1031 Exchange vs Deferred Sales Trust: Which Tax Strategy Is Better for Sellers?

Aviva (00:00)
this week, we have Paul Ranieri. I'm sorry, I just butchered your last name, Paul. Paul, how do you say your last name again? Ranieri.

Paul Ranieri (00:08)
It's Runera, you did pretty well.

Aviva (00:11)
Reneary, there's a lot of vowels and I crunched under pressure with the vowels, but Paul is a consultant at engineered capital gain

So I wanna boil this down for the listeners. Can you explain what capital gains are and why it's important for sellers to navigate them properly?

Paul Ranieri (00:34)
Yeah definitely, so capital gains are, let's say you buy a property for $100,000 and in 30 years now it's a million dollars, well the government wants their sliver of that. They're your favorite, or probably your least favorite, silent partner in every transaction. So depending on which state you're in, there's a certain amount of taxes that you'll have to owe. And so...

You want to make sure that you're being as efficient as possible with those taxes. And there's a lot of different strategies that are really, really great. Some of them like the 1031 exchange, Delaware statutory trust, the deferred sales trust, which is what we offer when a 1031 or Delaware statutory trust doesn't work for somebody. So definitely it's always smart to be advantageous and efficient with your tax money.

Aviva (01:22)
Can you explain to the listeners what a 1031 exchange is?

Paul Ranieri (01:29)
Yeah, so a 1031 exchange and we don't specialize in 1031 exchanges, but what it is if you sell your property and...

you have a huge capital gains tax, you can actually defer that capital gains tax and you can purchase another property of equal or greater value and defer those gains to pay them at a later time. So it's one way of just using your gains and instead of paying taxes upfront to Uncle Sam, you can actually defer them and kick them down the road.

Aviva (02:03)
Sure. So what I would say is 1031 taxes are probably the most common method of deferring capital gains taxes. Tell us more about your group's strategy and how it differs from 1031 exchanges.

Paul Ranieri (02:19)
Yeah, no, really good question. So the main tangible benefit to the structure is someone who's selling an asset that has a huge gain in it. And they can either invest their money going forward with their after tax money. So let's say that's $2 million, or they can invest the entire proceeds, which is $3 million. So in other words, the million dollars that they would have written a check to the IRS for.

actually able to have their trust invest and generate an income for them over the next 10, 20, 30 years and pay the IRS way down the road in future dollars, giving them a huge discount from a time value of money standpoint and earning money using the IRS's taxes in the meantime.

Aviva (03:12)
That is so fascinating.

Paul Ranieri (03:14)
Now I did want to mention, I know you asked a little bit about the differences between the 1031 and the deferred sales trust.

The 1031, you are required to go back into real estate. And so it is required that it's a like to like property. And with a 1031, there's some other guidelines. So if some of your listeners have either done a 1031 or they're familiar with it, they probably are aware of the 45 days where they need to identify a new property and there's 180 days to close. The Deferred Sales Trust.

guidelines or restrictions just because it's on a different tax code it's not on the 1031 tax code so it is a little helpful for investors or people who maybe they are interested in you know real estate right now but they're kind of tired of it and maybe they want to wait let the market play out a little bit and then invest at a later time so it does provide some extra flexibility

Aviva (04:20)
Do you have to invest straight into real estate or can you invest in the stock market or other assets?

Paul Ranieri (04:28)
Yeah, yeah, good question. So a lot of our note holders, they're actually people who they've, you know, their entire life was in real estate and some of them, you can't get them out of real estate. So they do eventually want to get back in and they're looking for maybe a new depreciation schedule. So that's one plus of the deferred sales trust now.

Aviva (04:39)
Wow.

Paul Ranieri (04:50)
Some of the clients, they're just tired of the famous slogan, it's tenants trash toilet. They're tired of having those problems at 7pm at night. Someone calling them and saying, hey, my toilet just broke. So, some people are over it and they just want to invest into stocks, bonds, securities, annuities, treasuries. I mean, right now they're extremely high. So there's a lot of flexibility in it.

Aviva (04:56)
No.

Paul Ranieri (05:20)
Most of our no holders are invested into things like stocks bonds securities annuities things of that nature But we do have quite a few who like I mentioned earlier if you know they started in real estate You can't get the real estate bug out of them So a lot of them will actually reinvest back into real estate or even other businesses, too

Aviva (05:40)
curiosity, say you have a client who is doing this type of deferment strategy and they die. How does that affect the tax? Because I know generally if somebody dies and they own a property, you get their trust or the inheritance get the benefit of a stepped up basis.

Is there anything like that you all deal with when the inevitable happens?

Paul Ranieri (06:11)
Yeah, so there's no stepped up basis, so that is one.

benefit to the 1031 versus the Deferred Sales Trust. So for some people if they're really only looking for a stepped-up basis which it is a huge advantage, we'll be the first ones tell them hey you should probably do a 1031 exchange. Now there's some no holders who they want to get back into real estate anyways and so they're going to reinvest back

real estate and then start up their real estate purchasing journey and so in the long

stepped up in basis but that gets a little more advanced and usually our attorney will walk through that strategy with some people but in regards to when someone passes. So you know in a hundred years when that person passes is usually what I like to say. It does, so we work a lot with estate planning to make sure that it gets left to their family or whoever they would like it to.

Aviva (06:59)
Yeah.

Paul Ranieri (07:11)
But the promissory note that is being paid out to them, it doesn't trigger upon death. So they are not required to pay the taxes upon death. What it does is it will actually, the note payments will continue to their beneficiaries upon their passing. And their beneficiaries will be able to work with us as the trustee and the trust's financial advisor to determine if they are happy with the way that the assets are being currently

that time if they'd like to they can you know withdraw all the funds pay the taxes or they can say hey you know I'm a little more conservative or a little more aggressive can we make an allocation that might reflect you know my investment approach or strategy. So there is a lot of flexibility but it doesn't terminate upon death.

Aviva (07:52)
Wow.

who are your average customers?

Paul Ranieri (08:10)
Yeah, you know, it really varies. On a day-to-day basis, I think we get a lot of people who are real estate investors, or there's, you know, individuals who have owned some multifamily for the last 30 years, and they're just tired of their roof breaking, or they're tired of tenants, you know, sucking them dry for all of their attention and time, so those are very common. We do have a lot of uncommon people who reach out to us, so like I did mention at the beginning,

Aviva (08:21)
Okay.

Hmm.

Paul Ranieri (08:40)
So it could be used for people who are selling businesses, who have crypto, anything that's highly appreciated. So whenever I come on podcasts, I like to share a fun story. So we had a probably about a year ago now we had someone call in and he mentioned that he had a Picasso painting that had been passed down through several generations of his family. And so he went and he was getting it appraised for about a quarter million dollars.

looking like it was going to be somewhere in the ballpark at his low estimate. He was thinking $25 million and $50 million was kind of what he was hoping it would go for. And so at a worst case scenario he was looking at $7.5 million in taxes. So he obviously didn't want to pay that upfront and he wanted to pay it over time and try and earn a little extra money off of that $7.5 million. And so that was what the conversation with him

That's been a long kind of drawn out process and so he's still working on making sure that gets appraised, finding a buyer and things like that. But very, very cool the spectrum of people that we get to work with.

Aviva (09:53)
So how long does the average transaction take for you all?

Paul Ranieri (10:00)
Yeah, transactions vary. Sometimes we'll get people who call us and they have a contract or they have a letter of intent. So, they're maybe a month, month and a half out. Sometimes we've got people who I've got people I've been talking to for the last almost two years. And, you know, it's slowly but surely sometimes they'll have a buyer, a buyer will fall out, especially as interest rates started to rise. It definitely affected the amount of buyers in the marketplace.

Just like in every business, that'll happen. And so, you know, it's a day-by-day thing, and the timeline for everyone's really different. The fastest transaction I think we've had from start to finish was two or three days.

Aviva (10:46)
and the longest.

Paul Ranieri (10:48)
Yeah, the longest, I mean, we had someone close a couple weeks ago that we'd been talking to from, I think they first reached out. We're so yeah, we're right now it's February of 2024. I believe the first time they reached out to our team was in January of 2021. So just to put it in perspective, there's, there's a lot of moving pieces.

Aviva (11:15)
Do you find that, you know, I find every year when I go to do taxes, the paperwork always looks different. It's constantly changing. I don't even feel like the IRS can keep up with the changes that they make for their own documentation, but I don't even want to get into that. Do you find that you all are?

sort of trying to chase a moving target, like are regulations for your capital gain solution constantly changing?

Paul Ranieri (11:51)
Yeah, so it's based off a little over a 90 year tax code. So thankfully, and I'm really grateful for this, it's that I don't have to be the one to manage that constantly, which is a nice part of my job. And our attorney would probably not feel the same as me because he's the one who is constantly on top of it. So I'm very grateful about that, that I don't have to be the one who does it. And I'm sure he's on a daily basis tracking every last little thing.

Aviva (12:17)
Wow. Have you seen any crypto people come in with crypto? Or did everybody lose their money in the last?

Paul Ranieri (12:25)
Yeah,

we had one, we've actually had a few people who've come in with crypto and so one of them...

He called us and said, hey, I had a friend tell me to buy

when it was like $10. And so I put in 10 grand and he just promised me that it would work and it would be the best investment of my life. And at the time, it was somewhere north of like $20 million. And so he was like, yeah, my cost base, this was 10. I forgot about it. I had it in my desk drawer in a USB drive.

That one was ridiculous to me. I was like, wow, I wish I would have had that friend 10 years ago. And so we've also had a couple people who've reached out and they said, hey, I bought Bitcoin or I bought Dogecoin when it was a penny. And he's like, yeah, my son told me to buy it. And I trusted him. So I bought it and now it's worth, I think it was like $700,000.

was like just one piece of his dogecoin he had a bunch of other crypto assets but it was just really cool to see you know wow this there's people who are making so much money on all this stuff and now just to clarify this is not investment advice nothing like that not tax advice you know make sure you bring your CPA on the line talk to our attorney don't invest in anything you can't afford to lose whatever there is I'm selling you be sure to double check but yeah.

Aviva (13:59)
Ha ha.

Paul Ranieri (14:01)
Yeah, it's just unbelievable to see what people are really doing out there.

Aviva (14:07)
It's so, something that I love about my job and you might feel the same way is just the people's risk tolerance and how they dabble with risk. And, you know, obviously look, people make risks and lose it all and you never hear about it again, but.

Oftentimes, we play with the people who make risks, and then there are rewards, because it's any type of investment. And seeing the way that risk can play out, the higher the risk, the higher the reward. And something like...

Paul Ranieri (14:40)
Right.

Aviva (14:50)
listening to your buddy tell you to buy some Bitcoin at 10 bucks. It's risky, right? He could have very well lost it. He probably did lose a bunch of money buying other crypto, but does that $20 million gain count? You know, does that reward make up for the risk of what you lost? I'm assuming yes, but I love risk and reward, and I could talk about it all day long.

Paul Ranieri (15:18)
Yeah, it's a really interesting topic to think about and for me it's kind of like the way I like to think about risk reward is with a casino.

You know, the casino, there's a reason that casinos are so beautiful, they're so big, they're so large, it's because they're always going to win in the long run. But you never hear about the people who go into a casino and they lose their house, they lose everything that they're worth, but you will hear about the people who, you know, they just won $100,000 betting on the Chiefs winning the Super Bowl or whatever it is. So it's, you always hear about the risk reward when it pays off, but sometimes people don't talk about the failures.

I think the failures are really important and sometimes we get so caught up in just learning about the success that we miss out on so much more.

Aviva (16:08)
Yeah, it's like shooting free throws. You're definitely not gonna hit all of them. But if you don't step up to the free throw line and shoot, you're not gonna make any of them. So yeah, I think it's really important to just understand your own personal relationship with risk, how, you know, where you are in your life and how you can navigate it, and then navigate accordingly.

Paul Ranieri (16:38)
Yeah.

Aviva (16:38)
So.

Paul Ranieri (16:38)
Definitely and it's really interesting to see because so many of the people that we work with have such a high-risk tolerance and You know some of the business owners too because we work with a lot of business owners as well And most of the business owners are looking to retire. They've they've taken all their risk They've put it into their business into their life and now they're just hey, I want to be as conservative as possible I want to spend time with my grandkids. I want to go get ice cream on Wednesdays with them after school

Aviva (17:03)
Wow.

Paul Ranieri (17:08)
So it's really interesting to see that contrasting view and people who have kind of used up all their risk as they start to get older.

Aviva (17:16)
Wow, that's so funny and so interesting. So, you know, your risk tolerance can change based on the day, the week, the year. So let me ask you, what are common mistakes that you find sellers make when it comes to managing capital gains?

Paul Ranieri (17:39)
Yeah, I think probably the biggest thing is that they just aren't prepared. So sometimes when people are about to sell their real estate, their business, whatever it is when they're going to sell, there is an un-talked about, oh, I have to pay a million dollars right now in capital gains, so they're expecting my sales price is $3 million. I'm going to have $3 million to work with. A lot of people don't.

think it through that there's going to be other fees that are going to be owed. So they kind of just said, oh, if I get $3 million, I'm good. And then when they end up with $2 million, they're like, well, I didn't plan for this. So I think planning accordingly and just being smart and efficient with your money is probably the biggest piece of advice I could give to anybody who's looking to sell. The other thing is to know your numbers. Talk to your CPA first and foremost.

details about your business and what you should be expecting at closing if things

go the way that you expect them to.

Aviva (18:43)
Something I learned this year is talk to your CPA in Q1 and talk to your CPA in Q4 and don't miss those meetings.

Paul Ranieri (18:50)
Yup.

Exactly. Now there's um, it's kind of scary. Sometimes the calls that we get, people just have no idea what, and they're like, yeah I close in two weeks. And I'm like, okay well, hey, what was your cost basis for the property? And they have no idea. I'm like, okay well what is the sales price? Uh, let me call my broker, I don't know. Well.

Aviva (19:17)
Oof.

Paul Ranieri (19:19)
I respect that you live with zero anxiety and you're extremely confident that your broker is doing a great job, but I could never do that. So it's just mind blowing sometimes.

Aviva (19:32)
I experience some sellers and buyers like that and it blows my mind. But, you know, how do you, you do tax deferment and I'm sure you hear people talk about the ethics or lack of ethics in deferring taxes. How do you navigate that conversation?

Paul Ranieri (19:59)
Yeah, so there's a few things. I mean, one that's very familiar and one example I like to give a lot is 401ks. So if you think about it, your money is growing consistently in your 401k and the government, they're totally cool with that. And so when you start to receive those payments, that's when the government is going to come over and say, hey, we'll take a little bit of that. You can pay up now. And so as you start receiving the money, they want their piece and that's very fair.

Using a tax deferral method, not only one, it booms the economy. That's actually the original reason that the 1031 exchange was first created. It was in order to help the economy after I believe it was World War I. And so it was just to help the economy expand. And I think that being able to use that tax deferred money not only just creates more opportunities in the economy and helps more people,

the government because at the end of the day they're just going to receive more taxes. They just have to wait a little longer for it.

Aviva (21:06)
Hmm. Yeah, hey, it's an interesting one that I talk about a lot. And it's like, you know, the government made these rules. It's just whether or not we choose to educate ourselves and understand that they exist, which was why I was really excited to get you on the podcast, because just to be entirely honest with you, your expertise is very advanced. I.

Paul Ranieri (21:28)
Yeah.

Aviva (21:35)
try very hard to talk on a level that the general public can understand. But when it comes to real estate and commercial real estate and the reality of trading assets is that some of these high level topics like tax deferment strategies are super, super valuable to our listeners. So I've got.

One last question for you before I ask you how our listeners can find you, follow you, or contact you. What in your day-to-day in your work makes you happy?

Paul Ranieri (22:11)
Yeah, the biggest thing that makes me happy is just being able to help people. So my previous role...

in a past life I was a loan officer and so I was helping people get into their first homes and I found great joy in that. So it was really, really fun, really exciting and maybe there's a young couple and I'd be able to give them a call a couple weeks later and say, hey, how's your first home? And they were just overjoyed and really happy. And so I thought that was something that was super fulfilling and now I get to do it on the flip side. So I get to help, like I mentioned, I think we talked about it a little earlier, it's like grandparents or people retire.

They've spent so much of their life building such a legacy, and now I'm helping them leave that to their kids, their grandkids, and be able to spend time really doing the things that they love with the people that they love. And so, you know, maybe it's not getting them into their first home, but it's helping them do things that really mean the most to them.

Aviva (23:09)
Very cool. I can imagine that's very rewarding. I love elderly people. So I'm sure you have great interactions because you help them that way.

Paul Ranieri (23:15)
Damn.

Yeah, it's really fun. It's just so rewarding and it just brings a smile to your face, especially knowing that you've made such a difference in someone's life.

Aviva (23:31)
Love it. Paul, do you work nationally? Like can anybody? Yes, I'm getting a yes.

Paul Ranieri (23:38)
Yes,

we work nationally. Anybody, any state, give us a call. We are always happy to learn more about your situation. We'll be the first one to tell you if it's going to be a good fit or if there's a different strategy that might be better. Even though it doesn't really help us, we've got partners all across the nation who do pretty much anything you could ever imagine tax deferral wise. So we're always happy to help.

Aviva (24:02)
Amazing and Paul, where can the listeners find you and your company on the web?

Paul Ranieri (24:08)
Yeah so on the web I would say check out our website it's ecgsinc.com so ecgsinc.com or you can reach out to me on LinkedIn that's probably the easiest way to get in touch with me it's Paul Ranieri my first and last name P-A-U-L I know it's hard to spell but it's R-A-N-I-E-R-I and yeah shoot me a message let me know you saw me on Aviva's podcast and I'm happy to

help you out.

Aviva (24:40)
Thank you, Paul, we appreciate you being on the show and for the listeners, we'll see you next week.

Paul Ranieri (24:45)
Thanks, Aviva.