Deferred Sales Trust with Brett Swarts

Solving Capital Gains Tax with the Deferred Sales Trust, with Brett Swarts

Do you want the freedom to sell real estate at the top of the market and wait to invest until the right time, without having to rush cash into a new property with a 1031, but still be able to defer taxes? A deferred sales trust may be for you. In this episode, we’re talking with Brett Swarts about why investors need to know about the Deferred Sales Trust.

If you want out of the box solutions to capital gains, a rescue from a failed 1031, or to find out how to save capital gains taxes over the deferral limits, so you can maximize your real estate investing progress and momentum, in your own timing and on your own terms … tune in below!

What is Capital Gains Tax?

Capital gains tax can seriously reduce profits from your investments when you sell them. And there is any number of reasons you might be selling an investment. On investment real estate, you pay capital gains taxes on appreciation over your cost basis and the recaptured depreciation of the asset sold.

However, the tax rate for capital gains is why strategies exist to defer and diminish their effect. These are legal tax incentives that the IRS actually encourages entrepreneurs and investors to use, to continue to stimulate the economy. If you can overcome a big payment now, you set yourself up to take advantage of bigger and better opportunities.

You’ve likely heard of the 1031 Exchange, which allows you to defer capital gains tax. However, the 1031 has limits. You have 45 days to identify the new property, and 180 days to close. And, it requires an equal trade—a like-kind asset of equal or greater value. When it makes sense, it’s a great provision, but results depend on the market.

Then, there’s the deferred sales trust—which allows you to play the long game.

What is a Deferred Sales Trust?

When investors sell their properties, a 1031 Exchange is a popular choice and allows them to transfer ownership without realizing capital gains. However, in a market like 2008, it isn’t nearly as effective. Investors who had taken on too much debt and overpaid for their properties were finding themselves selling high and then buying high.

If a 1031 exchange doesn’t seem right for you, or you’re unable to complete your exchange, you won’t want to sit on your cash. Otherwise, you’ll be paying up to 20% in federal capital gains taxes, plus there could be additional state and Medicare taxes, depending on which state you live in. On top of that, you’ll owe depreciation recapture taxes at ordinary income tax rates.

With a DST, you work with an outside trustee to sell the property within the trust. Rather than receiving a big payout upon closing, the money goes into a trust. From there, you’re only taxed as the money is distributed. The funds from the sale allow you to diversify your investments, giving you the chance to wait for the right deal. There’s no pressure to purchase another property. Where a 1031 is quick, a deferred sales trust allows patience.

By setting up a trust, a trustee can re-invest the money from your sale in a diversified portfolio, use up to 80% of the funds to purchase new properties (without it needing to be of equal or greater value), and provides liquidity.

Deferred sales trusts put time on your side.

How Does a Deferred Sales Trust Work?

A deferred sales trust can seem overwhelming with all the moving parts. Fortunately, you don’t have to do it alone. The IRS requires that you have a 3rd party “trustee” to oversee the management. This means you can partner with professionals, such as Brett Swarts, to find a buyer, make the sale, and set up investments.

And if you find a real estate deal that you’re interested in, you can partner with your trust as an LLC to take the deal. You can do so immediately, or ten years down the road—you have the freedom to make the call. And you have more investment options with a deferred sales trust, unlike a 1031 exchange.

Brett Swarts - Deferred Sales Trust

When Should You Put a Deferred Sales Trust in Place?

If you are selling an investment property, you have three windows in which you can set up your trust:

  • at the close of escrow (as long as that language is put in place to establish the trust before the buyer removes all contingencies)
  • day 46 (as long as you send to a qualified intermediary)
  • and day 181 of a failing 1031 Exchange

If you attempt a 1031 exchange and can’t find a property—or otherwise don’t think you can complete the exchange within the 180-day window—your qualified intermediary can move it to a DST. That gives you more time to find a suitable property. Otherwise, you can end up paying the taxes you were working to defer.

Even if you feel that a 1031 exchange is a better fit for you now, being informed about DSTs can give you an efficient exit strategy instead of a tax nightmare.

Commercial Real Estate and Syndication

If you’re investing within a commercial real estate syndication, selling your property can be a headache. In a traditional syndication, the whole group has to agree when moving into a new deal. With a deferred sales trust, you can have a seamless move, and anyone who wants out can take their cut, pay their taxes, and be done. Not everyone needs to agree on the outcome, making it an efficient move.

A DST Gives you Options

Whether the real estate market is down, you’re looking to leave the market or you’re shifting from a failed 1031, a deferred sales trust gives you flexibility. It’s also a useful tool in your estate planning, as it can be a part of your living trust and pass on to your beneficiaries.

The real estate market isn’t always roses. Just like any asset class, it moves through a cycle. Don’t feel like you’re backed into a corner if you want to sell and don’t know where to reinvest right away.

About Brett Swarts

Brett Swarts is the CEO of Capital Gains Tax Solutions and every year equips hundreds of business professionals with the Deferred Sales Trust tool.

His experience includes numerous Deferred Sales Trusts, Delaware Statue Trusts, 1031 exchanges. He has also closed $85,000,000 in commercial real estate brokerage transactions. Brett is an active commercial real estate broker and investor himself with experience and holdings in Multifamily, Senior Housing, Retail, Medical Office, and Mixed-Use properties.

Brett is a licensed California Real Estate Broker and holds series 22 and 63 licenses. He is formerly an associate at the largest Commercial Real Estate Brokerage firm in the country. This blessed him with years of experience and hands-on training from some of the best in the business.

As a trustee, he is passionate about educating on capital gains tax deferral with a Deferred Sales Trust. He also passionate about helping others gain freedom from feeling hostage to a 1031 exchange. He helps investors divest and reinvest, all capital gains tax-deferred.

Brett Swarts is considered one of the most well-rounded capital gains tax deferral experts and informative speakers on the West Coast. He challenges his audiences to lean into multiple capital gains tax deferral strategies, develop a passive cash flow wealth plan of their own, and preserve that wealth. Brett lives in Roseville, California with his wife, Melanie, and their 4 daughters and 1 son.

Find Out More About Deferred Sales Trusts

Everyone’s situation is different. Before making any tax decisions, consult with your personal tax consultant or CPA.

Visit Capital Gains Tax Solutions to connect with Brett Swarts about Deferred Sales Trusts or get his book, Sell Your Real Estate of Business Smarter in 9 Steps to learn more.

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Rachel Marshall

Rachel Marshall

Rachel Marshall is the Co-Founder and Chief Financial Educator of The Money Advantage. She is known for making money simple, fun, and doable. Rachel helps her clients create time and money freedom with cash flow strategies, Privatized Banking, and alternative investments. Rachel is the co-host of The Money Advantage podcast, the popular business and personal finance show. She teaches how to keep more of the money you make, protect it, and turn it into cash-flowing assets.
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