One of the primary tools the ultra-wealthy use to defer taxes and maximize their investments in real estate is 1031 exchanges. This tax-advantaged strategy is unique to real estate, and today’s guest will be sharing how all real estate investors can leverage it. Brandon Bruckman‘s firm facilitates 1031 exchanges and DST investments for their clients. He has a diverse background in hedge funds, real estate, and consulting.
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Leveraging 1031 Exchanges And DSTs With Brandon Bruckman
We’re excited about our guest, Brandon Bruckman. He’s an Investment Advisor and Board of Insight Investment Advisors. We are excited to have him on. He’s got a cool background. We’re going to focus on the world of 1031 Exchanges and DSTs. The whole context for this show, Brandon, we’re looking at what are the strategies and tools that the ultra-wealthy are using in their investments around the world of alternative investments. Hedge funds, private equity and real estate are the largest of the alternative estimate world. 1031 is an amazing tool that’s been around for a while. A lot of wealthy investors use this as a way to defer taxes and maximize their ability to invest in real estate.
It’s unique to real estate. It’s one of the main reasons why the ultra-wealthy are in alternatives. It’s to be in real estate and to be in the tax advantage strategies that we’re going to talk about. Why is real estate so darn good? Forget the appreciation or the income idea, but it’s also the tax advantages. We have an expert here, Brandon, walking us through some of these opportunities.
I’m going to give some context to Brandon’s background. He’s focused on growing the 1031 and DST business for Insight Investment Advisors. He leads the marketing efforts and investment due diligence. Prior to Insight, he founded West Chapman and Co., which is a consultancy that helped clients grow their businesses by gaining insights through data. He’s assisted large and small businesses in a variety of industries. Even prior to that, he worked at a prominent hedge fund as head of fixed income financing and also was a healthcare consultancy before that. He has broad exposure and a cool career, including working in hedge funds. He is now into real estate and helping people place money. Brandon, tell us a little bit about your background and how you got to where you are, and the story and path to get there.
The only thing I haven’t done is be a lawyer or sell used cars. I’ll put that on a bucket list. First of all, thanks for having me on. It’s awesome to be with you. It’s been a winding road to get here. It’s interesting when I relive that and do the movie in reverse about how I walked through some of those things. When I think about why such a windy road, some of that is luck. Some of that is intentional but a lot of it is based around I like doing stuff that I find interesting. I’ve gotten so much negative feedback from that at some points in my career of like, “What is this resume that you have? What path are you on?” I’m like, “I don’t know.”
Speaking of reliving movies, you financed a movie at one point in there. Can we talk about that?
When I mentioned luck, this is a big luck thing. If I think about my experience of working at a hedge fund, it’s probably the most valuable professional experience that I’ve had. There’s a big difference between being inside the financial service industry and understanding how the machine works and being outside. I had such exposure there about how the sausage is made per se and those are interesting. No worries. Nothing illegal is going on there. Our firm had the SEC and we invited them in to audit the firm. It was a firm that was very high in regulatory standards, but it was amazing to understand how it works. I had the opportunity to sit at that hedge fund through the financial crisis. If you’ve ever seen the movie, The Big Short, I lived that story.
Part of what I was doing was around the subprime mortgage market and trying to understand and finance that for our firms. I went and watched that movie in a theater with my wife. She was like, “Get me out of here. It’s not entertaining.” I looked at her and I said, “These are the people who won this race in a big way and it’s still stressful.” There’s a lot of stress when you look back upon it too, but so much learning. Ben, you mentioned the movie thing and thinking about alternatives. A hedge fund is so wide open in what we can invest in. At one point, we did look at doing a movie deal and it was very interesting to understand how that works. There is no stone left unturned there. Frankly, you had to learn about and find ways that you could help the firm.
How did your path end up here at Insight?
A windy road there too. Unfortunately, when you’re at an average hedge fund, average doesn’t cut it in that space. Folks can look my background up. It’s called Stark Investments. At one point, it was a top 30 hedge fund in the world and no longer ceased to exist. As that firm was winding down, I was looking for interesting things to do. That led me to work with some friends and starting a healthcare consultancy. That is another industry I didn’t know anything about, but when you work at the hedge fund, people throw stuff at you almost every day that you don’t know anything about. You have to go figure it out.If you eliminate the 1031 exchange, it'll have a negative impact on the tax bill. Click To Tweet
It’s a valuable skill for people to learn to do that and teach themselves. We’re very successful in doing that, but happening in the background and how I ended up at Insight was I got connected with my partner in Kansas City named Josh Wright. He was an investment advisor. He was doing a lot of strategies with the investment advising book that looked like a hedge fund. He needed some help in doing some coding and thinking about those investment strategies. We got connected through a firm in Australia. They introduced us together. Go figure. It’s a small world and folks that are doing these things. We got connected and did a variety of projects together. Eventually, I got exposed to Josh’s ideas around 1031 and so I got to be part of that. I was like, “Let’s do this. Let’s run this at Insight.”
Insight Investment Advisors, as I understand it, investors hire you to find 1031. Most of your guys come to you saying, “I’m selling a deal and I want to roll it into another deal on 1031. Help me out.” You help them place their money from the sale into another thing. Is that correct?
There are two parts that we think about. One, if you think about the 1031 process holistically, top-down, it’s complicated. There are a lot of rules in there that are black and white. If you break them and get audited, you’ve exploded the entire exchange. I would say 2 out of 5 of our clients, without our oversight on that exchange, are doing something wrong. The number one thing that we’re looking at is to make sure that we’re following the rules and executing that properly. Two, it is about investors that aren’t the average investors. They are someone who’s managed real estate for 20 to 30 years. They want to perform a 1031 exchange, but they don’t want to manage real estate anymore. There are a variety of reasons that are pretty obvious in this environment. They say, “How can I do 1031, earn money and still defer tax? How do I do that?”
They want to shift from an active role to a passive role in the process.
How do I do that? What are the vehicles available to do that? How do I know if any of these investments or sponsors are writing these deals? How do I know if they’re any good or not? Our job is to figure that out.
Maybe at this point, we can jump real quick into what is 1031. Give us the snapshot.
1031 Exchange is a portion of the tax code that now allows investors in real estate to sell and buy a replacement piece of real estate or property in a tax-free manner. They’re avoiding or deferring capital gains tax, state taxes, depreciation recapture. There are a variety of other taxes that are in that bucket. On the average tax bill, we usually see an excess of 40% of the capital that’s coming off of that transaction. It could be a big tax bill if you held the property for a while.
As you guys mentioned at the beginning, a 1031 Exchange is a tool that the real estate investor and wealthy investors have been using for a long time. There wasn’t a class in school about this. I must have missed this because it didn’t exist. I didn’t know this was a thing when I was working at a hedge fund, so imagine that for a second. You need to be in this business to understand it. It’s an amazing tool.
What it allows you to do is you can sell your property and buy a replacement property. You have to do that in a certain timeframe. There are rules around this that you have to follow. The real basic rule here is you have 45 days from the time of which you close on the sale of your property to identify a replacement. There are a couple of different rules to do that. You have 180 days from that close mark to close on your next transaction. That sounds like a long time.
Forty-five is definitely quick in the real estate world. Take an example. I bought a $1 million apartment complex and I’m going to sell it now. I’m going to get $2 million, so I’m going to hit all taxes on $1 million income. I can 1031 if I take that $2 million from the sale and I roll it into another asset. It’s a non-taxable event and I carry forward my $1 million basis. Is that pretty much the gist of it?
There are a couple of key points in there that you said that I think is a tricky bluff all the time. In order to defer those taxes, you do have to invest those full proceeds. That $2 million has to go from property A to property B. You’re like, “Why can’t I just take $1 million out?” You can’t do that. You can partially, but you’re going to owe tax on a portion.
There was this article that came out about billionaires and how they avoided paying taxes. A lot of them have these appreciating stocks portfolios. The base of the trick is you let your stock appreciate. If you’re Jeff Bezos or whatever, you let your Amazon stock appreciate. You never sell the stock and so you never pay taxes on those gains. You borrow against your stock. This is the same thing. It’s like, “How are the rich not paying taxes?” This is a pretty powerful way. As long as you keep rolling it over into 1031, you never pay the taxes. It’s quite ingenious. It’s quite a powerful way to do it with some challenges. We’ve thrown out the word DST a lot too, the Delaware Statutory Trust. It’s a wrapper. It’s a technical implementation of the best practices way to do 1031. Is that accurate?
Yes, that’s right. There are a couple of different ways to think about this. One, the vast majority of 1031 Exchange transactions are someone selling or buying a building they own and manage. That’s most of the transactions, but the folks that hit our desks are going, “I don’t want to buy that next building. What can I do?” The easiest option there to get passive is the Delaware Statutory Trust. It’s what you described. That’s the trust that owns a larger piece of real estate. You become a fractional owner. However, in the eyes of the IRS, it’s an eligible exchange asset. From a tax perspective on an annual basis, it looks like you own real estate.
Let’s say you divide up an asset that you’re going to buy, maybe 100 owners. You buy 1/100th of that for $2 million. It qualifies for an exchange, even though you’re not the sole owner. The DST structures it so that you are the sole owner of a slice of that asset.
Brandon, could you break down a typical deal you see in the DST world? I think that’s going to be a very new topic. If someone’s familiar with 1031s, DSTs aren’t always the first thing that comes up as part of the options set.
Every single speaking engagement I do, I ask folks if they’ve heard of or done 1031. Invariably, every hand in the room goes up. I’m like, “Who serve a DST?” I’m looking at them like they’ve lost their minds. They have no idea. These are experienced real estate investors. They have no clue. The typical items that we see in a DST are designed and structured to produce income year one. They’re designed and structured to be conservative in nature. I caveat that with the products that have been designed to fit the folks that are investing now and vice versa, so 65%-70% of the space is class-A multifamily in class-A markets.
You see what return pattern you would expect out of those assets as opposed to you buying C-class multifamily in an off-market and doing rehab on it. They are two vastly different things. That’s what we see the most of, but we also see a lot of industrial. We see single-tenant retail, triple net lease type properties, self-storage, senior living. There’s a good variety of assets in this space. The best part about it for someone is like the $2 million example that you gave. The minimums on these investments are $100,000. You can quickly turn one building into 5 or 6 of these DSTs and all of a sudden, you’ll have a diversified portfolio of real estate. That’s a good aspect of the asset.
These 1031s can be daisy-chained. You can 1031, 20, 30, 40 times and you never have a taxable event.If it wasn't hard being a housing provider before, it's getting even harder now with the Eviction Moratorium. Click To Tweet
Some of our clients refer to it as a swap until you drop. Nevertheless, it is accurate. You can do this. You keep doing it forever.
Let’s hit this. Is the party over? The big news up in the industry is the potential end of 1031s. Maybe this is the first time you’ve heard about 1031. You are getting pretty excited about it. Unfortunately, a part of the President’s tax plan is to eliminate the 1031 loophole. That’s on the table. It’s far down the road yet, but what’s your perspective on that?
What a great 100th anniversary for the 1031 Exchange. You put it to death. It is out there as an item on the block to be cut. There have been great lobbying efforts done by various organizations to maintain the 1031 Exchange. When we think about it, it sounds like something that plays as well when you talk about it, “We’re going to close this ‘tax loop’ for billionaires.” Stick it to them. It sounds like great fodder for headlines. In reality, the people you’re sticking it to are our small landlords. In essence, they’re small business owners. Those are the people you’re sticking it to, in addition to farmers. Farmers utilize 1031 Exchange often. It helps to build and store their wealth. We all know the economic situation farmers have been facing over the last decade. It’s a huge struggle.
A lot of lobbying efforts have been focused on Democratic senators in states where there are lots of farms that say, “You’re going to do a lot of damage to folks in your state.” Moreover, there’s a study done by Deloitte who said, “If you eliminate 1031 Exchange, it’ll have a negative impact on the tax bill, not positive.” Even closing that loophole eliminates people like myself from that industry and I pay taxes. There are a lot of people that work around this industry who pay taxes as well. We’re gone. If folks don’t have a 1031 Exchange, they are not going to sell. The volume is going to go way down. People will do cash-out refi as you talked about borrowing Amazon stock. They’re going to pull cash out refi from the properties they own and are not going to sell them. Let’s think about the lack of turnover and transactions there as well as very negative. That message is being heard loud and clear. We’re very optimistic that 1031 is here to stay.
Who can forecast the political winds? I would probably tend to agree. It’s got an uphill battle to win. Let’s say it’s here to stay. Hopefully, it is. It’s a great way to defer taxes. One of the other incredible things about real estate and real estate investing and why billionaires focus on real estate with their core holdings is not just 1031s but also depreciation. The fact that if there’s a piece of land with a building on it and it’s a commercial building, you can depreciate the value of that building every year over 27 and a half years or something like that, where the land doesn’t depreciate. It offsets the cashflow income and so you have more cashflow than you have a tax liability. Cashflow is maybe $100,000 a year. Your tax liability is maybe $70,000 a year. It’s very good. In all of this talk about the 1031s disappearing, one of the positive things that are happening is this idea of cost segregation studies. You’ve been pioneering some of this work. Tell us how this works and what the current thinking is here?
Naturally, if you threatened 1031 Exchange, you threatened a sizable portion of our business. That’s problematic. We’re thinking about alternatives if 1031 does go away. There are a couple of different things that investors can think about in doing that. You can think about looking to sell and then looking to purchase another property or purchase a portion of what’s referred to as a syndicated deal where you would own a portion of a partnership. That’s not 1031 eligible. That’s problematic now, but in year one, what we’ve seen are two things. One, the cost segregation study that is creating more depreciation.
Explain what that is.
I’m not an expert in doing cost segs but in essence, you look in every portion and an item in that property and you’re setting different depreciation schedules attached to them. You’re pulling a lot of that depreciation you do in a year.
The idea is to accelerate depreciation. It’s an easy way to say, “We’re going to depreciate over 27 years. We’re going to depreciate 3% of the value of this property every year,” but you realize maybe the wiring, the plumbing, the windows or whatever can be depreciated faster. The idea is to accelerate as much of that depreciation to the front end of this investment. Maybe your $100,000 income, you have a depreciation of $90,000. Maybe that’s too much, but the idea is you can eliminate a lot of your tax liability through accelerated depreciation.
We’ve seen some of these deals have $0.50 to $0.75 of every dollar that you’re investing in the deal that comes out as a loss in year one.
If I sell a $2 million property, I could see $1 million in losses coming out of that in year one. The duplication of the taxable liability there is huge. It almost wipes it away if not all the way, if there’s enough juice to squeeze there.
The caveat of this is that you’ve got to find the right deal. They got to find a deal that can be accelerated.
Some of the rubs that were struggling with from the traditional 1031 Exchange investor who would do the 1031 and a Delaware Statutory Trust is estimating exactly what that loss is going to be in year one. It’s hard to do unless you perform the study and that doesn’t happen until the deal is closed. There’s an element of risk that the investor is taking in doing and performing that transaction. With that said though, producing those losses would be interesting in a year one scenario if you didn’t want to do 1031.
There are some folks that advocate for that because you are carrying an asset into the 1031 Exchange that has a very low basis. They say, “Even if 1031 Exchange is eliminated in 2021, at some point, do you want to do some tax management around the asset that you own now and raising the basis on your asset by investing in a new property?” Maybe you might want to do that. There’s tax mitigation or a holistic tax management strategy here that you can start to think about. I think it’s valid, but it is a good alternative to 1031. The last point you said and the biggest point is I just want great deals. I don’t care how they’re structured. I want folks to invest in deals that are good. That continues to be very hard.
They’ve got a lot of cash chasing fewer deals in this market. Isn’t it shocking how it was the exact opposite many years ago? It didn’t matter how good your deal was if you couldn’t find the money for it. Now it’s the opposite of everything. Talk a little bit about the market now, especially in 1031. What are you seeing and what are the drivers behind those changes?
Before he does that, I want to follow up on my last question. What percentage of deals do you think that there could be good cost seg, where cost segregation could get you those numbers? Is it 10%, 50%, 90%? What do you think?
That’s the rub that I don’t know. That’s the biggest issue. I don’t know what those losses are going to kick off in year one. It’s not just cost segregation. The other important point that’s driving a lot of these year one losses is through the 2016 Trump Tax Cuts, the bonus depreciation. It accelerated depreciation even further and faster. Combining that with the cost seg is producing the environment that we’re in.
In 2022, that bonus depreciation has to come off the books. It is scheduled to come off the books in 2022. It’s not something that can be automatic. It will be up to the House of Congress in resetting a law that would continue bonus depreciation. That’s what’s driving a lot of what’s happening there. It’s very hard to estimate what we’re looking at in year one loss. I don’t know what percentage of properties would qualify well for that.
One of the things I love that you guys do at Insight is that it’s very holistic. It’s not a one-size-fits-all because you guys have that financial planning background with this alternative and real estate edge. You’re looking at the whole picture. As you’re saying, the tax mitigation strategy down the road, where you’re at in your investment life cycle, your earnings in your career and those things. I love that you guys are building a strategy around your investors. Assuming that everything worked out perfectly with transitioning from selling a property at a nice gain into a deal that worked with the cost segregation. This is something that can’t be emphasized enough if this works because what you’re saying is you’re essentially getting a get out of jail free card where your basis now can increase without the huge tax liability that you may have.There is too much money chasing too few deals. Click To Tweet
The only aspect to think about on the negative is once the next deal sells and looks to roll when you’re looking to invest again after the initial deal, you are facing a tax liability on the appreciation of that asset. You have no 1031 Exchange possibilities. That is something to think about. Before, we mentioned the swap until you drop mentality of doing the 1031 Exchange with the DST. That’s valid. In stepping away from 1031, you eliminate your ability to do that.
It’s something for folks to think about. I think folks need to balance that out when they’re thinking about, “If I do want to pay taxes, when do I want to do that?” The emphasis seems to be earlier than later but it’s a decision to make. I have some folks that come to our desk and say, “I don’t ever want to pay taxes on this.” We’re going down the 1031 Exchange route and we’re going to ride that horse until it throws us off.
To clarify here the swap until you drop, once you pass and you pass on your assets to your beneficiaries, basis steps up at that point. Am I right in that?
Under current laws, yes, it does. The laws that we’re more concerned about being eliminated is the stepped-up basis. There seems to be a lot of momentum around eliminating that aspect from the tax code. The swap until you drop concepts might get blown up with or without the aspects of the 1031 Exchange being there. Another aspect for investors to think about is, what is this going to look like at the end of life for our heirs?
If you do a 1031 swap until you drop, and then you drop, do you mean your heirs don’t pay your original basis? There’s no taxable event that happened? This is better. No wonder.
The value of that asset is marked at that transition point. That’s their basis.
Hopefully, it remains that way. Brandon, to transition here, talk about the market environment and what you’re seeing from deal flow and the appetite for deals.
We’re probably seeing more demand from investors in the 1031 Exchange, passive investing/DST space than ever in the history of the space. What’s driving that is a variety of factors. One, I think property owners are generally getting older. Ultimately, this is a lifestyle choice for them to make and saying, “I want to do something different than managing property.” That’s what we hear very often from our investors. The desire to do that is ramping up. This is a hot real estate market.
The numbers that some investors are seeing and selling their properties are very enticing. That’s driving a lot of folks. If it wasn’t hard to be a housing provider before, it’s getting even harder now with the eviction moratorium, especially here in Milwaukee. I’m not sure if that’s the same thing in Kansas City, but it’s different all over. What a challenge it is to deal with that as well. You put all those factors in and a lot of folks just want to sell. We see a lot of demand from that perspective. On the other side of that, supply is constrained. We’re seeing a lot of money chasing the class-A assets and multifamily that are prominent in the DST space. This is creating a problem.
We’re watching DST sponsors purchase multifamily assets for lower and lower cap rates. It’s challenging holistic economics on here that isn’t the same as what we saw three years ago. That’s a problem. What we’re doing here in a way is we’re advising folks, “Let’s look at the best of multifamily that we can if that’s an asset class that you’re interested in. Let’s look beyond that into self-storage, industrial, senior living, where we can find better economics.”
The problem that everyone is having now in this market is the deals are getting more striped. The cap rates are getting lower. Prices are getting more extended. I’m thinking, look at the stock market. It’s the tippy top. Do you want to buy now? It’s that kind of thing and too much money chasing too few deals. There’s not a lot of deals that you look at and say, “I love this deal.”
It’s rough. With that said, there are deals out there that I like. Are there more deals than I would have liked five years ago? Yes. At any given time, there are probably maybe a dozen deals that I like. I would say that’s more like 5 or 6 at any given moment that we’re comfortable investing with. It makes it tougher. It’s definitely more difficult.
What are you finding that you’re liking now? Is it certain geographies or certain classes of things? What are you liking?
I like self-storage in off markets not in primary markets. We like the idea of a good self-storage operator competing against mom-and-pops and tertiary markets. We think that’s a good idea. We like senior living with a great operator behind it. That is a business you’re running inside of. It’s extremely sensitive. If you’re good at it, we think the senior tsunami is coming to that space. There are more old people and demographics always win. We liked that space a lot. I don’t think I would have said this years ago, but there are certain single-tenant retail deals that are very interesting in the space from some tenants that are extremely strong. We like those. Of course, there’s a rush of Amazon distribution facilities that are coming to the space as well. Everybody likes Amazon. It seems like a good default. We like those in good markets, but that’s where we’re looking at that is interesting.
To clarify for those that may not know. If you had a multifamily asset that you’re now selling and want to exchange, you can’t exchange because it’s considered like-kind into a different asset class as long as it’s real estate backed.
Almost any real estate is considered what’s referred to in the 1031 Exchange code is like-kind. For example, there’s no reason that you can’t sell a farm and buy an apartment complex or vice versa. It’s a broad definition of what is eligible for exchange across asset classes.
Talk a little bit about how you vet these sponsors and providers of these opportunities, whether it’s a DST or more standard syndication. You’re saying that the number of good deals you’re seeing are few. How do you determine whether a deal is good or not? You talk about what you guys at Insight do a little bit because that’s your value add here. You’re being a third-party objective viewpoint of these deals on behalf of the investors.
The whole deal of where we’re adding value is doing that. The process is two-part. In every deal, the deal is as important as the sponsor. We will start that work on the sponsor. The number one most important thing, and this eliminates a lot of sponsors, is an audit track record. Show me what you’ve done and how you’ve done. Surprisingly, there are a lot of sponsors that aren’t able to produce that. That immediately eliminates you off the table. It makes it easy for us to X people out when they’re unable to provide a detailed track record of how they’ve done before. We are looking for that, how they’ve done and what they’ve done. Beyond that, we’re doing third-party due diligence checks on the background of management there.Be careful of conflicts of interest when you make recommendations. Click To Tweet
We’re doing deep onsite interviews to walk through their philosophy, who’s on the team, what experience they have. We’ll run the whole gauntlet there to understand the sponsor at a deep level. On the deal, we’re digging into that as deep as well. We’re reviewing appraisals, property assessment reports, the demographics of that market. In the case of the single-tenant, we’re reviewing the creditworthiness. The actual income that tenants are making at that location is critical. We don’t think simply, “Investment-grade tenant. It’s all good.” No, it’s not good enough. We need to go beyond that and understand that this location or this store is making money and it’s going to continue to make money.
We’ll take that a step beyond to look at that asset. It’s important that the sponsors are making all the choices here about when they’re going to sell this and how they’re going to manage it. The huge hurdle for our investors to get over is to sacrifice control. They’ve got to know that we’ve done our work on them and they got to be comfortable with that sponsor, and then we’ll get to the deals.
Talk about the decision process if you have an investor and they’re comparing, “Should I do a DST? Should I try and get private syndication?” I think we’ve talked before that generally, if you find the right deal and the right return profile, private syndication might produce better return metrics, but there are also some challenges there where a lot of the sponsors won’t take the 1031 funds. How have you overcome that?
The thing about the private deals syndication and away from the DST marketplace, a lot of what we’re seeing from the private syndicators are not doing class-A multifamily. They’re doing class Cs and a lot of value adds to that property and that’s producing economics. It’s not only an asset that’s offered in the DST space. It’s not there. We’re looking for access to that. To get over that, there are a couple of things that we’ll do. One, from a syndication perspective, we would love if sponsors would take 1031 money. There are ways for them to do that. They can do that on what’s referred to as a tenant-in-common structure, which would make you a partial owner of that property.
Tenant-in-common is a precursor to DST. Before DST was 1031 eligible or existed, a lot of people did tenant-in-common deals. We’d love sponsors to be able to do that. What we’ve seen from sponsors more is they’ll do both. They’ll have a deal where it’s a side-by-side tenant-in-common money. There’s the typical, what’s referred to as a GPLP or partnership money. They’ll operate that structure side-by-side. Those are forward-thinking sponsors that have been able and found a way to have both best of both worlds in a deal structure. We love dealing with them. For some of the smaller sponsors who haven’t done that before, we’ll help them structure that.
There’s no reason not to do a TIC structure and divide your asset up. However they want to invest the money, let them do that. You would advise a sponsor who wanted to set up a TIC, DST structure to take multiple classes of money. You would help them advise them how to do that.
We would point them in the right direction. To do that, we have to be very careful of conflicts of interest there where we’re making recommendations and we might have pre-existing relationships. We’ll point them in the right direction and start with that. Some of the pushback on the tenant-in-common structure from the sponsors is they do have to sacrifice some level of control there. In that TIC structure, the investors and the TIC do get to decide when to sell the asset. They don’t like that. They prefer to do the GPLP structure, but it becomes a battle between, “Do you want this money or not? Do you want to raise this significant amount of money to go and purchase the deal or not?” The desire to raise that money outweighs that sacrifice of control. It’s ideal for them to split it and to take a portion of 1031 money and take a portion of non-1031 money. That will allow them to stay in the driver’s seat.
The final question I have is when does it make sense for someone not to do a 1031 Exchange if that even does exist? I’m sure there are some people where the number is too small or something. What do you see? Is it like, “This is probably better to not try and pay the taxes?”
There are some prospective clients we get twenty minutes into the conversation with them about all these details and all the stuff we’ve talked about. I simply ask them, “What’s your tax liability?” They’re like, “I don’t know.” Let’s pull our website up on the fly. We have a very rudimentary siloed calculator on there. It can give you a rough idea of what it is. Lo and behold, I’ll spit a number on and they’ll say, “That’s not that bad” or “I have this other net operating loss, so they can offset that with. That’s not that bad.” That might be a situation where you don’t want to do it.
The other situation too is when we see folks that need liquidity. We’ll try to sneak that financial advising conversation in there. A lot of our real estate friends don’t want to have a financial advisor. They don’t want to have a financial planning conversation. We’ll sneak it in there for their benefit. We’ll say, “What are your liquidity situation? How many liquid assets do you have?” “Not much.” A lot of these folks, all their wealth is wrapped up in the real estate. It’s like, “You may want to take some money off the table there.” At the very least, we would recommend maybe a partial exchange. In some cases, we recommend, “You need this cash. You might want to take that out and skip 1031.”
There’s also an argument for if long-term cap gains tax rates despair, pay the taxman. Take your long-term cap gains rate at 15% and sing hallelujah as you pay the taxman. Let those rates go up. There’s an argument to say, “Let me get my asset out of jail, pay my taxes and move on before the rates go up to the moon.”
I’m seeing more of that mitigation type strategy for the long-term than I have before. I’d rather roll the dice, but that’s just me. We’ll see what happens. I’ll keep as much of my money as long as possible. We’ll see what shakes out.
Brandon, what’s the best way for the audience to get ahold of you to get more resources? Who is your ideal client? Who are you looking to work with?
Give me a call. Go to the website. There are tons of resources on there in terms of articles and other podcasts that we’ve done and the calculator as well. The website is InvestWithInsight.com. I encourage people to check that out. Our typical investor is a real estate investor that’s been doing this actively and managing property for 20 to 30 years. They just want to go take a vacation. They don’t want to deal with the hassles of managing that property anymore. That’s our typical investor, but I would say that there’s a subset of our investors too that may own a business.
If you own a business and you’re selling it and there’s real estate inside of it, that’s 1031 Exchange eligible. If you own a farm, we have a handful of farmer clients. We’d love to talk to them about long-term strategies, especially if their kids don’t want to manage that farm on a go-forward basis. There are things we can do there too that are putting more cashflow in their pocket than doing all that work that they do. I feel bad when we make those onsite visits for our farmer friends and they’re doing all this work. We look at the P&L and we’re like, “We can do better in some of these assets.” Those are the folks that we’re aiming at, but the vast majority of folks are real estate investors that need a way out and we help them find it.
There are two sides to your business. You do the financial advisory work as well as this 1031 DST work. It’s a subset of your financial advisory business. You do real estate advisory is what that is. It’s awesome. I want to say that both Brandon and his partner, Josh, are some of the sharpest people I’ve ever met in the financial advisory space and in the real estate space. Good job, guys.
We like you too. You guys are super sharp too. These are great interviews that you guys are doing. I appreciate you guys doing this and diving into these topics. Not a lot of folks are going this deep on some of these strategies. It’s stuff I didn’t know about either. It’s enlightening for folks.
Thanks so much, Brandon. We loved having you on. I’m sure we’ll have you back down the road. We appreciate it.
Thank you, guys.