The Real Estate Syndication Show

WS1934 Break The 1031 Cycle | Eric Most

February 06, 2024 Whitney Sewell Episode 1934
The Real Estate Syndication Show
WS1934 Break The 1031 Cycle | Eric Most
Show Notes Transcript

In the final segment of today's episode on the Real Estate Syndication Show, marking the culmination of our five-part series, we're honored to once again engage in an insightful conversation with Eric Most, an expert in strategic real estate investing and philanthropy. Our focus was on the often overlooked aspect of real estate investing: the exit strategy.

Many investors find themselves trapped in a cycle of 1031 exchanges, with death being the unintended and grim final exit plan. Eric shed light on a more life-affirming and impactful alternative: gifting real estate assets to a donor-advised fund or a supporting organization like the National Christian Foundation (NCF). This approach not only allows investors to bypass the capital gains tax and depreciation recapture but also provides a fair market value deduction, all without the need to pass away to break the 1031 exchange cycle.

Eric explained the tax benefits and differences between private foundations, donor-advised funds, and supporting organizations. He emphasized that while private foundations offer more control, they come with less tax efficiency compared to donor-advised funds and supporting organizations, which offer fair market value deductions and are more cost-effective and simpler to set up.

Listeners interested in making a greater impact with their investments and philanthropic efforts were encouraged to explore the resources available at Eric also invited listeners to connect with him directly through the NCF's Rocky Mountains page or on LinkedIn, and to tune into his Generosity Now podcast for more stories and examples of impactful generosity.

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Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. We're continuing the conversation with our guest today, Eric Most. I hope you've been listening to this series and you've been learning how to be a better steward of this property or finances, financial capital, whatever it may be, even your time that you've been given. Our guest today is an expert in just that. We're continuing that conversation. But today, If you have been concerned about the exit plan that most people have when they talk about doing 1031s, you're going to want to listen to today's show. He has a different option for you as opposed to having to die to get out of this 1031 plan that a lot of investors are in. Eric, I hear often this concern of going from one 1031 exchange to another 1031 exchange to another 1031 exchange. I mean, I hear it often, like, when does it stop? And oftentimes, unfortunately, it's the exit plan, like you and I've talked about, is death, right? And we would often probably prefer a different exit plan, right? Yeah, absolutely. And you all have a solution for this, and let's dive in there.

Eric Most : Yeah, absolutely. Yeah, I always think that death is a pretty bad exit plan as it relates to our investments, right? And why we say that, just to be clear, I mean, most of your listeners will know this very clearly, but why death is the exit is because our children, the inheritors of that asset, will get a step up in basis and won't have to pay that huge capital gain. So if they then sell that asset, they broke that cycle. But how do you do that today? What's also very interesting about those assets that we see, that they now think the exit plan is really probably only death, is a lot of times those assets aren't ones that are really necessary for income either at this stage. And so they had been right as they've been building that portfolio and 1031 exchanging, 1031 exchanging over the years. And you keep having to get hairier and bigger and sometimes uglier in the assets and compress time that you have to find it. Well, a great exit strategy is gifting that asset. So just like we talked before about gifting real estate, you can gift a real estate that's been in 1031 exchanges. Now, here's the beautiful thing. Remember, we don't pay any depreciation recapture. And by gifting into a donor advised fund or a supporting organization, which is another tool that NCF has, you get the benefit of fair market value deduction. So let's take that property that you've been 1031 exchanges. It started as just a small little house or a small little duplex so long ago that you picked up for $25,000. That was your original basis. And as you've moved along, right, you've upgraded and upgraded and upgraded along the way. And now that assets, a million dollar property, a 2 million, a $10 million property, who knows where that's gone over the years. By gifting it to NCF instead of just doing the next 1031 exchange, you get a fair market value deduction. And we pay no depreciation recapture. So you get the benefit of avoiding that capital gain from that $25,000 original basis to where you're exiting it. And you didn't have to die. And so the proceeds then flow into your giving fund, and you're able to grant those or invest them as we talked about in other segments about using, you know, impact investing, things like that, and making kingdom impacts in different manners.

Whitney Sewell: Yeah, that's great. Right. I mean, it's, uh, I, I love that we have this option, uh, you know, cause we're so concerned about having to pay that tax bill. Right. Uh, and, uh, in this way we can have a much bigger impact. Yeah.

Eric Most : And, and, and this does dovetails into another discussion that we were going to have and, but I hit on it a little here, so I might as well just, just jump right in. Um, You might also have listeners who one of their friends had a foundation, like, oh, you should have a foundation. And there is a place for a foundation or a private foundation for the work of some of these asset classes, but not for a 1031 exchange and not for an asset gift, a hard asset gift, okay? So a private foundation, if you were to do that exact same strategy that we talked about, gifting that property into a private foundation, you get the charitable benefit of original basis. So you get that charitable benefit of that $25,000. You don't get the benefit of fair market value deduction. And so a lot of times people think, oh, I need to set up a foundation to do these things. You really don't. A donor advised fund, at least with NCF, it takes two minutes to set one up. Yes, we talked about how long it takes to do a gift and things like that. There's more complexity to doing these gifts, but it's a much simpler, more cost-effective gift and gifting strategy. And so a lot of people, we've actually converted a lot of people that, that started a private foundation and realized, you know, this wasn't all that I thought it was. And they converted over into a donor advice fund or supporting organization with NCF. And, and it really solves a lot of their problems and their headaches in a much more efficient way.

Whitney Sewell: Yeah. You know, you're talking about a private foundation. I hear people talk about private foundations often as well. Uh, but maybe, uh, help us to, you know, obviously at a high level or for time's sake, unfortunately, you know, we talked about private foundation, uh, donor advice fund and, you know, supporting organizations, you know, how do we distinguish or, and, uh, the difference there?

Eric Most : Yeah. So, um, three things for those that are watching the podcast, you can kind of see my hands, but, um, we'll put, uh, I'll, I'll use it for those listening. I'm a listener to podcast type of guy. Um, and so on the left hand, let's put a private foundation, okay. Um, a private foundation, um, and we'll put, uh, support organizations and, um, donor advised funds on the right hand. Um, on the left hand side of here, private foundation, um, you have some of your least tax efficiencies as it relates to it, unless you're using cash. Just purely giving cash can be efficient, but we already said and established earlier in this show that friends don't let friends give cash. Right. And so that that rule still applies, but giving into a private foundation, it's most efficient if you're giving cash. other type of assets, business, real estate, intellectual property rights, patents, royalties, all those things, gifting it into a private foundation, you get the taxable benefit of fair market value. I mean, I'm sorry, you get the tax benefit, strike that, you get the tax benefit of basis, original basis for that asset class. By gifting that into a donor advised fund or supporting organization, you get the benefit, that's on the right hand here, you get the benefit of fair market value deduction. There are also limitations in how much you can give and get a deduction. In a private foundation, it's a lower amount that you can give to get charitable impact. In a private foundation, you have greater control over that vehicle though. You have greater control over who you give to. So the donor advised funds and supporting organizations are dictated by the IRS code that says you have to give to a 501c3 or recognized charity. And you're just an advisor. And so the DAF provider, so that would be NCF, National Christian Foundation in this conversation, has the right to deny your grants. We actually have to have that right. The IRS requires that. In a private foundation, you've got nobody telling you, no, you can't give to this organization. And so you have greater control in the private foundation. So the more control you have, generally speaking, the less taxable benefit you get. So on the Donor Advised Fund, NCF actually becomes the owner of those assets, or part owner if you gave part of it. And so because of that, you get better tax treatment, but you have a little less control. So NCF has the right to say, no, we won't grant to those. And NCF, we allow you to grant to anything that is 501c3 or recognized charity, as long as it's not antithetical to an orthodox view of Christianity. If it's innocuous, no problem. So if you want to give to, like I said before, American Heart Association, Wounded Warrior, Alzheimer's Association, no problem whatsoever. There's no faith component to the work that they do. But we aren't going to give to things that are antithetical to Orthodox Christianity. We'll say no to those things. So we've talked a lot about donor advice funds and many of you have heard the word supporting organization that I've used, Whitney just used a minute ago. This is another tool, it's very similar to a donor advice fund. but you actually have more flexibility in a supporting organization. Generally speaking, it takes more assets to have a supporting organization. It generally takes a minimum of about $10 million of charitable assets to have a supporting organization, but it works much more similar to a private foundation. So you, in a donor advised fund, you're not able to pay program expenses. You can't go and pay for flights and things like that. You can do that in a private foundation, okay? You can do that in a supporting organization though. So there's more similarities between those two charitable vehicles. You're able to, in a private foundation, employ family members. You're not able to employ anybody in a donor advised fund. In a supporting organization, you are able to employ people but they cannot be family members. And so you're able to employ a third party to be able to manage the work of your foundation effectively. And so those are some differences and kind of a high level entry of those different assets. You have greater investment flexibility over the supporting organization than a donor advised fund. Though we talked about how you can use the impact foundation and things like that to be able to make investments and really feel like you have a lot of flexibility.

Whitney Sewell: Eric, I'm so grateful for your time and I just really opening our eyes in the listeners to making greater impact, right? We all claim we want to do that, right? And this is a great way that we can put some feet to that, right? And even seriously make a bigger impact and potentially even save some money.

Eric Most : Without a doubt.

Whitney Sewell: You know, it's just so interesting that this is even an option and that it's, it seems like to me, not known widely enough, you know, and so just so grateful for your time. You know, how, I want you to, you know, tell the listeners how they can get in touch with you, how, if there's a resource, maybe that, you know, where they can learn more about donor advised funds, you know, through you all in the National Christian Foundation, you know, where do they go?

Eric Most : Yeah. Um, so easiest place to find information on NCF is That's Um, it is a treasure trove of information. Um, I would actually encourage you there's, there's, um, there's this thing that you can sign up. You'll get a pop-up the first time you go there and it invites you to sign up for the Saturday seven. it's actually quite good. You get a single email digest of like the top seven stories from the week. It comes in on Saturday mornings. I love going through it. There's been many times that they've, that the NCF team has used articles that I've written. And so it's a great place to just get some information. It's also a place where you can find, there are, like I said, there's over 30 offices, NCF offices across the country. And so you can say, Hey, where's, is there an office close to me? And, and you can get ahold of somebody and talk to them. I'm also available, you can find me on the Rocky Mountains page. I'm the president of the Rocky Mountain region out here in Denver, Colorado. And so, easy way to get ahold of me. Also easy to find me on social, LinkedIn, things like that. I also am the host of the Generosity Now podcast, where Whitney, you've been on the show, and that's a great way to continue to hear more stories, more examples, of how you can be generous and steward all that God has entrusted to you. I think that's also a great avenue to get more information.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to and start investing today.