Ep 81: Navigating Real Estate Transactions: Tips for Deferring Capital Gains Tax
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You’ve found it. Everything you need to know about real estate investing, all in one place.
In this episode, Matthew, Brent, and Joshua, talk with Jay Frank, President of Cantor Fitzgerald Asset Management, to discuss everything you should know about real estate investing including what you should know as a landlord, what a Delaware Statutory Trust is, and so much more!
Jay discuss:
What a 1031 exchange is in the real estate industry and how they work
How he can help real estate investors grow and enhance their business strategy
What a Delaware Statutory Trust (DST) is and how they can enhance your real estate investing experience
What to consider before becoming a landlord
And more
Resources:
Connect With RPA Wealth Management:
(909) 296-7977
Connect With Jay Frank:
About our Guest:
Jay Frank is the president of Cantor Fitzgerald Asset Management and Chief Operating Officer of Cantor Fitzgerald Investment Management. Jay has spent the last 16 years focused on the real estate assets and alternative investment industries.
He works closely with financial advisors on the implementation of sophisticated real estate solutions, including 1031 exchanges and tax deferred exchanges.
Transcript
Welcome to The Retirement Plan Playbook with Brent Pasqua, Matthew Theal, and Joshua Winterswyk from RPA Wealth Management. In this podcast, we cover current events, retirement planning strategies. And provide you with the tools to help you build a successful retirement playbook in any political or financial landscape.
Join Brent, Matthew and Joshua as they navigate the issues that can make the later stages of your retirement plan challenging and help you create the best Retirement Plan Playbook. Now let's get to the show.
All right. Welcome to the Retirement Plan Playbook. Uh, today we have a special guest on the show. Joining us today is Jay Frank, the president of Cantor Fitzgerald asset Management and Chief Operating Officer of Cantor Fitzgerald Investment Management. Jay has spent the last 16 years focused on the real estate assets and alternative investment industries.
He works closely with financial advisors on the implementation of sophisticated real estate solutions, including 10 31 exchanges and tax deferred exchanges. Jay, welcome to have you on the Retirement Plan Playbook. My pleasure. Thanks. Uh, thanks a lot for having me guys. Js we kind of jump into this. Why don't you tell the listeners a little bit about what you do and I guess what you don't do.
Yeah, yeah. Well, well said. Uh, to knock that fun part out, just, we don't give tax investment or, or legal advice to make sure you're working with, with experts such as, uh, RPA as well as your legal and accounting teams. But yeah, I'm the, I'm the president, camp Child Asset Management. We've built a pretty.
Real assets and private markets platform over the years with a lot of real estate related strategies. And a lot of those strategies cross between real estate investment and taxation, which I believe is the focus of this call. So I've helped build a lot of those strategies, grow those businesses, and you know, we're always trying to bring innovative and useful solutions to, uh, to investors.
Uh, tell us a little bit more about Cantor Fitzgerald, how you guys started and what your main focus. Sure. Uh, I've been here seven years now helping to build this business. I, I'm, I'm out in Los Angeles, but, uh, the firm's been around 77 years, going on 78. So the firm was founded here in LA in Beverly Hills in 1945.
The business through the, through the decades was mainly a lot of fixed income bond trading and we're specifically government bond trading. Can I created the first electronic trading system for government. Anyway, the business grew and expanded over the decades and, and moved up to New York, and today it's the largest private partnership on Wall Street.
So about 12,000 employees around the world in 22 different countries. Investment grade rated from uh, s and p and Moody's and um, has a number of different business lines. Still fixed income, still a big business. Equities, prime brokerage, investment banking and real assets asset. Tremendous growth in tremendous large company.
When one of the questions I think a lot of listeners have is when a person sells or they have, let's say an investment property and they're sitting on real estate, what real estate tax tor solutions do they have available to them? Yeah. And, and, and I'll, I'll, I'll broaden that to touch on all options that they have.
So the first one, Not sell the property, right? You can always, and sometimes that's a good strategy, right? Just stick with what you got Second and, and probably the least recommended strategy, but sometimes appropriate pay taxes. You know, there's sit situations where a very small tax benefits causing someone to make a decision on a much larger, um, size, you know, investment amount.
I mean, sometimes it's just, just pay those taxes and, and do something else for the money. But when it comes to, you know, when there is a sizable taxable event and it makes sense to do so. There's, there's a few primary options. One, you can hire a real estate agent, help sell your property and help you find a replacement property.
You can do a 10 31 exchange on your own. Number two, there are things called, uh, DSTs, which we'll get into that allow you to do a 10 31 exchange into a larger asset that somebody else puts together. And. Third, there are things called 7 21 upgrades that we'll get into where you can actually sell your real estate to a larger real estate investment trust to defer taxes that way.
And last but not least, there's the qualified Opportunity zone program that was created five years ago as a, as another option. So I think that's seven options. And, and if, if we wanna be cute, an eighth option would be a combination of some of those, those first. Most people are aware of pay tax, don't sell or do a 10 31.
There's a number of items that, um, everybody should be aware of. Every time I tell a client to pay taxes on their real estate property, their eyes just light up like a deer in the headlights. Nobody wants to pay taxes ever. Jay, I'm glad you did say that. Me and Matt talk about that too. Like it sometimes it is okay to pay taxes.
Yeah. Maybe, maybe let the, maybe bring the CPA into the discussion and have him, have him or her deliver the good news, . So how does a 10 31 exchange actually work? Sure. Very. Um, in its simplest form, cuz it gets pretty complicated, but it can get complicated. But in the simplest form, when you sell a piece of property, let, let's just say someone you know, Matt, own a million dollar rental property in Los Angeles.
When you hire a real agent, and when you go to sell that property, you need to make sure that your proceeds are sent to a qualified intermediary or a qi. Just think of it as just an escrow company that holds those proceeds. So that's the first step because if, if you sell a property and you receive the proceeds from sale, that's called constructive receipt, and that triggers a taxable event.
So you can't receive the money, you can't take constructive receipt. So the money goes to this qi and it sits. Earning interest and you now your clock to complete that 10 31 has begun. You have a 45 day window calendar days to identify at that qi, to let them know what properties you might exchange into.
And there's three different rules to identify properties that, that we won't go into detail on today. So you'll identify your replacement properties and then you have an additional 135 days. Combined with the 45 gives you 180 total to actually close your new investment in those replacement properties, 1, 2, 3, to sometimes more than those properties.
So that's the basics of it. The benefit is that you defer the recognition of any tax from the sale of that initial property. So if you'd bought a property for, uh, half a million dollars years ago in LA you sell it for a million dollars, you'd have at least a half million dollars of capital gain. And you'd have some depreciation recapture tax.
Well, if you take that million dollars and put it in replacement property, right, completing it, section 10 31 exchange, you defer the recognition of any of that tax indefinitely. So that's the basics of it. So you said one of the other options if you weren't doing a 10 31 was a Delaware statutory trust.
DSTs have become popular over what, the last five plus years. Can you tell us a little bit more about a ds? Sure. And, and I'll go back to section 10 31. So section 10 31 on the tax code is over a century old, I think it's 102 or 103 years old now. This is been widely used, hundreds and hundreds of trillions of dollars have have gone into to 10 30 ones.
And, and what the code says is that you can exchange, if you're selling investment property, real property, you can exchange that into like kind real. Like kind just means real estate. So you can sell an office building and exchange into an apartment building. You can sell an industrial property and buy a healthcare facility, right?
That's, that's all real estate. That's all like kind a Delaware statutory trust or a DST for short. Is a trust formed in Delaware, as you can fer from the name. But if you follow certain rules that were laid out in 2004, it was IRS revenue ruling, 2004 dash 86, and basically what that ruling states from the IRS is, as long as you follow certain rules as a DST structure about what you can and can't do, then that DST qualifies as real property.
Thus a client that's selling a million dollar duplex in Los Angeles. Can buy a million dollar fractional interest in the dst, and that counts as a 10 31 tax deferred exchange. So to put another example to that, that DST could own $100 million Amazon industrial property. So you could take your million dollar duplex, or you've been running it out and dealing with tenants and you know, fixing toilets and whatnot, you know, as a landlord.
And you could buy a million dollar, 1% for actual interest in that a hundred million DST that owns on Amazon and get all of the economic benefits of owning that property, but not having to manage it, not having to find it, not having to due diligence and not having to close, not having to finance it.
That's typically all done by a larger institutional firm. So DST really provides for fractional ownership of institutional quality real. And passive ownership. Some people like that, some people don't. So they're not for everybody. And technically a DST can have multiple properties in one trust. So there are ways to get diversification in multiple properties in a DST or invest in multiple DSTs.
So if you're kind of sick of the grind of real estate fixing toilets, like you said, dealing with tenants a, a DST is just a tremendous way to not pay your taxes, probably still get some income and make it a passive real estate. . Yeah, I think, I think you said it best. It's, it's, if, if that is what you are looking for, it can be a great solution.
You know, that person that wants to buy an asset, leverage it up, fix it up, flip it, that's a hands on, that's a business. That's an active trade. That's, that's probably not a DST investor, but that same person, 50 years later in her life, she's, she might be over that. She might be thinking more about her estate plan, generating more consistent income.
Certainly doesn't wanna recognize a taxable. And, and I think everybody knows this, but once you pass away, when you own real, real property, whether that's your own building or whether that's DST interest, your basis steps up to fair market value upon death, right? So it, there's some estate planning considerations here, depending on where someone's at in their life.
I think what's also important is there's this stress. Of the deadlines. The deadlines aren't long. Right? You said 45 days and then 180 days to get these deal closed. So if you're trying to exit a, a bad property or a bad investment, you don't have to deal with the stress of closing, you know, this 10 31 exchange very quickly.
That can be solved by that DST ab. Absolutely. And, and we see it every day. I mean, we're on the institutional side, so we're buying 50 to 200 million buildings, you know, regular. 80% of deals right now are being re traded. So if you're selling a prop right now, or if you're trying to buy one, you're, you might be getting re traded because your bank came to you and said, that loan I told you is yours.
It's no longer there at that loan of value, or we're widening your spread, meaning we're, we're gonna charge you a higher net interest rate. Like there, there's a lot of moving parts to buy real estate already when you slap a 45 day window to identify what you wanna buy. That's probably the bigger constraint, right?
Once you, once you find what you wanna buy and identify, closing on, it's a little bit easier. But 45 days just is not a long, long time to do anything. Right. Do you find that most people or, or some people that are coming into doing a DST are just generally tired of working or managing their real estate properties and they want to go into something that's a little bit more hands off?
I think that's the number one driver. For it is all, you know, 10 31 as a whole, which includes DSTs. It's about deferring tax number one. But why would someone prefer a DST over doing a 10 31 into a property on their own? It's getting access to more institutional quality real estate, institutional financing, institutional management, right?
So it's, which come along with that comes, you don't have to do anything. So I think there's the getting access to more institutional quality asset, maybe a lower risk asset. But also not having to deal with it on your own. It, what was the line? It's the tease, the teases of real estate. I haven't said this in a long time.
You're trading taxes, tenants, and toilets for, tennis tee times and travel. There you go. That's, that's pretty good. You have me at tee times. The teas, the teas of, uh, 10 30 ones. So our DST and our REIT the same. ? No. Um, both trusts. They, they both ended the letter T, but um, and they both own real estate. Uh, they both allow for the fractional ownership of real estate.
But you can, um, A a a A DST can be, is considered real property, right? If you follow the rules from the irs, so you can exchange into a dst, you can 10 31 exchange. You cannot 10 31 exchange into a. However, there are ways to get into a re in a tax sufficient manner. I think we're gonna get there a little later, um, as we get to kind of 3.0 in this, this conversation.
But we'll save that. So that, that, those are some of the similarities in the, the differences on the, on the surface. You're telling us a little bit about what some of the typical DST properties are that people purchase based on some of those typical properties. I mean, what is the typical interest rate or cap rate that's paid to investors on a ds?
Yeah. And, and it obviously that's gonna correlate with the asset type, the quality of that asset, it's gonna correlate to the marketplace that you're in. Amazon credit is Amazon credit, you know, build new Amazon building is gonna be just as nice in one market as another market, but that's gonna trade at a different price or cap rate in, infill Inland Empire, which is really popular for industrial, one of the most expensive markets in the, in the world.
That's gonna trade very different than you. I don't know, outside of Tulsa, Oklahoma, a hundred miles outside of Tulsa, you know, so it's, it's all relative, right? Risk equals return. For our listeners, if they don't know what cap rates are, think of it as the unlevered cash flow that a property generates after expenses.
So if you buy a property at a five cap. Pre leverage, you're gonna earn about a five cash flow net of expenses. You buy something at a three cap, you're earn about 3% cash flow. So you, when you buy real estate, everyone wants as much cash flow as possible, but the higher cap rate, the higher cash flow you're taking on a cons, a consistent level of risk to achieve that.
Different real estate sectors trade at different, cap rates, right? So I think today cap rates have started to increase a little, uh, the flip side, meaning real estate has started to decline a little bit, right? We're all seeing housing, it's happening in commercial real estate and multi-family as well.
That softness is just, is, is definitely here, which is starting to create buying opportunities. But we're seeing cap rates between four and four and a half for multifamily and say, I don't know, five to six for retail. So it's kind of a four to a six cap rate world. You can go find seven a caps, but you're taking on a level of risk that I, I don't think any of us will be comfortable with, but it's for institutional quality, real estate, stabilized stuff that's gonna generate a consistent, cash flow return.
You, you're talking about a four to 6%, four to 5% world. I think too, what's interesting about that is that when we work with a lot of clients that have rental properties, everybody wants to think they're getting 6, 7, 8, 9% return on their rental. When you factor in expenses and repairs and all the things that go into owning rentals, they pay their taxes on it.
They're really not making that much money or that high of a return on the, on a, on a rental property. This is very comparable to not really having to do any work. Yeah, it's a, it's a really good point. I, I'd encourage every good advisor in CPA when, when someone's doing this exercise about investment property, whether they own it already or whether someone's thinking about buying something, to really help walk them through a work detailed worksheet to really capture all expenses.
They're gonna go in to make sure, you know, you have all, you know, you go in eyes wide open so that you can make an informed decision. We, my wife and. I have a rental property out in, in LaQuinta, in Palm Springs area for those of you that don't know LaQuinta. And, um, we, we just went through this exercise with our CPA and um, look, we actually have a third party property manager.
Cause it's a, it's a short term rental. So we get a detailed breakdown of what I'm paying property man fees to them. The, the improvement cost maintenance cost. It, it, it really starts to add up. And it might still be a good investment, but it's, it's typically not. Um, uh, oh, I generated x number. Revenue this year in rents, and here's what I, my assets worth, here's my nice return.
Therefore, getting a lot of those costs as simple as interest rate expense or property tax, HOA fees, you know, utilities, gas, electric lawn maintenance, taking out the trash security patrols, replacing furniture and fixtures. You know, the list goes on and on. You really need to have a good assessment on all those expenses to really understand what you, what you have, and the cost of your time.
Fair enough. Yeah, absolutely. And that might be the largest line item for some, some, some properties. Absolutely. And with so many properties nowadays reaching such highs over the last couple of years, if someone were to sell their property, could they break it up into different DSTs, into different investments within the dst?
Yeah, so typically, you know, DSTs, basically you can have unlimited number of investors. It used to be capped at 4 99. So if you had, um, you know, a hundred million, you know, a hundred million dollar property, you can have a thousand plus investors. So most of these products will have a hundred thousand dollar minimum, and some of 'em will even accept lower than that if there's a, a good reason for it.
So a client that's selling a property for half million dollars or a million dollars in theory, Could diversify into three, four, or even five. DSTs. You, you don't wanna get too granular. I, I think, you know, I'll leave that to you guys to make recommendations so you don't wanna split it too much, but there's no restriction on how many DSTs you can exchange into.
You just don't want your in investment, each one to be too small, because that would limit your optionality five to 10 years from now. When that exits on what you want to do, you know what you're gonna do with that money. You, you, let's say you had a million dollars and you put in the 10 DSTs and you got a hundred grand each.
And those start exiting. You got a hundred grand left over, plus appreciation. What are you gonna do with that money? Your only option gonna go back into another dst cuz where are you gonna find $120,000 replacing property on your own. Right? So you want, there's some other considerations, but yeah, there's no restriction on how many DSTs you can diversify into.
And what are some of the risks with Ds? Yeah, I would think about all the normal risks of owning your own real estate. You know, the roof could fall off, you know, it could collapse or need to be replaced. You, electricity costs could be higher. You could have a tenant move out. You could have, um, you know, your loan comes due and interest rates are higher.
You can't get new financing. It's the same risks inherent owning your own real estate. The on the flip side, if you're talking about exchanging into a much larger, more institutional quality property, There's, you know, you have different levels of risk. For example, if I've got an Amazon warehouse leased to Amazon for 15 years, that's a corporate obligation of Amazon that, that a corporate obligation, a lease is more senior than a bond obligation of a corporation.
So is there risk in Amazon going chapter 11 and not paying and getting our chapter seven and getting outta that lease? What is it? 0.01% of investment grade companies fail. So it's, you know, risk is relative, but, uh, I don't wanna, I don't wanna overstate nor understate the risk. It's a lot of the same risk inherent with, with owning real estate.
I would add unique risk with a DST is that DST is managed by a firm like can. , we, we are making decisions and so the client isn't making a decision that says, oh, let's, put money and, you know, improve this part of the property and get an ROI on it. Or, you know what, let's refinance this debt now versus in two years when it comes due, or let's sell this property in year three.
I don't wanna hold it for seven years. Those decisions are made by the sponsor. So that introduces a risk that people should be. It seems like a DST could fit very well into an estate plan. How does that all kind of structure or work together? Yeah, I think, um, there's a lot of different tangents that we could go into here and obviously if we had an estate planning attorney on, they would, you know, they, they'd be the person to really could, could probably nerd out on some of these topics here.
But when I think of it, when I think about estate planning, I'm thinking high net worth, I'm thinking beneficiaries and family. I've been thinking about charitable goals. I'm thinking about a lot of assets, liquid assets, illiquid assets. I'm thinking about, planning for when that person that sets up eventually passes away, right?
Those are the things that are synonymous with estate planning, but what we talked about earlier, you go from hands on managing the real estate. That person's older maybe doesn't wanna do that anymore. They're looking for more passivity. This asset could easily be that that property could be in the estate and could exchange into a DST inside of that.
or a DST could be contributed to an estate, right? And then when you have the eventual passing of the patriarch, you, you just, it just like a normal 10 31 in a dst, you would have a step up in basis inside with those assets inside of that estate to get all the tax protections and the legal protections of the, of the, of the trust, whether that's a rev vocal or irrevocable trust.
And it would, um, play into the wishes. The people that set up that trust in the first place. So it, it works like any other asset and provides some additional flexibility for, for real estate that has gains that you trying to, yeah. It seems like it could be a really helpful tool, you know, as someone's not wanting to manage real estate and then use it as part as their estate plan.
You did. Yeah. There's also like the whole, um, you guys might know more than me about this, but you know, DST would be considered an illiquid asset that you don't control. Thus, if there's a contribution or a gifting of that asset, There would be, um, what do you call it, A discount for illiquidity. Mm-hmm.
right? Yeah. Discount for ii liquidity premium or something, or discounts, whatever, whatever it's called. There's a lot of tax firms that, and state planning firms that do this all the time. So there's some creative and appropriate gifting ideas with the DST that could help address some of the. Some of the estate, some of the rules around the states, let's put it that way.
Now, you had mentioned also a, a 7 21 transaction or an uprate. I'm curious what that is. Yeah. So here we go. This is, we've done kind of 1.0 with 10 30 ones, 2.0 with DSTs. Now we're on a 3.0 with seven 20 ones. So, like irc, section 10 31 from the 19 twentie. There's another section of the tax code that's closer to half century old.
That's irc, section 7 21. So this is a section of the tax code. This is not some interpretation. Gray area, right? This is irc section 7 21. Go. Go ahead and Google it. Basically what a what? Just, just like a 10 31. A 7 21 is a tax-deferred real estate exchange indefinitely. Okay. Just like a 10 31, a 7 21 starts with an an investment property, okay?
The difference is this. In a 10 31, you're selling investment property. You're exchanging into investment property. Real property. Real property defer tax indefinitely, and you can do that over and over and over again until you either wanna pay the tax until you pass away and your base steps. A section 7 21.
Someone is selling investment property, but they are selling that property to a real estate investment trust or a re, that could be a publicly traded re that could be a private placement rate, that could be a publicly registered, not nav re. There's a lot of different types of res out there, each with their own consideration, but you're selling your property directly to that.
In return for your real estate that you're selling to them. Instead of getting cash, you're getting operating partnership units or op units of that re that exchange of real property for op units of the REIT is a tax deferred 7 21 real estate exchange, just like a 10 31 from a tax point. A big, big difference.
Obviously you're going into a reit, which could be a very large diversified, much more liquid, diversified company. Um, that's one big difference. Another big difference is it's your last stop. You can't do another 10 31 from there. You can't do another 7 21. You are exchanging into the re o p, and in theory, you probably wanna live there until you pass away, where you will also get that exact same step up in.
Eliminating all of that tax, which works into a tax Wealth Management and estate plan, as we were kind of touching on earlier. So that, that's a seven, that's a 7 21 exchange, also known as a up umbrella partnership rate. Uh, but that's also called an up exchange. And these things have. To blown up in a good way, in a positive way.
They've exploded in terms of use and popularity really over the last three years. Be and that's really when these things start being available and all. We'll explain why in, in a minute year. Yeah. Why do you think they are so popular? What the major benefits here? Yeah, so, I mean, I'm gonna answer this a little different way, but I will answer the question.
What we just described is selling a property to a reit, right? Most REITs that I know, and most publicly trade REITs, there's 120 of 'em. They're not buying a million dollar rental property in Los Angeles. They're buying Cedar Side Medical Office building for a hundred. Absolutely 40 million, right? They're buying institutional real estate.
So seven 20 ones have been around as long as I've been alive, but the average person has not heard of a 7 21 exchange. Everyone's heard of 10 31. So what's happened in the last five years is a derivative of that 7 21, making the ability to end up in the reap tax deferred available to someone with a million dollars.
That's why they become so popular in high net worth management, Wealth Management land. So the what that we call that the two step transaction. Okay. So, Step one, we're gonna take everything we've learned on to date on this call. So step one, client sells investment real estate, right?
They buy a fractional interest of that a hundred million Amazon. They have to hold that for a minimum of two years to make sure that it's not an active trader business, right? Or else the IRS would view that as a disguise sale and a taxable event. So they need to be in that DST two years minimum, you know, earning whatever cash flow that DST is generating right from rental.
Sometime after two years that DST could be acquired by a re. That REIT will give those DST investors. Cause remember that DSTs real property, you'd be exchanging real property DST or Amazon for op units of that re That's step two. So first step 10 31 transaction real property to dst. Step 2 7 21 transaction DST into the op of the reap.
All of a sudden half million dollar rental, million dollar rental. in that dst, now it's a hundred million dollar property, right? Which is exactly what reads by. So, that, that's really what's, what's what's happened. And then there's been a lot of education from firms like us and firms like yours about this powerful tool that is for the first time becoming available to not just hot ultra net worth, but high net worth, even down to the accredit investor spectrum of mass.
And then if I, um, and an investor in this product, can I sell like half of my units upon getting it into the reit? How does that work? Yeah, so once you're in the reit, your liquidity is based on the liquidity of that company. So if it's a publicly traded re public traded, REITs are, there's stock trades every day when the market's open, right?
If you go into, there's private reads that have no liquidity, so you'd be illi. And then there's, what you would call these perpetual nav REITs that have, most of 'em have very similar but some liquidity built in, usually up to 20% a year, 5% a quarter for the whole company. So there's, there's a lot of liquidity that can be built into these that can be restricted at times.
Right. But, um, some people should understand the REIT that they're trying to end up in and, and do their due diligence and understand those, the benefits and the, and the risks of that transaction. But generally speaking once you're in the op, you can convert your units to common stock of the REIT and liquidate those shares.
The, the conversion from OP to comment to liquidate that conversion is the tax triggers, the taxable. But where, where firms like you guys can add tremendous value. As you guys were explaining this to me, the client had a million dollars in this, in this Reto P and that said you guys were able to generate $50,000 of losses by doing tax lost harvesting each year.
Over a decade or two, that client could take $50,000 of their billion each year over a 10, 20 year period, and you guys could be matching. Capital gain taxable money with those carry forward losses that you guys so eloquently could harvest, allowing them to get periodic liquidity in a tax efficient manner, right?
Yep. Or of course, if they pass away basis, steps up, then they get liquidity with no taxable event for the entire position. So what I'm hearing, you're losing some flexibility cuz that's your last stop, like you said, but you're adding liquidity and you're adding maybe potentially some more diversification as well than the Ds.
Yeah, you nailed it. I mean, most of these rates today are diversified geographically and by asset type. Right? Multifamily, industrial, life, science, healthcare, you know, and so you're not making a one-way bet on a market or a one-way, you know, idiosyncratic risk on an asset class. You know, there, there's still risks, right?
Still, it's still a, it's still real estate. It's still managed by somebody. So you got diligence all that and be very comfortable cuz you could be there for an awfully long time. Right. You'll also typically see the older somebody. The more attractive they are to the 7 21 because you're getting income, you're getting some liquidity, you're getting risk management, you're deferring taxes and a pun passing away.
Your basis steps up. That REIT may be liquid the next day, where if you own your own property, you gotta hire a broker and sell it. If you own a dst, you have to wait until the manager of that DST liquidates it. Right? The 7 21 has, I would argue, is the most. Friendly of all the different ways of owning tax-deferred real estate, and how many times, let's say a client has multiple properties, right?
They're not all selling 'em. Now, how many times can they use the 10 31 or the 7 21 strategy? Yeah. 10 31. What's the morbid, uh, phrase? Swap until you drop. Right. Exchange. Exchange, exchange until you pass away. Base the steps up. So you could do a 10 31, I mean a hundred times. I don't think there's any restriction on it.
You just have to follow the rules of the code. Right. And make sure you're talking to the right advisors about, about that. 7 21. It's one. Once you complete a 7 21, it's one and done. You are there until you pass away or until you sell your position. Recognize the taxable event. So one of the major consideration.
Yeah. One of the other things that you also had mentioned, I think this is 4.0. Is opportunity zone. What is a qualified opportunity zone? Yeah. So, you know, not a hundred years old, like section 10 31 or 40 plus years, like Section 7 21, but the qualified opportunity zone program or call, let's call it the OZ program for short, that was created five years ago come December.
So it was the, the, the one of the provisions of the 2017 tax cuts and jobs. Said simply the government taxpayers are offering lucrative tax benefits to individuals or entities that have capital gains in their portfolio from the sale of any asset. So if you sell a business, you sell a stock, you sell a home, you sell investment property, you sell that Hones Wagner, 12 million rookie card that just sold, you know, an auction, not not that long ago.
If you generate a gain, the tax US tax will gain on. And you invest some or all of those gain dollars into building properties, building buildings, construction, substantially, improving buildings or starting businesses. Those are the qualifying things you can do. Those are all job creating, economic driving, activities, if you will, if you, you invest in a fund that does those things in a lower income community in the United States called an opportunity zone based on 2010 census.
Then you are eligible to receive a lucrative set of tax benefits. So the whole program is trying to encourage healthy people and entities that have gains to invest in building buildings and starting businesses in lower income communities. And they're trying, they're motivating that through major tax incentives.
So there's over 8,700 of these opportunity zones around the United States, down Hollywood. You know, the Dream Hotel just south of Sunset and Hollywood is in an opportunity zone. The SoFi Stadium. For the Rams and the Chargers is in an opportunity zone. Alaa the waterfront next to Oakland. Looking at downtown San Francisco.
Beautiful views, opportunity zone all of downtown Sacramento where the King Stadium is and the new headquarters for the Kings team opportunity zone. Is your guys' audience mainly California or is it across the country? Across the country, I'd say, but mainly California. The entire medical district of Houston, Apple's regional headquarters in Austin, all five boroughs of New York, including Manhattan, have opportunity.
So wherever you are in the United States, Google, you know, Tempe, opportunity Zone, Google, you know, Miami Opportunity Zone. There are good areas to it for investment. There are average, there are bad, there's 8,700. There's a lot of great opportunities. So don't, don't think low income areas, bad place to make money.
We, we find it very attractive places where we can make a, where there's good opportunity for. That can be magnified by these tax benefits of the program, but can also do some good in those communities. Right? Creating jobs, creating long term, uh, economic growth in these, in these communities. How that's the basis of the program.
How do you see investors utilizing opportunity zones? Yeah, really. And, and I know we're touching up on time here. Any time if anyone has a capital gain that was realized in the last hundred 80 days. They should keep listing the remaining portion of the podcast, but then email you guys or call you guys and make and understand that this is still applicable.
So even if someone already sold something five months ago, they've already paid taxes. You know, they have constructive receipt. This is not like a 10 31. They could still do an OZ if they're within the, the 180 day window that you have to complete an OZ investment. Um, but since this, this, this discussion day was really about investment real estate.
Let's, let's talk about the application. Most. Most people, large, large majority, know that they can do a ten third line exchange. Some people know about the use of a DST and very few people more now after this call, know about the use of the 7 21, right? Almost no one thinks about an opportunity zone when they're selling investment real estate, but what I would tell you to keep this simple, 60 to 70% of the time when a client's selling investment real estate, an opportunity zone is an absolutely viable option.
What makes it viable or not viable is based on how much basis the client has on the property they're selling and how much debt they have on that property. The more basis they have on the property and the less debt they have on the property that they're selling, the more attractive the opportunity zone becomes and the.
Makes a 10, 10 31 is more attractive, meaning the less amount of basis, the more debt you have on the property you're selling, the more a 10 31 is attractive. The real key takeaway is it's complicated stuff. The real key takeaway is make sure these clients make sure these your list listeners are getting the right advice from true professionals that can run models to show you.
Staying the course, paying the tax, doing a dst, a two step 7 21, or an opportunity zone, what those look like. Doing the quantitative analysis, being able to marry that up with the qualitative analysis on what the investors are looking for. That's how you, that, that, that's really how, um, that's how people should be, should be treating every single sale of a real estate property, evaluating all seven options available to them.
Well, So if any of these strategies sound interesting to some of the listeners, how does Canter work with financial advisors or state planners, CPAs to ensure like they pick the right sort of investment situation that's suitable for them? Yeah. I would start by number one, our team's job. We have a highly educated team that all day, every day we're just doing this.
We're educating people, we're partnering up with great firms that are like you guys are trying to educate the community and just making sure people are aware of these. When it comes to Canor, I mean, we, we might be a little bit biased, but of course we think we're as good as anybody at providing these solutions, but that's biased.
And you know, firms like you guys that have like RPA that have access to the Canford Cheryls of the world, but a lot of other great peers out there, you guys are able to, you know, bring best in class partners solutions depending on the needs of the client to them. So yeah, we're, we're building investment products in these areas every single day.
It's what we do, we're passionate about. But uh, we leave it to the experts like you guys to, to make the right recommendations to to, to clients. And if listeners wanted to get in touch with, either you, do they go through their advisor? Do they go directly to Canter? Like how do people get in touch if they have, complex situation they wanna walk through?
Yeah, we, we, we, we are not retail facing, so I reach out to your financial advisor, reach out to RPA Wealth. Obviously, you know, we, we call and do business with thousands of Wealth Management firms across the. There's a lot of people that know opportunity zones and use 'em. There's a lot of Wealth Management firms that use DSTs, right?
There's a lot that summer just starting to use seven 20 ones. It's very rare, believe it or not. It doesn't sound, it sounds intuitive, but it's not. There are very few firms that actually have the full understanding of all of these. Along with, you know, traditional management, what you do every day, right?
And how those all play together. That's the holy grail is finding the right Wealth Management firm that understands all these complex topics and can work with you, work with your tax team, work with your estate planning team, work with the family, make sure you're getting, you're getting sound advice.
Yeah. And I think if they wanna, if they wanna learn more from us, you know, I, I'd start by going to canada.com. Um, they can email us@cfsupportcanada.com, but we're just gonna pass you on to a financial advisor. We, we can't make recommendations to, to, to retail. So it's better to go through the rpa, rpa.
They have access rpa, obviously you guys have access to all of our thought leadership education and probably a lot more beyond you, what we put out there. So you, you guys are the experts. I, I think today was great because like you said, it is a complex industry and not everybody always knows all the options that they have.
Like you said, they might know 10 30 ones or they might know some of the basics around a dst, but being able to navigate through some of the logistics of what some of those, you know, specific options are. As clearly as you define them out. I think that's such helpful information to the listeners and to people.
And Jay, we, we thank you beyond words for just coming on here and, and being able to share all this wealth of knowledge that you have with the listeners. Yeah, Brian, my pleasure. Thanks a lot guys, and, uh, hopefully everybody, hope all the listeners learn something today. Thank you, Jay. Thank you.
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