Looking for a way to reduce your capital gains taxes? In this episode, Steven highlights three strategies that will help you do just that. Discover how to make full use of the 1031 exchange, Deferred Sales Trust, and Bonus Depreciation approaches.
Looking for a way to reduce your capital gains taxes? In this episode, Steven highlights three strategies that will help you do just that. Discover how to make full use of the 1031 exchange, Deferred Sales Trust, and Bonus Depreciation approaches.
Key Takeaways
Steven Pesavento 00:05
This is the Investor Mindset podcast and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode, we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:31
But a couple things that are really important for you to understand is how you can leverage this kind of mindset, this way of thinking for your clients to actually get more listings, and drive people down that path for them to be ready to make that decision. Because when you start understanding some of these tools that are available, it can change the game for you. So one way that this plays in is something called the 1031 exchange. Who knows what the 1031 exchanges in here? Raise of hands? Who doesn't know what the 1031 exchanges? Okay, so the 1031 exchange from a very high level is essentially, it's in the tax code. And as soon as a tax was put on capital gains, immediately, this was added to the tax code within a few months. And so it's a way for you to exchange in kind property, one type of real estate for another type of real estate. So why is that beneficial? Because you can pay no gain, you can pay no taxes on that. So why is that beneficial, because if you sit on a property for 10 years, and you've owned it for those 10 years, well, it's probably gone up a lot, think about how much appreciation has happened in Denver in the last 10 years, you probably bought a property for 200,000, it's worth a million. And now you got to pay 15 to 25%, or God forbid, next year, it's going to be higher, you're gonna have to pay more in capital gains, because of some of these new regulations and taxes that are going to be coming out on that. And so this is important because some of the clients you're going to run into are going to be interested in selling their house, but they don't want that game. And they don't want to exchange it into another property because they don't want to be the manager anymore. Because they had the same epiphany that I had years ago, where I thought after buying and flipping 200 houses while living in a different state, that this is crazy. And I don't want to deal with this. This is awful. And so some of those people have gotten to that point, maybe they're older, maybe they had a bad experience with a rental property and a tenant, they got burned, whatever that is they want to get out. But they don't really want to pay taxes. So it's a great strategy that you can bring your clients. And you can help them either maybe exchange into something that's 100% passive, like a triple net lease, on a commercial building, they exchange into that it's 100%, everything's managed by the tenant or by a property manager. Or they can exchange into the type of deals that we do, where they're 100% passive, because essentially, the way that our firm works is we go find these properties. We're experts in these niches, and these different cities, we buy property in Denver, Dallas, Jacksonville Phoenix, for property in Atlanta, we're buying properties all across the country, we just closed on a deal two months ago, a 280 unit property and in Arvada, that $71 million purchase, most people won't be able to buy that. But they can buy shares in at the same way you buy shares in a company. So we have investors invested in that for 100,000, we have people exchanged in a million dollars, right. And so by exchanging in, they didn't have to pay taxes on that income. So super valuable to know about that.
Steven Pesavento 03:39
The other one that's really valuable is something called a deferred sales trust. You might also hear this, it's different. But you hear it as a DST, you might also hear it as a Delaware State trust, different, very important, they're there. They're different. There's different benefits. Deferred sales, trust is better, in my opinion, but I'm not a tax professional. So I always encourage you guys to seek your own. But the benefit of this tool is the A essentially transfer all of those assets into the trust, the trust that owns the asset, when you sell it all the money goes in the trust. So never comes to the individual, which means they never get the game. They don't have to pay taxes on that. Well, they have to pay taxes when they receive that money. So with the deferred sales trust, they're required to receive payments on a monthly or quarterly basis. But you can actually defer those back into the trust and reinvest them. But the key with this is they usually people out to spend one to 3% up front to set it up. And then like 1% a year, but you can see a pretty clear ROI breakdown of you know, where's it breakeven and if you invest that money again into the kind of deals we do, or back into, you know what the DST what's nice about is you can invest you can take that money and put it into crypto, you can put it into stocks, you can invest it all over the place. It's not required to go back into Real Estate. So that's a huge tool that can be used. And, obviously, you'll have to learn a little bit about this stuff before you go pitch it to your client. But just knowing that it exists, you can bring it up in that listing presentation be like, hey, you know, it sounds like your objection here to selling the house sort of signing agreement, as you're worried about the tax situation, if we could put together some professionals that could help you eliminate that, would this be something you'd move forward with today, there's something you're confident you want to do, right. And also you shift the conversation, you've solved their problem. And you can bring these kinds of strategies to them, whether it's referring them to a firm like ours, or whether you're saying, Hey, I'm gonna go find you another property for you to own and manage or something like this.
Steven Pesavento 05:46
But the third is bonus depreciation. So we talked about this initially, it's the strategy where when you buy real estate, because of the Trump tax plan of 2016, or something like this, they allow you to take 100% of that depreciation that's normally over 27 and a half years, they allow you to take it all up front, your one. So that's how you can buy something and invest 100,000 and get 60 to 80%, back or more, because we have deals where we're getting that depreciation, but then we've carved the way we've allocated that depreciation is more of it's going to the investors, because maybe it's some big private equity firm that's putting in all the money and they don't need the depreciation, or they're not looking for it. So there's ways that by clients investing into these kind of things, they can eliminate taxes themselves, it allows you to drive that listing for it. So if you guys are interested in keeping in touch, there's two ways to do it. Instagram at Steven pesavento. We're putting out content pretty much every day on investing on real estate on these types of topics. And then of course, we've got a podcast, which we do two times a week. We're always in the top 200 Business podcasts who've been doing this for about a couple of years, probably 280 episodes. So it's a great resource. A lot of it's on mindset, how to shift your beliefs, and the rest is on real estate investing and passive investment, things like that.
Steven Pesavento 07:20
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