of risk on that stuff. And so that’s over in the insurance side of things. Here on the DSTs, we’re talking about protecting your, you know, being able to advise your client on high dollar investments and high dollar exposures.

Scott Bursey (25:27)
Absolutely. And Ray, I wish we had more time. We’ve covered a lot of ground here today. And I know people are going to want to tap into your brain. What is the best way for them to reach out?

Ray (25:42)
My email, ⁓ [email protected]. I have a website because I, as we discussed earlier, I published a number of books and you can find those books on Amazon. They’re actually on several different platforms, but Amazon’s the easiest under Raymond B. Johnson. ⁓ happy to talk to people. ⁓

done a lot of expert witness work over the years for 20 or 30 years, probably on coverage of insurance policies. ⁓ so I’m not very active anymore because I play too much pickleball and ⁓ ride my bikes and stuff. But the ⁓ point being, I’m happy to discuss it with people.

Scott Bursey (26:39)
We need to have you back on the show very soon. Thank you for joining us today,

Ray (26:46)
Happy to do so. Thank you.

Scott Bursey (26:49)
And for our listeners who see and appreciate the content here, if you kind of vibe or found some gems in this episode, do us a favor, hit the subscribe button. We’ve got a heavy lineup of guests, just like Ray coming your way in the near future. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.