106: How to Reduce Capital Gains Taxes without a 1031 Exchange Featuring Bruce Jones

Real estate has some amazing tax advantages, but when you sell a property, you can still end up paying a lot to the IRS. Owning rental properties allows you to depreciate the structure of the property, but when you sell, you may have to repay that tax savings. 1031 exchanges can be a way to defer the taxes, but they come with many restrictions. 1031 exchanges cannot usually be used when you flip houses either. Bruce Jones, with TaxWealth, is an expert on real estate taxes and joins me on this episode of the InvestFourMore Real Estate Podcast to discuss strategies for reducing taxes on flips and rentals without doing a 1031 exchange.

How did Bruce Jones become an expert on reducing real estate taxes?

Bruce has been in the financial planning industry for 47 years! He started out as a financial planner and adviser, but in the last ten years, he has focused on tax savings for real estate investors. In the past, Bruce would advise his clients on how to maximize their retirement contributions and possibly buy real estate to reduce their taxes.This is what most CPAs and attorneys will advise, but there are many more options when it comes to saving money on taxes. Most CPAs are not trained on how to save money on taxes, but instead, they are trained on how to make your taxes easy and simple. There are many different strategies that real estate investors can use to reduce or even eliminate taxes when they own or sell investment properties.

Remember to always talk to a tax professional for specific tax advice!

How can Bruce help real estate investors save money on their taxes?

Bruce works with clients, their CPAs, and their attorneys to develop a comprehensive tax plan. He offers many strategies to reduce the taxes when owning and selling properties. Bruce can take a look at an investor’s properties and:

  • Time owned.
  • Type of property.
  • Debt on the property.
  • Federal and state tax rates for the investor.
  • Depreciation.
  • Expected gain.
  • Improvements.

Bruce can take all of this information and figure out the best strategy for the investor. He will create a report that will show the tax savings using multiple strategies. The best part is that Bruce will do an analysis for free! If you decide to implement any of Bruce’s strategies, he will then charge you to get things set up.

What are some different strategies investors can use to reduce taxes?

Bruce and I discuss many different strategies that he likes and dislikes. Most of these strategies were above my level of comprehension. Most people think a 1031 exchange is the best way to avoid taxes when selling investment properties, but Bruce does not like the 1031 exchange. There are many restrictions, and most people who intend on completing one fail to do so. When you complete a 1031 exchange, you also must buy properties for at least as much as you sell them for, and you have to find replacement properties within 45 days.

There are a number of alternatives when selling properties:

  • Charitable tax planning
  • Deferred sales trust
  • Structured sale
  • Installment sale

If you want more information on how these strategies work, listen to the podcast, or you can contact Bruce. These strategies can work for flippers or rental property owners. Bruce tells a couple stories about how he has saved people hundreds of thousands of dollars over simply selling a house and paying the capital gains taxes.

How can you choose the right tax strategy?

As I mentioned earlier, it is not easy to figure out IRS tax laws. I was not aware of many of the strategies Bruce talks about, and my CPA and attorney have never mentioned them to me either. The best way to figure out which strategy to use is to talk to an expert like Bruce. Strategies can also change based on the investors goals, age, and income.

Not only can Bruce help with tax savings, but he can also help with tax savings while you own properties. Many rental property owners are able to change the depreciation schedule on their properties, which can amount to thousands of dollars in savings.

You can reach Bruce by checking out this website. It is free to get an analysis from his company. 


[0:00:13.9] MF: Welcome to the InvestFourMore Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper. I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine and we sell close to 200 houses a year.


So on this show, we’d like to interview house flippers, landlords and the best real estate agents in the business. So stay tuned for some great shows, if you want more information on my rentals, on the numbers, on how I buy properties, check out investfourmore.com.




[0:00:58.3] MF: Hey everyone, it’s Mark Ferguson with InvestFourMore, and welcome to episode of the InvestFourMore real estate podcast. I have an exciting guest on for today's show, Bruce Jones, who’s the CEO and president of Tax Wealth. He's been in business a little while. The last 47 years or so he’s been in the financial world. What his company specializes is reducing taxes, reducing capital gains, especially on real estate. Obviously, that’s a great subject for audience for real estate investors. Really happy to have Bruce on today. Bruce, how are you doing? Thank you for being on the show.


[0:01:32.9] BJ: Thank you very much. I’m doing well. Thank you.


[0:01:35.8] MF: Great. Bruce, can you start us with how you first got into the industry? I know it’s been a little while, but was that something you always wanted to do or did you just kind of fall into this business?


[0:01:45.2] BJ: Actually, I fell into it. My initial training in college was actually in communications, but that was during the Vietnam era, and so when I got out of school in the spring of 1969, there was really nothing available whatsoever, so I ended up in the insurance world first and then transitioned later in the securities world. Then into late ’73, into the overall comprehensive type financial planning world.


Since, really, ’74 to date, that’s what I’ve been involved in, was overall tax and financial strategy planning. I was in that world for 41 years until I retired from it three years ago and decided to keep my tax planning company, which is nearly 30 years old now and just focus on what I enjoy doing most, and that’s beating up the IRS legally.


[0:02:35.0] MF: I imagine a lot of people would enjoy doing that if they can do it legally. We talked a little bit before the show, just catching up on what you’ve done. It sounds like you made a pretty big switch from kind of like a financial planner with 401(k)’s, IRA’s, into really gigging in to how to have a comprehensive tax savings plan. How did that come about?


[0:02:58.1] BJ: I’m what is called a certified tax coach. The tax coach community is a group of CPAs and enrolled agents and other financial advisors who have been trained in proactive tax planning on comprehensive basis, and I’ve been involved with that for the last several years now.


The focus on proactive tax planning is entirely different than what one might perceive as being financial planning tied in with tax planning. Having been a financial planner myself for all those years, I know that perspective well and that, generally, the perspective of the financial planner generally is you maximize your contributions in your 401(k) or your IRA’s, perhaps getting to a Roth and thereby reduce the taxable amount to the pretax dollars that you put in there and thereby lowering the taxes. If it’s appropriate, then you buy oil and gas then you get further tax deductions, or buy real estate to get the depreciation recapture as best as you can. That’s all part of it, but that’s by no means the sum total what real tax planning is, even tied in with financial planning for that matter.


Tax planning is a very comprehensive look in regards to how one can, first of all, identify misplanning opportunities that the tax bearer does not realize is in tax law, and often times the CPAs don’t realize it either. I’ll get to that in a moment to why that often times occurs.


To identify those misplanning opportunities first and then also quantify the amount of taxes that are being overpaid needlessly. What I do, as I was sharing with your earlier, is to review the tax returns to find out those misplanning opportunities, identify the taxes that are wastefully being paid and then I get to respond to the tax bearer actually saying, “Okay, here’s the pain. Here’s how much you’ve been paying needlessly over the last — Not usually quantified over the last five years. Here’s your gain. Here’s how much tax law says you’re entitled to keep,” and then I craft the formal tax reduction plan to help get them there. There’s a lot in tax law that folks just have no idea that’s there, that can be taken advantage of.


Why don’t the CPAs do that? Because CPAs largely are not tax planners at all. I refer to them and accountants and enrolled agents typically as financial historians. That’s not a slam on them at all. They have a very important role to play in service of the client, absolutely. But they are more trained in compliance to the law instead of being proactive to delve into law to find the solutions.


What I endeavor to do is to work collaboratively and synergistically with the CPAs and the attorneys and every other financial advisors the client might have in a collective fashion to serve the client and I do what I do best, bring to the table what I find in tax law to find to be the solution and we work together to serve the client in the best possible way.


[0:06:11.0] MF: Oh, that’s a lot of great information there, and I’m taking notes myself here. Working with the CPAs, working with the attorneys, I’ve dealt with that myself where I bought up my father a few years ago and the attorneys have their idea of what’s going to happen. The CPAs have their idea of what’s going to happen, and it’s rarely the same thing, and I know it’s tough as myself in real estate. I’m not an expert on tax law. I’m not an expert on what the attorneys do. It’s hard to know which one is right and which one to go with.


I imagine kind of your role, you see as almost like a go between to figure out the best plan that’s legal and saves taxes as well, right?


[0:06:48.7] BJ: I think that’s a good way of looking at it. Basically, again, each of us has our roles to play, and we want to play those roles in the best possible way in service to the clients. However, let’s look at it this way. A person wants to sell a piece of real estate. They know that they have a tax problem, they may not know the extent of that tax problem. What I do is project what those numbers are based upon the numbers tied to the real estate, must breakdown into basis what they originally paid for the asset. If it’s investment property, how much they’ve made in capital improvements or for personal residence as well. For investment property, how much they’ve depreciated over the course of ownership. Is it a single person showing or a married couple? That actually has an impact on the tax issues.


Of course, debt plays a role. We project out what those projected taxes are both on a federal level and on a state, and then combine them. Then what we do is find — What I do is find the right solutions. Understand something about tax planning. This is important. There is no cure all. It doesn’t exist. Not everybody is the right fit for any given planning approach, nor is the planning approach the right fit for everybody. It’s very important at the outset to really identify what the need is, what the actual projected taxes are and then move forward to find the right solutions that can be insured with the client so that they know, number one, they’re all backed by law, they’re all supported by law, and then what the benefits of each of these different choices are that best fit them.


Then they can know for surety that, number one is real, it’s supported by law because their own attorney and their CPA come in to the process, and from a completely objective viewpoint, do the due diligence. In every situation, when I talk to somebody who wants to sell a piece of real estate, for example, I ask them to bring their counsel in; their CPA and their attorney in to that process. Why? Because it safeguards them, doesn’t it? They don’t know me. I know what I talk into them is absolutely real because I’ve had it very well researched and vetted and I know what’s real, but they don’t, so it’s most appropriate and I think imperative that we invite their own counsel into the process with whom they already have implicit trust and let them do what they do best and do the due diligence and let tax law carry them through that process so that the end of that process, they know themselves that it’s real, that it is supported by law.


That way, when the client can make a decision, it’s a truly informed decision to do that planning approach or for that point not to do it if that’s what the end decision is, but at least it’s based on fact. There’s so many mis-assertions and misunderstandings about different planning approaches that are out there that need to be put into the right perspective so that at the end of the day, the client can really make a truly informed decision to do what they plan to do and what is best for them.


[0:10:04.4] MF: Oh, that makes a lot of sense. I’ve got a lot of questions for you on some more specific cases here. First, before I forget, I know a lot of people might ask you this or be wondering, with the new president coming in and threats to change the tax code and completely revamp things, how worried should we be that things are going to be completely change and everything that you’ve learned and specialized in is not going to exist anymore?


[0:10:30.1] BJ: First of all, understand that tax law is ever-moving, is ever-changing, is never static. When the IRS might close one particular planning approach, which before they did was purely law and it was totally permissible to do. The IRS could come in a later date and change it, which they have. All you can do is base what you’re doing upon written law as it stands for today and then you move forward.


In regards to what the president is doing. Frankly, so far, I applaud it. We’re going to see, hopefully, a lower tax bracket on a personal level for income. Right now there’s five levels. He wants to bring it down to three. He wants to raise the standard deduction. He wants to lower the corporate taxes from the 35 down to 15, and I don’t think personally it will hit 15. I think it probably will settle around 20%. Even then, that’s a substantial discount, which means if that happens, the likelihood is that there’s going to be much more hiring that occurs within the corporate community, business community, which means more income for these people, which means actually more taxes are going to be paid because of the volume that will occur as a result. I’m excited about it.


[0:11:43.2] MF: Good to know. Yeah, I know it’s hard to speculate on what will happen, because as you said, the code can change so frequently and what someone’s plan now does not mean that’s going to become the law. There’s a lot of hoops in people that have to approve it first.


For me personally, I like to ask this question. I do a lot of fix and flips. Right now I have 16 fix and flips going. Typically, I’m selling those properties in six months. Is there any way for me personally to reduce my tax obligation or am I stuck since I’m selling them so quickly?


[0:12:18.9] BJ: You are what is called a dealer, because you are doing multiple flips within the year. Typically, I’ve heard from CPAs that if you’re doing three or more you’re considered a dealer and not an investor, which means each time you do a flip, that’s consider an inventory under law and not a capital asset. Therefore, the earnings that you’re receiving from doing the flipping is all ordinary income as supposed to long-term capital gain or even short-term capital gain.


If you’re doing 16 flips right now and they all consummate, and I’m sure they will, then whatever the sum total of the amount that you receive from all the sales is all going to be ordinary income to you, which is going to thrust you into a higher tax bracket. The typical types of approaches to solve capital gains tax issues are not available to you.


However, having said that, there is a plain approach that I’m aware of that could very well be a solution for you. Essentially, from a helicopter view, what is does is you can take the earnings that you get, put it into a tax deferred environment by law and actually structurally being able to use the very earnings that you get from the flips, keep it in a tax deferred environment but use the same dollars for your future flipping projects and just build for the future. That’s really a possibility that could be explored for you.


[0:13:42.8] MF: Okay, cool. No, it’s good to hear. From everything I’ve heard and known, yeah, there’s no magic way to change income into a long-term capital gains legally. I know that’s an interesting option as far as the retirement account is what you’re saying, right?


[0:13:58.5] BJ: That’s part of the structure, but not all of it. There are ways under law that can convert one year income into long-term capital gains. It’s just a matter of whether or not your particular situation is a fit for what the law says can be done.


[0:14:13.3] MF: Okay, cool. For people who aren’t doing three flips a year, what about them? What if they do maybe one or two a year, but they’re still selling it less than a year out?


[0:14:24.8] BJ: Okay. If a short-term gain, which means if the sale occurs prior to one year and one day or longer, and that’s going to be short-term gain which basically is going to be taxed as ordinary income, but there are things that can be done structurally to be able to still defer the taxes for a very lengthy period at the very least and give them a whole lot more actual [inaudible 0:14:46.2] than they would have otherwise.


If the properties are debt free, then there are other types of planning strategies that could be implemented to where you can actually eliminate the taxes completely and end up with a much better outcome [inaudible 0:15:01.6] than they would have otherwise.


[0:15:03.6] MF: Do you mind sharing an example of how one deal might work like that?


[0:15:08.1] BJ: Sure. Let’s take the deferral for example. Most people identify, let’s say, an installment sale as seller carryback financing. Now, installment reporting has been in law for 99 years. It came into the law in 1918, so it’s nothing new. By definition, an installment sale is very simple. The law says it’s one or more payments made after close of escrow. That’s it. It doesn’t say how much it has to be or how little it has to be. It doesn’t say how long the contract must be or how short it must be. it just simply says one or more payments made after close of escrow.


There’s a planning approach that I utilize and have now for the last nine years for my clients to where — Here’s the following that can actually be accomplished and is being accomplished, and that is we can demonstrate to the seller and their CPA how the sale or the asset can structure it to where they utilize a specific type of installment contract, defer the taxes for decades and instead of receiving the sale proceeds which would be what they call constructive receipt under law, and therefore taxable. The receiving proceeds that end up being nontaxable that are nearly equivalent to the sale proceeds themselves.


Let me give you an illustration of that. I do a lot of work in this area. In fact, last year, using this planning approach, we closed between business transactions and real estate transactions. We finalized north of $60 million in total transaction value using this planning approach and we’re actually nearly that amount already for this share.


I’ll give you a really good example. It’s not a particularly large case. This was a poultry farm sold on the east coast, and the gentleman had a very high debt. He also had a very low basis in the property. He is a gentleman that is in his early 70s and he was looking to this sale as the bulk of his retirement. The problem he had principally was that he had a lot of taxes tied to this, so much so that if he didn’t do proper planning on a $2.5 million sale after the cost of sale were made and after the debt was paid off and the taxes are paid, he would only walk away with less than $200,000, which is hardly enough to have as the bulk of base for retirement.


By doing what he did do in using this particular planning approach where the taxes were deferred for decades, he actually was able to sell the property, pay off the debt, pay the cost of sale, but end up with nearly $800,000 in proceeds lump sum cash tax free at close of escrow. This is almost a direct quote, and this is something I really cherish, and because it’s indicative of what real tax planning is all about. It’s not saving the taxes, it’s what those tax savings can mean to people and how it can really impact them positively. When I was talking to him, he told me, he said, “Bruce, if I don’t do this, the last 25 years of my life financially would be foreverly nothing.


When you’re in a position as I am on many occasions where we can demonstrate how to solve the tax issues and translate those savings in something far more meaningful than just the tax savings, is what those tax savings can mean to them. in his case and his wife’s case, that was a complete life-changer completely for them. That’s, for me, anyway, that’s where I get the greatest gratification of doing what I’m doing in tax planning.


[0:19:09.1] MF: I’m sure that was — Yeah, it felt pretty good being able to save someone $600,000. Like you said, I’m sure he spent his entire life building up that business and to see only $200,000 come out of it, pretty disappointing, but that’s a great story.


[0:19:26.6] BJ: Let me add something. See, but that’s very common, isn’t it? People who own real estate, rentals, whatever the property is, for many many years, they see the appreciation occur but then they also see that, “Gee! If I sell this — My gosh! The government is going to take 30% or 40% of it? That doesn’t make sense.” That alone is what keeps people from moving forward confidently to sell the property even though they might really want to sell that property. They just can’t take to tax it.


[0:19:57.5] MF: Right. I have somebody you should talk to. I’m actually listing a property — I’m an agent as well — Next week for $800,000, and it’s a college rental property the gentleman has owned for 24 years. He’s depreciated it down to almost nothing. Has almost no basis. He’s going to pay — He has almost no debt on it, which is nice. But still, he’s going to pay a lot of taxes by just selling it outright. He may need to talk to you about some strategies.


[0:20:24.5] BJ: I’d be more than happy to help.


[0:20:27.7] MF: Now, for someone, one thing in your notes that you’ve talked about is 10/31 exchanges. I know a lot of people talk about those. One way to defer your taxes to avoid the depreciation re-capture, but they’re not all great. What are some of the pros and cons of a 10/31 exchange?


[0:20:47.4] BJ: The exchange originated from the Starker decision back, I think it was 1979, the late ’70s some time; ’77, ’78, ’79, somewhere in that area. Basically what the 10/31 exchange allows the seller to do is to defer the taxes into what they call an up-lake property and they defer all the taxes, they defer the re-capture on depreciation, and all that’s great. The concern is that there’s a lot of restrictions that have to be complied with. For example, to do this, you have to name and declare up to three properties to an accommodator, which is a go between the seller and the buyer, and the sales proceeds of the relinquished property after selling goes to the accommodator so that the seller doesn’t receive constructive receipt at the sale proceeds and therefore be taxes for the year’s sale, but they have to declare up to three properties within 45 days after close of escrow.


Finding a worthy property in today’s market is somewhat challenging. It’s been reported to me by very prominent commercial real estate brokers that I consult too, that right now, nationally, 50% of the exchanges today fail. That’s a big problem. When we were going through the recession, it was reported to me that up to 80% or more have failed. That would leave the seller in a very big tax problem, wouldn’t it? Because they would not able to complete the exchange, which means then all ended up being a taxable event for them in that year.


Plus, not only do you have to declare the profits within 45 days of closing escrow in the relinquished property, but you have 180 days inclusive of that 45 days to close escrow. Sometimes things happen to where it falls apart. If that doesn’t happen, then they have an added problem.


Now, you also have to carryover debt, and you would carryover the basis of the relinquished property into the new property, which means there’s no reset on depreciation for the new property that you’re buying. Every time you do a 10/31 exchange, your depreciation basis gets lower and lower and lower and lower.


Now, the folks that are propagating and promote the 10/31 exchange, one of the things that they not rely upon but they promote, and this is a term that I’ve heard some real estate brokers is you swap until you drop. In other words, you keep doing the exchanges and you keep building your portfolios, you keep deferring the taxes, and then when you die, then there’s a step up in basis under current law to devalue the property at the time of your death and then if whomever inherits the property, if they were to sell for that value, then they’re not going to pay any capital gains taxes. Absolutely, correct.


What they’re missing or what they’re not thinking about is things change through the years for folks. A person who buys real estate or rental properties of whatever nature it might be, they go into that whole relationship with that mindset, but sometimes down the road the road they get pretty tired of management. They get tired of the midnight calls from the renters or having to replace whatever the element is tied to the property.


I have a client right now who’s facing a lawsuit because two gangs decided to have a war on his property and one of them was shot and killed. They’re now been suing that owner of that property for wrongful death. While he didn’t have enough caution or things in place on the property to prevent that. I think that’s a bit silly, but that’s what he’s facing. Every time he put in new fencing for safety and all those things and the cameras for safety, they either shot them out or they broke it apart. You just don’t know what’s going to happen in the future.


Sometimes whether it’s for those reasons or whether it’s for health reasons or whatever the reason might be, a person wants to get out of real estate. A 10/31 exchange is not an exit strategy, it’s a replacement strategy. You must buy more real estate of like an equal value. Equal value means whatever you sold the relinquished property for minus sales cost is the amount that you must buy the new property for or a greater amount and then you can defer the taxes.


In today’s market, it’s a great time to sell, but a horrible time to buy. Your cap rates are very very low. It’s increasingly difficult in today’s market to find a worthy property to buy and to do an exchange with.


[0:25:45.0] MF: I’ve been through that same thing, right? I sold a couple of rental properties last year and I thought about doing a 10/31 exchange, but because of those restrictions, I ended up not doing it. Mainly, I didn’t want to be forced into buying a bad deal in 45 days. I thought I was better off just waiting, getting a better deal. What alternatives are there to the 10/31 exchange for people?


[0:26:07.7] BJ: Again, there’s deferral, there’s — In tax planning, especially in dealing with capital gains taxes, really, the categories to explore are pretty narrow. Let me share with you what they are. First of all, if you were to go to a CPA, and this is typical, at least in my experience over the last 40 odd years, and you knew you had a tax problem and you wanted to sell and you go to a CPA and say, “How do I solve the tax problem?”


Generally, they’re going to say, and it’s usually in this order in my experience, “Well, you really want to take that change. Why don’t you just pay the taxes?” “Well, no. I don’t want to pay the tax.” “Okay, well you can do a 10/31 exchange.” “No, I went out of real estate.” “Well, okay. Then you can do seller carryback financing. Sell the property, take the down payment, beat the bank for a while and just carry the paper.” “No. No, I don’t want to do that. I don’t want to rely upon somebody to make payments. They may stop making those payments. We saw a lot of that during the great recession.”


Well then the CPA will say, “Well, if you don’t want to pay the taxes, you don’t want to do an exchange, you don’t want to seller carryback. Well, about all you can do is to keep the property in a portfolio then die. At least there’s a step up in basis to the value of the time of your passing and then your wife or whomever your heirs are can sell the property for that value and pay no taxes.” Not a great choice for the owner who wants to sell, is it? That’s often times what they experience.


Now, what reality, you do have the exchange, you do have charitable tax planning. I’ve got a 47-year history in charitable tax planning as well. The typical approach there is what is called a CRT, a charitable remainder trust, or a charitable gift annuity to where you can setup the trust or you can gift the property to the trust or to a nonprofit and they are the ones that sell the property, not you. You get a tax deduction for the gift to the trust or the charity, you escape the capital gains taxes completely. What you’re getting is an income for a term of years or for life. What you’re not getting is a lump sum amount of cash at close of escrow, that’s tax advantage. Nor do you get that with a 10/31 exchange.


A third approach is a thing called a deferred sales trust. Now, that has been very vigorously promoted in the market place and has been for the last few years. I would tell you that I am not a proponent of it. I do not advocate that at all. I believe personally that there’s problems with it. Setting my bias aside for a moment, structurally, the way that works is that the seller of the asset sets up a trust, they hire a third party trustee to manage the trust. It’s expensive to set up, it’s expensive to maintain, but the seller then sells the property to the trust that they themselves setup. Through that mechanism, they claim, they can defer the taxes. If they take any income or lump sum amount, it’s going to be taxable to them. Again, I’m not an advocate of that at all, so if any of your listeners encounter that, then I would encourage them to be very very cautious at the very least.


Then there’s a structured sale. The structured sale was established many many years ago by All State Life Insurance company as a means probably they thought to sell a lot of annuity products. Structurally, what happens is that the owner of the property assigns it to a third-party who sells the property. At close of escrow, the sale proceeds, why, I don’t know, but I’ve been told this is part of it, that the money must go offshore for 24 hours and then it comes back in and they buy the annuity from the insurance company for a term of years. Then they receive a flow of income from that annuity of that same term. A portion of the annuity income will be nontaxable and a portion of it would be taxable.


Then there’s the installment sale. Again, as we talked about earlier, what an installment sale, the definition is very succinct, it’s one or more payments made out the close of escrow. As I mentioned also earlier, seller carryback finance in which is a traditional installment sale is not the only way to structure it. It can also be structured in other ways. In one way, especially, which I think is the flagship approach in deferring taxes for decades and giving the seller the asset the best possible outcome at close of escrow, is to be able to tap into this other type of structure that’s permitted by law to defer the taxes with that lengthy period and give the seller a near equivalent amount of the sale proceeds and the tax free basis at close of escrow.


Going back to the charitable for a moment, there’s also a way if the property is debt free, to where the seller can sell, eliminate the taxes, get an out of tax deduction, but instead of an income for their lifetime or for lengthy period of terms, they can actually get equal sum payout over a five-year period, 99% of which is tax free.


They don’t get a full lump sum at close of escrow, but they get five equal installment of payments nearly tax free over the next five-year period. Actually, it’s 4-1/4 year period at this moment right now. There’s ways of actually being able to monetize that as well, but those are generally about the only approaches you’ve got. It’s a matter of finding, first of all, and identifying what the real needs are that the client has, the property profile, what the tax problem really is and how best to approach it in regards to the types of planning approaches that are available and supported by law and share those different approaches and the benefits and the risk tied to them through the client so that they can make a decision that’s best for them. Solve the tax issue and still maximize their profit at close of escrow.


[0:32:17.2] MF: What I’m thinking right now is it’s best to get an expert like you to help out with this situation, because it gets complicated just from the short explanations you gave for each one of these programs. You really need to know what you’re doing and be an expert on each one to figure out what the best solution is for each person. The solutions vary depending on the person’s debt, their basis, their property, their goal, so it’s kind of probably something they shouldn’t try and do themselves.


[0:32:48.7] BJ: No, I don’t think they should do it on themselves. They should take advantage of professionals who are very schooled and skilled in these areas, that includes their attorneys, that includes their CPA, that includes their financial adviser. I certainly recommend though that they add into that mix of professionals a trained proactive tax planner, because these other folks that they have on their team are not schooled in those areas. Once again, it comes back to a collective team of people who each do what they do best, but they do it in a synergistic fashion in serving the client.


[0:33:27.0] MF: Yeah, I mean that sounds like definitely the best solution. If somebody is in that position where, say, like on this client I’m working with where they’re selling a high dollar property. They know they’ve got to pay taxes on it. Maybe they’re not aware of these other strategies but they want to figure out as much as they can, what’s the best way to work with you or to bring you into the equation to help them figure out the best solution?


[0:33:48.8] BJ: I can only speak to how I approach things and other planners may have different approaches for themselves, but I’ll just share with you what I do. I provide what I call a presale tax analysis and money flow projection, and that’s a result of all the collective information about the property and the client themselves. Basically, that is comprised of the basis of the property, the amount of debt, how long they’ve own the property, is the owner married or single, that actually has an impact on it.


Actually, where their property is located. Is it located in — And are they domiciled in a state that has a tax problem? If they’re Florida, or Texas, for example, or Washington State, they don’t have a state tax problem. Most every other states — There’s 11 states that do not have taxes that they have to worry about. Most of us do have to contain with that, especially in California, because we’re among the worst in the entire union that has the highest tax rates, because in California everything is considered ordinary income no matter what the source. It can get up to 13.3% for California alone.


The basis of property, how long they’ve owned it, ownership. What kind of ownership is it? Is it corporately owned? If so, what kind of corporation? C-corp, S-corp, is it a partnership, is it in an LLC, is it owned individually? All these factors are very very important to know in the frontend because they have different impacts from a tax view point.


C-corporation, for example, which is the worst way of holding title in my view. You would have double taxation problems tied with that. That’s just one example. Then we’d look at the depreciation re-capture. Just as a side note, I’ve encountered folks who tell me, “Why do I have to worry about that, because I never took the depreciation.” That’s wrong. That’s not an option under law. You must take the depreciation. If you didn’t take the depreciation and you sold the property, the IRS is still going to go on the assumption that you did and they’re still going to tax you on it as if you did. That’s something very important to understand in real life. Now, it’s a surprise to a lot of people, but that is true.


Then we look at, of course, the pricing. We look at the length of escrow and all those other things. Then what I do is take all that information, I do the tax projections both federally and state and break it down categorically on a federal level and what the state is and then combine them. Then I do a contrast. I call it a money flow projection summary. With that, we breakdown, “Okay, here’s the sale price. Here’s the net sale proceeds after cost of sale. Out of that, you pay the debt. Out of the net proceeds after debt is paid off, that’s before tax profit, then you pay the taxes and then you end up with your net amount after taxes as far the profit.”


Then re-contrast that with what — Let’s take the deferral approach, for example, that I was speaking about earlier. We look at the cost of sale and then we look at what they would end up in the structure on a tax advantage basis out of which they would pay any debt to be paid off, but then all the taxes are deferred for decades. That same amount after the debt is paid off is what comes to them at close of escrow. Then we can contrast it out, “Here’s what happens if they don’t do this versus here’s what happens if they do.” It’s a very clear view to the sell or the asset exactly where they stand both from a tax viewpoint that they’re subject to and also at the same time what can be done about it and how they can maximize their profit close of escrow. All of that I do it no charge, and the reason I don’t charge for that is because that’s how I prove value. That’s how I prove my worth, and I have no problem taking the time, whatever time is necessary to do that and to school them on the planning approaches that are available to them under law.


Once we identify what they see as to be the best approach to solve their situation, that’s when they engage me and then we’d go on from there and I help facilitate and put everything into place, work with their existing advisors, their attorney, their CPAs and such to bring it to close and escrow is to close and so that they can, again, maximize their profit close of escrow.


[0:38:18.1] MF: Oh, that’s fantastic. Having a free analysis is not a bad way to get started. That’s for sure. One question that I’ve just remembered is if someone’s using this structured sale or the installment sale or something like that and they’re selling the property, is there anything special they have to put in the contract that might deter possible buyers. Does that make the property hard to sell, or is it similar to any other sale?


[0:38:43.6] BJ: That’s no different than announcing that you might do a 10/31 exchange. No different at all. There’s a cooperation clause that’s inserted into the sale agreement or it can be done by addendum. Simply, the announcement from the seller to the buyer that they can do a 10/31 exchange or the deferred planning approach using a qualified intermediary, but it doesn’t impact a buyer at least. The only change with the buyer is that they see a different name in close of escrow as seller and then the name of the original seller’s name. That’s all.


In regards to transference of deeds, it’s just like a 10/31 exchange. It’s called a direct to deed. It goes directly to the buyer through escrow at close from the seller and circumvents the third-party buyer, in this case, the dealer. I spoke about it earlier.


If it’s a business transaction, same thing with representations and warranties, it goes straight from the seller to the buyer at close of escrow and circumvents the third part. There’s no disruption or interruption at all as far as the flow of the escrow of when is the close.


[0:39:45.8] MF: No, that’s great to know, because that would be one question I would have is, is this going to mess up how many buyers there are, but it sounds like that won’t be a problem.


[0:39:54.0] BJ: None, whatsoever.


[0:39:54.9] MF: That’s great. Bruce, I think I’ve covered everything I wanted to cover and ask you. Is there anything else you can think of that’s important for people to know that are either flipping or they have rentals as far as planning for taxes?


[0:40:06.6] BJ: Actually, there is. One thing we haven’t talked and I’d like to bring up just for consideration is for those folks who want to keep rental properties in their portfolio. Are there tax benefits beyond what they think they are already getting? The answer is yes, there could very well be. I’ll give you an example. May I tease you for a moment and your listeners?


[0:40:29.3] MF: Yeah, of course.


[0:40:31.6] BJ: And you got to forgive me. I love to teach, so I’m sort of in my teaching mode right here. Let me make a statement, and you just be blatantly honest with me as a yes or no answer, and that statement is I call you up completely cold. You answer the phone and you say hello, and I say, “Mark, I can guarantee you 100% return on your investment in a matter of six weeks.” Would you do it?


[0:40:55.5] MF: The skepticism would make me say no, because I wouldn’t believe it, but I would ask for more information. It would pique my interest for sure.


[0:41:04.5] BJ: What if I said 100% guaranteed within six weeks with no risk. Now, would you do it? Would you stop down perhaps a couple of hundred thousand dollars and buy that or invest into that whatever it is. I haven’t told you what it was yet. Would you do that? Of course, you wouldn’t.


[0:41:22.5] MF: Yes.


[0:41:22.8] BJ: [inaudible 0:41:22.7] you are going to fly everywhere, and they should. Let me prove it to you. This is one of the few ways that I can prove this and be actually honest about it. Whenever a person is evaluating a piece of real estate, they’re looking at all sorts of different components to that property, aren’t they? They’re looking at condition of the property, age of property, rent rules, rent history. Are they able to increase the rents? When can they increase the rents if they can? Cost through rehab? All sorts of different things. Of course, pricing as well. They’re going to take all these collective information, they’re going to put it on a spreadsheet, project it out, and based upon what they see in that spreadsheet, if A, B, C happens, “Oh, that’s going to be a great investment.” or if D, E and F happens, “Well, it’s still going to be pretty good.” or if G, H and I happens, “Oh, it’s should be really bad.”


Once you agree that based upon conjecture, they’re going to decide to buy that property. It’s what if this were to happen. Am I correct?


[0:42:27.2] MF: Yes.


[0:42:28.3] BJ: Okay. In tax law, we’re dealing with written law, not conjecture, and no gray areas of those laws, at all. If you look at tax planning as an investment, because in real estate the bottom line is ROI, return on investment, correct?


[0:42:45.8] MF: Yes.


[0:42:46.6] BJ: Let’s look at it the same way from a tax planning view point. The investment is the cost to do the tax planning. Your return on investment is the tax savings. Let me give you an example. I’ve done a lot of writing on tax planning and real estate through the years and I have been published quite a bit especially throughout California.


I got a call one day from a young lady, early 40s, and she and her husband were having some tax problem. In fact, the day before she called me after reading one of my articles that she came across. She had written a check for $40,000 and sent it to the IRS and taxes. When she called me, she was not a happy person. She said, “Bruce, what can I do to mitigate these taxes? It’s killing me and my husband.” I said, “I have actually no idea.” Send me your tax returns. Let me review them. So she did.


When reviewing the tax returns I discovered going to schedule E they had six small unit investment properties, the largest being a five-plex. Maybe I knew there was a law that could possibly re-tapped into that could help them. Fortunately, the summary depreciation schedule, they gave me all the information I needed to run a forecast was there, and I got hold of my experts in that area and they ran a forecast for me.


For those six properties were prime candidates for this law. I’ll get to what the law in a few moments. When I actually met them for the first time, I had something at substance that I can come back with to discuss with them. Well, they ended up doing this.


The IRS, regarding this law, says, “Yes. This is law. We recognize that. However, to apply that law, we require you to do a formal study by a third-party authority in that area of law preferably from an engineering background and apply it to the property you want to apply it to. As long as you do that and it complied with our regulations, you’ll never hear from us, because it’s law, and you’ve met the test that the IRS has.”


Okay. Her husband was basically manual labor, he was a truck driver. She ran a private school out of her home. Lovely people, just wonderful people, but they’re getting nailed in taxes. Gross income was less than $200,000, but they had a nice living except for the tax problem.


Let’s look at the cost to do that study as the investment. The cost to do the study was $13,000, but that was deductible. When you took their tax bracket and subtracted the tax savings on that deduction out, their hard dollar cost or investment was just over $9,000. What’s the ROI, or return on that investment?


In 30 days, we’re able — Through going back to their previous year in taxes where they paid the $40,000, we were able to amend that tax return because we applied this law and we got 16,000 of that 40 back in their hands within 30 days plus interest from the IRS. That’s not bad. That’s about a 78% return on investment, but I said 100%, didn’t I?


[0:45:50.2] MF: Yes.


[0:45:51.0] BJ: In addition to that, we got another $86,000 or tax savings, totaling $102,000 in their hands tax free on a $9,000 investment, meaning the cost to do the studies. What’s your ROI on that? It’s a little bit higher than 100%, isn’t it? That’s actually about 1,100% return on investment with no risk, because you’re simply applying existing tax law.


The reason I bring that up is for your listeners who have investment properties. The general guideline is if they bought the properties for all around 400,000 or 500,000 or more at purchase, not current value, but purchase price, there’s likely to be a lot of benefit there that they don’t know is available to them. This law has been available to them since January 1st of 1987. What it does, it allows them as the property owner to partition out certain components that they’re tied to the property and change this character from real property that has either the 27-1/2 year depreciation schedule, if it’s single family or multi-family rentals, or if it’s commercial, it’s 39 years, and change those portion to personal property and accelerate those tax benefits to 5, 7, or 15 years. That generates a tremendous amount of benefit.


Why do they have the money in hand already? Because once that law is justified, per IRS reqs, and what they want done, then they already have the money in hand. It’s just that much left that they have to give in their quarterly estimates to the government for that tax year, and they can simply reallocate those tax savings immediately, perhaps even broaden their portfolios and real estate by using those tax savings as down payments for new properties they might want to buy.


Once again, there’s a lot in tax law that folks are not aware of that need to be explored. Make sure it’s done correctly and rightly for them specifically, in their needs, in their particular profiles, but take advantage of what law actually offers and end up with a much better outcome than they could ever expect otherwise.


[0:48:15.7] MF: That’s a great story, and it’s pretty good teaching you just did right there on how to save money when you’re holding long-term rentals which I think just about everybody would like to do if it was possible.


Bruce, I know we’re coming up on an hour here, that’s about our scheduled time to do the interview. You’ve provided an amazing amount of information, a ton of great stories, and then things people can do to save money on taxes, whether they’re buying or selling, holding properties. If somebody needs your help, if they want to learn more about the structured sale, the installment sale, what the best choice is or the depreciation schedules, what’s the best way to get in touch with you and reach you?


[0:48:54.6] BJ: In regards to the deferral approach, we simply refer to that as an SAS approach, or specialized asset sale solution. If any of your listeners are interested, they are more than invited to find out more about that particular planning strategy simply by going to the website. Actually, we’ve set up a special one tied to your podcast, and it’s www.capitalgainstaxplan.com/investfourmore, and download a free report, and that free report includes case studies illustrating cases that we’ve done in the past for folks who are selling their properties. It’d be a really good thing to review that and really give you an insight as to what can be accomplished under real tax law and real tax planning.


They can also request a free presale tax analysis and money flow projection to see if their property or for the business or whatever the asset is that they’re planning to sell, qualifies for that particular planning approach and what the benefits would be. Again, that’s free. There’s no cost to it. We want to earn the right to serve them.


As far as the phone number goes, they can all 949-627-8714, and we’d love the opportunity to be of help.


[0:50:24.6] MF: Oh, great information. Thank you so much for being on the show. I’ll give you one last change. Any other advice or tips you want to throw out there before we get out of here?


[0:50:32.7] BJ: One more thing, and it just occurred to me. In the vast majority of situations that are folks are facing in tax planning, please understand, you never have to rush into anything. That’s absolutely true. Take your time. Don’t be pressured. Don’t rush on anything. Really take the time to learn what your real options are and get a good grasping at least conceptually as to what each of options’ structure is and the benefits, the risks, the gains, all of that, so that when you do make a decision, you know it’s not rushed, it’s based upon real due diligence. It’s based upon real thoughtful thinking so that you can sleep comfortably at night with whatever that decision is that you choose to make regarding that particular planning approach or any planning approach for that matter. Take your time. There is no need to rush.


[0:51:30.6] MF: That’s great advice. Can be used for most anything in life, but especially for taxes. I know the IRS doesn’t seem to rush, do they? Are they pretty quick when they do things?


[0:51:40.9] BJ: They’re not very quick, unless they really are really trying to pressure you for money. Let me make a comment, and please understand, I said earlier that I love beating out the IRS legally. You know what the real problem is? It’s not the IRS. It really isn’t. The real problem is not knowing what’s available in tax law, is being ignorant of what the law provides. The laws are there actually to help us, not to go against us.


It’s really a matter of taking advantage of what the law says you can’t do and do exactly what the IRS says you can do. That’s what we’re taking advantage of, not going against the IRS at all. They have their rule. If it wasn’t for the taxes that are paid, this country wouldn’t run. What’s important to also understand is that the laws are there in place to allow us, everyone us, not to have to pay more than what we need to pay under law. Unfortunately, I think largely, most people are overpaying taxes and not even realizing that they are.


[0:52:49.3] MF: Yup. Nope, I would agree with that, especially people in the real estate business. I think I’ll be talking to as well after the show to see if you have any advice for my situation. Bruce, thank you so much for being on. I learned a lot myself. I know you’ve helped a lot of other people learn as well. Great information. Thank you for providing it and helping out people and helping them learn how to save as much money as they can on taxes. I really appreciate it.


[0:53:13.5] BJ: Thank you so much for inviting me. I’ve enjoyed it and I hope your listeners founded the value.


[0:53:18.7] MF: I think they have. Like I said, we’ll have notes on the show notes for the website and the phone number, where to get in contact with you so people can reach you easily. Thank you again for being on the show. Yeah, we’ll have to keep in touch.


[0:53:30.9] BJ: Forward to it. Thank you, all.




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