When and How to choose between Opportunity Zone, 1031 and DST

Foreign welcome to Think Outside the Stocks. This is our bi weekly webinar series Free Educational series and we are welcoming Brandon third time in a row now back to back to the every week. So thank you welcome series Free educational series and it goes live on these token stats.

It wants to hear it again.

I know. So yeah, in this three part series we are talking about capital gain, taxes and how we can save on that. So far in two parts we discussed, you know, 1031 Exchange, DST Opportunity Zone and today we are going to be talking about with life case studies. Brendan is going to explain about how you can calculate your taxes and how you can evaluate that what's the right choice for you if it is 1031 opportunity zone or you know, even going ahead and putting your money in dsts. So we're going to talk about that. We're going to discuss in detail. If you have any case studies please post it in the chat window and and for our audience on Facebook please join us. I will be posting the link in the comments soon so you can post your questions here in the zoom window. So again, welcome back Brandon. Three weeks in a row back to back to back.

No, it's awesome. It's awesome to do it and I hope we put a kind of put a bow on it for folks tonight and they can get a good feel for at least the starting point of the which direction should I head down and do more homework on.

Absolutely. Thank you so much and welcome everyone. I am so glad to see your names being familiar, your familiar faces. Just love to have you back. I know it's a weekday, sometimes it's tough to get here on time but I really am grateful for you showing up and so we can continue this very educational series ahead. I'm your host again. My name is Madhavi Nadesh Jain. I am the president and wealth strategist at Think Outside the Stocks. So let's go ahead and get started. I'm just gonna get started just a little bit intro and we will jump completely. I'll hand it over to Brandon. So today again as we said, we're talking about how to choose between 1031 opportunities and deliver DSDs. A disclaimer from our side. This is an information only and education purpose only webinars. We are not, you know, financial advisors, CPAs or tax tax attorneys or lawyers. So if you need to seek out any information, any advice, any counseling, please, please reach out to your, you know, your team, your legal team, your tax team. So if you are this is not any investment offering. If you're not offering anything here, if there is an investment offering it will be through proper legal documents. And also note that the examples and today we have a lot of examples, a ton of examples, right? So please note these examples, these are point in time, it depends on many factors so each scenario will be different. And I you know, I think everybody understands that. But it's just nice to repeat that most of you by this time know about me. I am Madhvi Nare Chen, President of Think Outside the Stocks and Wealth Strategies as well. I use two fold approach to help my investors to get closer to their financial freedom. The first fold is to get your savings account in your bank which is the lazy money in your bank accounts. Get that to work for you with Infinity banking system and have your the second fold is the investment to help you able to participate in real estate investments in hassle free approach with group that is the syndicated investments and just you know, through education as well as bringing this investment opportunities which are thoroughly vetted by me with different syndication team across the country in the emerging market. So that's what I do with thinkout center stocks. In my previous life I worked in IT industry about 1617 years, most of it with the top five consulting companies into project management. And in my real estate journey I have portfolio of single family, Airbnb, multifamily passive investments in syndicated investments as well as active syndicated as well. But truly, truly, truly I'm passionate about education and that's why I'm here every other Thursday at 6 o' clock central bringing in new topics just so you can move towards your passive investment journey and financial freedom slowly step by step. And our guest today is Brandon Brickman. He's from Insight 1031 and he leads their marketing and investment due diligence effort. And prior to Insight he focused he founded Wes Chapman and Company. It's to assist the clients to grow their business by gaining insight through data and he worked with different clients ranging from financial services to logistics to pharmaceuticals and prior to that he was actually he worked in a prominent hedge fund as a head of fixed income financing and he helped consultancy assisting hospitals in making vendors selections. He also serves on the board of repairs of the Breach, a daytime homeless shelter in Milwaukee. And he has done double major in finance and accounting. So that's a little bit about about our guest today with the think outside the stocks. Like I said, you know I help clients not just to save invest but kind of take a bird's head perspective to their wealth maximization in terms of growing, preserving, protecting and passing the wealth to the next generation. So that's a little bit about think outside the st. I help that with the two fold approach. That's the better saving system with infinity banking and the risk managed syndicated investment as well as the education. We have the upcoming webinars scheduled, just couple of them and we keep on schedule adding more and more in future as well. But next week I'm gonna go back and kind of do a rewind of syndicated investments. The hassle free world of real estate investment with syndication. I'm gonna just take that again and just gonna explain from scratch what is a real estate syndication and how you can benefit from it. That's going to be two weeks from now. We will talk about the terminology, the terms advantages and you know, whole nine yards. So just come and join us for that one one hour of education. On the first of July we actually are bringing in a cpa. Kenneth Yocha is going to come in and talk about foreign investors. I know a lot of you have friends, family in different countries and they often see the real estate in us and they think about that hey how can I invest into us and all these real estate investments that's going on there. We're going to talk about the nitty gritty details of that, what is tricky, what's kind of overwhelming and how to handle that. So Kenneth is going to talk about that. So please do join us. And that was just a little bit spill from my side and now I'm just gonna turn it over to Brandon. So Brandon, take away from here.

Kind of excited about those upcoming, upcoming webinars. Oh, can you give me the ability to share? It looks like I can't share.

Oh, I'm sorry about that. And I think we have participants posting has provided a case study and you should have the sharing type. Can you share?

Yes, now I can.

Perfect.

Yeah. And that not the plug future before we get to this one but that one's really awesome to think about. The foreign text I know Kenneth from, met him on LinkedIn as well. Awesome resource on that on that front. So that's going to be super fun to kind of walk through that totally different, different dynamics to sort of think about. So today's sort of the wrap up that I want to walk everyone through. As we've, as we've discussed, We've talked about 10:30 doing the 10:31 exchange through DST. We've talked about opportunity zones. What, what do I do now? Right. How do I make a decision about like what path to go down to. So can we, can we wrap this in a bow and at least get started down a path that might make sense or maybe eliminate one of these choices from, from the equation. So that's the goal for today is to kind of walk through how we think about this from maybe a top down scenario and what's out there in terms of tax that I'm going to owe potentially and then to think about what tax I can defer and how that would work through each of these options. So we'll walk through it. This is the calculator. So let me take you through kind of how this will work. Every green cell is items that we enter. Everything else will be calculated for us. So most examples we look at do think about selling property. So you'll see that prominently in here. But my last example, I'll walk a little bit through what if I'm not selling property, because obviously Opportunity Zone is a play for that as well. Then we'll compare each one of these items to say, okay, if today I make this decision, what will that look like 10 years from now?

Right.

And so that's what this chart is going to kind of tell us as the output of that. What will I have in my account after 10 years? So there's a variety of assumptions for us to get there. I'm assuming some top end tax rates here that may not be the case for everybody. So we're probably over assuming some tax there. We want to take that down for particular examples. And the other key point here on the assumptions is I'm using 8% as an annualized return for every investment option in here that's not a DST or not Opportunity Zone. Obviously that can fluctuate a lot in terms of what you can expect in an annualized return. But we gotta start somewhere and use some sort of benchmark. So I've been using eight. So again, three different options I want us to think about. One, what happens if I pay the tax right? What will I owe? So when you, when you sell property, there's really two types of big taxes that you owe. You're owing the capital gains tax and there's a depreciation recapture as well. That kind of sneaks in there on us. That I think is sort of surprising for folks that the government kind of comes back to us and says, oh wait a second, you know that you've been writing off every year that depreciation, we're actually going to want some of that back. So it's important to understand how much depreciation you have taken and that that's coming back as well when we think about the tax bill. So that's one option. And paying the tax is an option. We watch clients make that decision, I think for a variety of reasons. One, I think we were talking a little bit pre show about, you know, some folks are looking to hedge their taxes. They're frightened out of their minds that taxes are going to go up dramatically over the next 10, 20, 30 years, and they just want to get it off the table and pay it now. So we're watching folks make that decision and do that. We're watching folks make this decision when they have offset somewhere else that the tax bill isn't. They're like, you know what? I can handle that tax bill. I have offsets over here as losses. I'm fine. I can do that. So it's really, really important to sort of understand before we start going down this road of should I 1031 or do an opportunity zone cash? I don't want to pay this tax. Do you know you have a tax bill that's significant, do you have other ways to offset against it? Right. Or third item, do I really need this cash right now? There are other things that I need to do with the cash and have that liquidity today that it's worth it for me to pay that tax. So these are all like big things to sort of think about. And they really start in this assumption bucket and thinking about what this means for you in terms of the tax on that sale. But also, as we talked about last time, like having a great CPA that understands investments and real estate, et cetera, is really going to help you understand, hey, what is my tax burden? So a lot to sort of think about there, but paying the tax isn't as we rarely see our clients take that option, but we recommend it. In some cases we look at it and say, hey, look, this, this is not as bad as you may think it is. Or, you know, you really consult with a CPA on that and, you know, some come back to us and say, you know what, I'm good. I'm going to actually pay the tax. So it's an option that I don't want us to maybe, maybe ignore as we're sort of thinking about this. The second option I'll take you guys through on the page. Let me know if this is too small. We can always make it bigger. The second option we can take through is sort of the 1031/dST. So we'll make some very, I would say Conservative estimates on the annual cash flow coming off of dst and what we'd expect is annual appreciation. We can play with those. But there's important items to remember here when we're thinking about this one. We are going to have some taxes on cash flow. And this is a very conservative estimate as well. A lot of DST deals we see have offsets in them, but it is on a deal by deal basis. So to make our life easier, I am assuming probably more tax we pay in cash flow here than we normally would. But again, there's no tax on the growth of the investment if we're doing another 10:31 exchange again. Right. So this option implies that we're continuing to do exchanges and continuing to roll this after 10 years. And then the third option I want to walk you guys through too, for you to consider how the mechanics work here is the Opportunity Zone. So in the Opportunity Zone option, I'm assuming that we're going to invest the gain, the gain into that investment. That's what we need to invest to defer that tax, if you remember from our first episode, to kick that tax down the road to year seven, that's what we need to invest in year one is that it's just that gain. So in some cases that will leave us with more money to invest elsewhere. And I'm applying the 8% to that as well to say, okay, I can split this. I can take my gain invested opportunity zone, I can take the rest invested in something else. And let's assume that that's 8%. So we're putting those two things together to get really a total of the value that will come out of that. Also important to remember here in year seven, yes, you do have to pay the tax in 2026. And so we are including that number in the equations as well. So that's sort of how the calculator works. And again, in this model, we'll plug some options in some of your case studies in as we get to that. But I have four that I want to sort of walk through and show you how they sort themselves out and then take some questions on that. The first one, is this big enough? Should I make this bigger?

Yeah, it's big enough. Maybe a little bit bigger will be helpful. This is good. This is perfect.

Okay, great. Oh, I didn't say the disclaimer. My disclaimer. I am an investment advisor. However, I am not a tax or legal guy. And this is for. This is illustrative. It's hypothetical. It's for information only. Investments Involve risk, you can lose money. Disclaimer Good. In this assumption, I'm assuming this is probably the easiest and most vanilla sort of assumption that I'm assuming here. So I'm assuming that we're selling an investment for a million dollars. I'm assuming that we purchased that for 500k. I'm assuming that we've taken 300k worth of depreciation. I'm also assuming that there's no debt. So it's probably the cleanest example that I can possibly give here. So the depreciation lowers our cost basis. Right. And then we're left with this as a capital gain on the transaction. So again, I'm kind of giving it away. I'm kind of cutting to the chase here in the chart. But we can see there's a substantial difference here between paying the tax and not paying the tax. For sure, there's a substantial difference between paying the tax and utilizing opportunity zones. It's a huge difference and a lot. Couple things that are driving that in this example really is some of the assumptions on returns. So we are assuming a 10% IRR on opportunity zones. Right. So that's about what we've seen from these investments in estimation. If we wanted to be more conservative, we would take that down to eight and see what that looks like to be consistent. Even if we take it down to eight, you can see we're still in a position where the opportunity zone looks like a pretty darn good option in that equation. It actually beats out 1031 DST. And I think the reason that we're seeing that is some of these really conservative estimates that we are seeing on DST returns. We kind of alluded to that last week a bit as we started to talk about what it means to look at some syndication tick options as potential sources for more economics in this equation. So I mean, to assume an average annual appreciation 2.5%, that's historic inflation, that we're sort of assuming there, which we know hasn't been the case in appreciation over the last decade or so. Right. So in some cases, hey, maybe we get a little bit more aggressive and say that should be 40. So if we start to drive that number a little bit and thinking about the return that you can get out of the 10:31 exchange, it starts to kind of level out with what we're looking at in terms of opportunity zones. So I think the decision for folks when it comes to this scenario where you're coming to it with, I've sold property. I don't really have debt on that property. I have a bit of depreciation that I've taken on it. Not all of it. You have a variety of options. Obviously in this scenario, paying the tax is the least economically advantageous option that you're looking at for sure. But if we're finding better options, I don't think Opportunity Zone is necessarily a slam dunk for us. However, what we've seen for clients is they say, hey, I would really like to defer this tax, but I have something else that I'd really like to invest in that's not eligible for 1031. Can we make that happen? And that's where Opportunity Zone gets really interesting. Because I can start to split and divide that capital, right? I can put a little. I can put some of that and put that gain against the opportunities. I'll get that deferral. But I can still look back and say, hey, there's this great investment opportunity I can have over here. Plus, we think the aspect at the end of 10 years is really interesting, is at the end of this 10 year period in the 1031 DST option, I have to do it again. I won't have. Who knows what will happen in 10 years, but I'm pretty sure we're not going to have another Opportunity Zone scenario, right? So now is the only time to really get involved in the Opportunity Zone and use that as an option 10 years from now. I have no clue if there'll be something like that available. But it's an aspect that I think people need to think about is you go the 1031 exchange route into any type of syndication, you've kind of boxed yourself in that corner of, I got to do that again, either through syndication or through dst. And many people are perfectly fine with that. We roll it, we find new investments, great. Others, not really. So when you kind of look at this equation, after 10 years in the Opportunity Zone, I have completely unencumbered cash. I can do whatever I want with that money, right? It's wide open. So there's a lot more in our mind, there's a lot more options and flexibility in that direction than there might be in the 1031 DST. Again, not to steer. These are only options. And you got to kind of decide which one of these sort of parameters fits well or fits right for you. Do you want to add anything there?

I love this calculator. Thank you so much for putting it together, Brendan. I love that there's this side by side comparison, not just at the point that they're paying taxes but the value after 10 years. So absolutely love this and for our audience actually if you find this calculator useful, just post a comment. I mean I'm really, you know, excited to see this calculator and if any of this information actually is a lot of information for you and you're not, you know, not understanding any terms, please put that in the chat window or raise your hand if you want to talk as well. We have been on this journey of a three part series and today is the last part. So if you. I saw some people, they have been attending with us from day one. So if you haven't attended the part one where we talked about opportunities on the pros and cons and details about it. In part two we talked about the 1031 tic which is the syndication 1031 and we also talked about the DSTS again pros and cons details about that. So today we are talking about comparing these three options. If you have a scenario, a case study where you're exiting the real estate and you are having that capital gain. So a. If you don't understand any terms please raise your hands and we will talk about it. We'll just repeat some of the information for you and if you, you will receive all the three recordings I'll make sure that you will receive as a package as three recordings after the webinar today. So you can always go back and listen to all the other other tool as well. So yeah, I just had to add that. Thank you so much Brandon. Please go ahead.

Absolutely. Yeah, that's a good point. I am probably motoring a million miles an hour so please slow me down.

No, no, I mean, this is what I mean. Great information.

Yeah, please.

I just realized that people, some people were joining in late and you know, some people haven't joined us in last two.

That's true, very true, very true. So as example one I think it's, I think example one sort of the cleanest example we think about that doesn't have sort of debt attached to it. Debt starts to make this a little bit more tricky but totally, absolutely doable in terms of this scenario. So in this scenario we're thinking a million dollars again, 500k purchase price. I have 200k of debt that I still have a mortgage I still have on that property. I've depreciated 300k. So your basis is dropping there. But in the key aspect that's a little bit different here is in the 1031 exchange scenario I have to replace that debt in order to execute the exchange into dst. So DST will allow you and has those options to do that. But it is a wrinkle to the equation. And what it does is it sort of forces us a bit as that as your basis. What's interesting is I kind of went through these examples and I want to focus on the Opportunity zone for a second. We talked a lot about the Opportunity Zone giving you those options to split and really diversify potentially in Opportunity Zone and in something else, as soon as you start dropping this basis lower and lower, you're really losing some of those options because again, we have to invest that. You have to put that gain into the opportunity zone to get the tax benefits of it. So we are sort of taking some of that optionality off the table a little bit, the lower and lower your basis gets in your prior investment. So it's something to really consider as we kind of go through this. And you think about what you want to do in terms of these equations is you probably don't have as much flexibility as you would have in our prior scenario where your basis is a bit higher and there's a little bit less gain there to kind of go after. As this gain continues to get bigger. You know, Opportunity Zone becomes a place that you kind of have to go to to get to get that full deferral benefit. Now, as I say all that, there's absolutely no reason that someone couldn't go down this road and say, hey, you know What? Instead of 800k, I really want to put 500k in there and turn around and maybe pay some tax on the differential and find a different investment away from here. That's interesting. You could certainly do that. We watch people actually do that more often in the 1031 exchange DST land where they will do a partial exchange. Let's say, hey, I want to take 20 grand, 30 grand off the table on this exchange for liquidity purposes, for another investment that I'm sort of thinking about and substantially lowers the tax bill to do that. So it's something you're never. It may seem like you're always locked in. You're kind of locked in. If you want to get to a place where I don't want to pay any tax today, zero. Okay, Then you're passed down the highway getting narrower, right? If you're open to, hey, maybe paying some tax today and providing myself some sort of freedom of that capital, there's absolutely no reason you can't start to split this off into maybe different directions. So it's something that I want to point out. It's very key when you think about opportunity zone in these scenarios.