Turn Rental Properties Into Passive Income | DST Real Estate Investing Strategy Breakdown

Raymond Johnson (00:00)
so I sold the fourplex for a million dollars, and so my basis for taxes on that is forty thousand dollars. Yeah, that means my taxable capital gains is how much? 960,000. Wow, okay.

What is the tax on nine hundred and sixty thousand dollars? Well, it varies depending on who’s in power and various things, but let’s just say it’s a third, 30 percent. Sometimes it can be higher, sometimes lower, depending on various taxing schemes. So that means when I sold my property for a million dollars, I knew I got to keep.

40,000, because that’s the basis, but all of a sudden, $160,000 is subject to in this case 30% capital gains. How much is that? 30% of $900,000 is $300,000, and the 60 is another 30% is 20. I have a tax bill of how much?

$320,000, right?

Quentin Edmonds (02:56)
Hello, everyone. Welcome to the Real Estate Pros Podcast. I am your host, Q Edmonds, and I am excited to be here today. I have a fantastic guest, and this gentleman has wrote a book. And this book.

It’s gonna help people. It’s gonna help a lot of people because the reality is eleven percent of the real estate professionals, CPAs, attorneys, and commercial developers, only seven percent know about the lucrative option that this gentleman is gonna talk about. And so I’m so excited that he’s here. I’m excited that he’s gonna walk us through and talk to us about DSTs. And so I am so excited to introduce you all to Mr. Raymond Johnson. Mr. Raymond, how you doing today, sir?

Raymond Johnson (03:41)
Doing good, thank you. Good.

Quentin Edmonds (03:43)
Good

and let me apologize right off the top because Ray, that’s the name you said I could call you, so that’s the one I’m gonna go with. I apologize, Ray. I’m so glad to have you here today. I’m so glad to have you on the show, sir.

Raymond Johnson (03:57)
Well glad to be here. Absolutely.

Quentin Edmonds (03:59)
Absolutely.

So listen, this listen, I want to I want to dive right in. You know, I want you to tell the people what’s your main focus these days? Help people understand kind of what you’re doing right now.

Raymond Johnson (04:58)
Well, there are many main focuses, but this particular one is one that can make people a lot of money or save a lot of money for the clients. And it is not some obscure thing, it’s just not well known. And just about everybody that’s in the real estate business or has a tangent activity with it, such as attorneys, CPAs, accountants.

even commercial real estate developers or even I run into a lot of my acquaintances that own real estate and are getting older and are thinking about selling the rentals that they have. And so almost everybody is very familiar with what’s known as 1031 exchange, which is a section of the IRS code.

That allows taxes to be deferred under very strict and rigid rules. And so if you play the game like in basketball and football, and you follow the rules and you get the results. And so this is a subset of 1031 exchange authorized by the IRS. This is not some offshore game.

To play to defer taxes. This is a very legitimate strategy written directly into the federal tax code, you know, complete with detailed implementation requirements and the guidance to do so. And the formal name for these are called DSTs or Delaware Statutory Trust. And what that means is that this originated in Delaware, who does a lot of

you know, they’re the icon initially for all of corporate activity. And so they proposed some I’m estimating here twenty-five or thirty years ago, that there could be a trust. and they enacted a law there, which is then called the Delaware Statutory Trust Scheme.

Since that time, many, if not most all states have adopted this form of it. In fact, my notes are that it’s approved and recognized, certainly authentic authorized in all fifty states. Let me first of all describe a typical scenario that requires a 1031 exchange consideration.

In fact, I can use one of my properties. my first property that I purchased for rental was a fourplex, and I paid a hundred and forty thousand dollars for it 30 years ago or whatever it was. And in the tax accounting handling of that, everybody is familiar that you can depreciate out.

Part of the property. And what you do is make a division between the land, which is not depreciable, and the building which wears out and is depreciable. Yeah. And so I did that also. I assigned $40,000 to the value of the land and $100,000 to the value of the of the building. So

With the depreciation schedule, as I recalled being in force at that particular time, I could depreciate 10% of that. So I could depreciate it ten thousand dollars a year against the income of that property to offset taxes, which is how, of course, 1030 or or the tax law at that point was and still is. So at the end of 10 years.

When I got around sometime later to sell it, I had depreciated out the whole building. And so what would be my basis in taxes for that, do you know?

Quentin Edmonds (09:20)
No, talk to him.

Raymond Johnson (09:21)
Forty

thousand dollars it’d be the land because it doesn’t depreciate, and so I sold the fourplex for a million dollars, and so my basis for taxes on that is forty thousand dollars. Yeah, that means my taxable capital gains is how much? 960,000. Wow, okay.

What is the tax on nine hundred and sixty thousand dollars? Well, it varies depending on who’s in power and various things, but let’s just say it’s a third, 30 percent. Sometimes it can be higher, sometimes lower, depending on various taxing schemes. So means when I sold my property for a million dollars, I knew I got to keep.

40,000, because that’s the basis, but all of a sudden, $160,000 is subject to in this case 30% capital gains. How much is that? 30% of $900,000 is $300,000, and the 60 is another 30% is 20. I have a tax bill of how much?

$320,000, right?

Wow. Okay, so this property that I just sold and happy about for a million bucks is really how worth only like what six hundred and seventy thousand dollars to me, right? That’s what I get for it. That’s a problem, isn’t it? Does anybody want to give up thirty percent of their gain?

Quentin Edmonds (11:25)
Yeah.

Yeah.

Raymond Johnson (11:50)
Okay, well the IRS is like the law of the Lord, I guess, and that is blessed be the name of the IRS because it giveth and now it taketh. But here we are with the giveth side of it, and they do it through the 1031 exchange option. Okay, what does that mean? Well

That means that if you follow the rules, and essentially to simplify it, is you take your million dollars, you now have to go buy a property worth more than the million dollars to be able to defer that 320,000 bucks we’re talking about. So then they let you roll it over. Okay. But to do that within

Forty five days of this and a hundred and eighty days of that and the very specific rules that they have. Well, first of all, you can’t take possession of the money. You use an intermediary that helps you go buy the property that you have designated that now you want to keep doing, right? Right. Or what’s the option if you don’t do it?

Quentin Edmonds (13:07)
Talk to me.

Raymond Johnson (13:09)
The option is you lose three hundred and twenty thousand dollars, right? So most people are motivated to go ahead and do a 1031 exchange. Yeah. That means they’re gonna go buy a more expensive set of apartments and keep managing apartments, fixing toilets, hiring managers to do it, arguing with the feds on whether people can have pets in their apartments or not. you know, I had that sort of deal going on.

Quentin Edmonds (13:13)
Wow.

Raymond Johnson (13:39)
in one of my apartments because this person wanted her comfort pig yeah in the apartments. Other people didn’t like that very well. You know, you lose tenants that kind of way.

So those are the problems that with the traditional 1031 exchange. And so when it came time for me to sell all my apartments, I hunted around and continuing with the

Example that I’m using, the million dollars now can be put into a Delaware statutory trust. And and and that then I get credit for the full million dollars, right?

So what is a Delaware statutory trust? Well, it’s just that it’s a trust. And so here would be an example. You put your million dollars in with

into the trust the trust goes and buys a sixty million dollar property because it’s got a million dollars from twenty-nine other people so it has thirty million dollars that it can put down and buy a sixty million dollar property right yeah and what is that LTV that’s a 50% LTV loan to value so they

Put down thirty million dollars and they borrow thirty million dollars and buy the sixty million dollar property, right? Yeah. Okay. So they’re the the trust is what owns that property and the managers of it have it calculated out so that they can make some money. And typically my million dollars they’ll pay six or eight percent annually. So now my million dollars is paying me sixty thousand dollars a year or five thousand dollars a month, right? Yes, sir.

Okay, so see what’s happened here is I’m no longer fixing toilets, hiring managers, fighting with the EEOC on whether a pig can live in my apartments or not. It’s now been converted to passive income. That means what’s my job now?

My job now is on the tenth of the month to look at my checking account and say, my five thousand dollars is there. Let’s play more pickleball. Or boat some more or fly your airplane or whatever you want to do, okay? Yeah. That’s your job nowadays. so it converts active to passive income. Yeah. Now, let’s finish the rest of the example.

So if you’re now invested in this DST that owns a sixty million dollar apartment and they’re paying it off because they got to pay that other $30 million loan, then you over time are also increasing your equity because they’re paying that down, plus the property generally inflates.

So let’s say five years later they sell it for seventy million dollars, but they’ve paid down two million dollars on the loan, that means now your share of the gain is thirty two million dollars. you know, your proportionate share of that g is of thirty two million dollars is what you gain. So your money’s grown a little bit during that time too in the right scenario, as well as having monthly income.

And this is all because of what? A DST, a Delaware statutory trust, because somebody was smart enough to find that and advise you for it.

Quentin Edmonds (18:26)
Okay.

Well sir, thank you. Thank you for taking us through what a Delaware statutory

Raymond Johnson (18:34)
Let

me finish a little bit more of why this is good. So everybody is probably gonna die.

Quentin Edmonds (18:38)
Yeah, yeah.

Raymond Johnson (18:47)
nobody wants to talk about it, but it’s a reality. And so there’s a lot of thing called estate planning that goes into it. And one of the current advantages of this is that when this DST passes to your children, normally, you know, there’s all these taxes that have to be paid, but they

It’s because remember the basis in our example is still forty thousand dollars, right? So now if the over the years if that’s risen to a value of say one and a half million dollars, can you see the tax bill that could happen to your heirs?

Quentin Edmonds (19:35)
Absolutely.

Raymond Johnson (19:37)
With

one exception. The IRS allows heirs to have a stepped up basis. What does that mean? That means that on the date of death the property is valued at what it is that way, and that becomes the basis for your heirs. So essentially they could get one point five million dollars tax free. Yeah.

Quentin Edmonds (20:01)
Well, yeah.

Raymond Johnson (20:02)
So nobody lives to die in that regard to you know, but it is part of the planning process. Yeah. So Delaware statutory trusts are an excellent vehicle to consider, but you need to follow the rules, such as in a basketball game or football, in order for the IRS not to blow the whistle and call a foul.

Quentin Edmonds (20:30)
Sir, yes, sir. Well, Mr. Raymond, thank you, sir. Thank you for taking us through what the Delaware Statutory Trust is. I appreciate it. I know people that’s listening, they are definitely intrigued. And so thank you for sharing that nugget. What’s next for you, sir? Like, what’s what what is your next goal? What are you looking to solve at scale next, sir?

Raymond Johnson (20:53)
everybody has plans. Probably the next is to buy a better pickleball paddle. Or people can get a hold of my book.

Quentin Edmonds (20:59)
There you go.

It’s still a little blurry, yeah, yeah. So say say the name of it for it.

Raymond Johnson (21:11)
A Guide to Using Delaware Statutory Trusts. I realized very few people were aware of this, and I’ve been surprised. people have really glommed onto this book. Yeah. And it sets all this out how to do it. Although with the typical disclaimer in the book, I’ll if you’ll allow me to read it, I’ll say there’s a bumper sticker that reads government philosophy.

If it ain’t broke, fix it till it is. And so the information here is a creature of government rulings and therefore they need to check and this is a guide. It’s not a definitive answer for it. You should with you know thousands of dollars or hundreds of thousands of dollars at stake, you should use professional help and current, not just because a book was printed in two thousand twenty-six.

Quentin Edmonds (22:10)
Absolutely, absolutely. So once more, give us the name of the book one more time. I because we can’t see it clearly. I want to make sure we got it the name clearly.

Raymond Johnson (22:20)
It’s called A Guide to Using Delaware Statutory Trusts as a 1031 Exchange Option by Raymond B. Johnson. It’s available on many platforms, notably Amazon, where I have about six other books currently available, also ranging from a children’s book called How Long Is Your Leash? Where a little girl gets a puppy.

And they both grow up together and the more self discipline they have, the leash gets longer until there is no leash. Yeah. Yeah. Whether ’cause they have self control or a novel that I have on there about the long con and narcissism in a intimate relationship and then four or five other books on various other subjects and so they seem to be selling well.

Quentin Edmonds (23:10)
Absolutely,

absolutely. Well, sir, I definitely appreciate you coming on. I do you you have a website? ‘Cause I just want state it cleanly, if someone wanted to get in contact with you and connect with you, how could they go about doing that?

Raymond Johnson (23:26)
probably my email [email protected].

Quentin Edmonds (23:31)
Yeah, gotcha. Gotcha.

Raymond Johnson (23:33)
there is the website. there’s RaymondBJohnsonBooks.com and and there’s a lot of stuff out there on that particular thing, but directly the email is probably the best. Gotcha. I don’t sell this stuff or anything. I just ended up finding out how it was so I could use it for the rest of my properties. Yeah.

Quentin Edmonds (23:55)
Yes, sir. Well listen, Mr. Raymond. I I I appreciate you coming on. Thank you for your time. Thank you for your story. Thank you for your mindset. Thank you for coming on and sharing some real gems today. I appreciate you coming on today. Absolutely. Well listen, y’all heard Mr. Ray. Please look in the show notes. His information is in the show notes. Connect with him, buy the books, but definitely make sure you’re subscribed here.

Raymond Johnson (24:11)
Thank you kindly.

Quentin Edmonds (24:23)
I promise you, we’re going to continue to bring on amazing people, just like Mr. Ray. So, sir, I say thank you again. And everyone else, listen, y’all have a fantastic day.