Cole Shephard joins us from Columbia to speak to international investments and DonnaMarie Baldwin discusses the ever changing opportunities in real estate investmenting

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

Chip Franklin:

Hi, welcome to Practical Tax with tax attorney, Steve Moskowitz. I’m Chip Franklin. Today, our first guest is Cole Shephard from the Legacy Group. Cole, thanks for being here. You represent a group of investors, international investors, essentially. Right?

Cole Shepard:

That’s right. Typically, we invest in early stage companies, or we found early stage companies here in Columbia. We focus on impact-focused investments, impact-focused companies. Our biggest company that anyone would’ve heard of is called the Green Coffee Company, which is a company that we founded about five years ago. Which, in the past two weeks, has become the largest coffee producer in the country.

Chip Franklin:

Wow.

Steve Moskowitz:

Very nice. And as Cole, I’m sure knows, there’s all kinds of special benefits, economic, financial, and tax, by investing outside of the country. That makes this extra interesting.

Chip Franklin:

Is that right? Do most people know what you just told me?

Steve Moskowitz:

No, they don’t. What’s a sad and a shame, I had been a professor for 10 years and I’m always trying to help people, and I’ve dedicated my life to this. So I want to say, “Hey, let me tell you some things.” Most people are walking through an orchard full of wonderful tax fruit, but they never look up into the tree. They’re too busy looking at the ground for something that may have dropped on there. And there’s so much available.

Chip, no, most people don’t know. When I tell them about it, usually their first question, “Is that new?” And I say, “No, it’s been around for years.” “Well, how come my last guy didn’t tell me?” I say, “Well, that’s why you’re here.”

Chip Franklin:

Let’s talk about agricultural investing. Cole, what does that encompass?

Cole Shepard:

Sure. So biggest project, like I said, was Green Coffee Company. What you’re seeing is a lot of especially high net worth individuals in the US worried about inflation, worried about what’s happening with US government just printing capital in Washington, and they’re looking to get their money diversified out of the US dollar into other countries.

So what we’ve seen is a huge uptick in high net worth individuals going after farmland. Right? Certain high net worth guys will go out and buy five, 10 million of farmland, and then they’ll hire an operator to run it. And it’ll be similar to what you’d see in a multi-family deal or something in commercial real estate. What we do a bit differently is we structure in a corporate structure.

So we’re actually buying … when you invest with us, you’re investing in a whole enterprise, or a company, an international conglomerate. And then we structured basically to do one of two things for investors upon an exit. One is a private company sellout, which a logical acquire for someone like us will be someone like JAB Holdings, Nestle, Starbucks. Or we put it on a dual track to be able to IPO on a US market.

Steve Moskowitz:

And, Chip, something else. Especially now in the time of inflation, you have a situation where the dollar today may not be worth what it is tomorrow. But a company, physically, the physical asset, the company is worth it regardless of what happens to the currency. That’s also another attraction.

Chip Franklin:

So, Steve, when you invest internationally, how much does a currency consideration play into that?

Steve Moskowitz:

And, also, another thing that some companies do is … what they’ll do is they’ll do hedging, where if you’re doing a contract with a company in a currency other than US dollars and you say, “Well, I don’t know which way the currency’s going to move. I could make money or lose money. And I’m in the business, not of finance, I’m in the business of the product.” You go to the bank and, basically, you buy a future. And then what happens is, with the future, if the currency moves the bank takes the risk. And that’s something that you buy from them. So that’s something else you can do. So if you’re worried about that, there’s an easy way around it.

Chip Franklin:

All right. So this next question is for both of you guys. Does the value of the currency always reflect the value of the investment?

Cole Shepard:

I’ll take that one first, Steve. If you don’t mind?

Steve Moskowitz:

Great.

Cole Shepard:

I would say it always depends on the currency that you’re trying to … if you’re going into a hedge position, or you’re going into a position that says, “Look, I just want to take a long position on this currency.” So certain of our investors will look at a COP rate that is historically just getting crushed versus the US dollar.

Our high net worth investors are primarily all US investors, so they want to diversify out of a currency. And some of it is just, I feel comfortable with the collateralized asset. And I feel comfortable that the Peso is undervalued, and they just want to ride that [inaudible 00:04:39] uptick. And then that would be the whole business thesis for them, or the profit thesis, and they’ll be comfortable with that.

Chip Franklin:

Is that a quarter to quarter thing?

Cole Shepard:

I would say it’s not a short term position. Usually when you have guys investing in alternative assets, especially private equity, they’re taking the longer term view. They wouldn’t invest in a company like ours if they don’t have a four to nine year time horizon, which would be consistent with any GP/LP private equity fund that you’ll see.

Short term positions, that’s more currency trading. And that’s something, if you’re not in the business of currency trading, it can go the wrong way real quick with your capital if you don’t know what you’re doing. I would always recommend taking a long term position if you feel strongly about one currency or another. Unless, of course, you run a trading desk at Citibank.

Chip Franklin:

Steve, we’ve talked a lot about accredited investors. Can you define it for us?

Steve Moskowitz:

An accredited investor is someone that the Congress and their infinite wisdom basically says should know better. This is not grandma putting her life’s savings into some [inaudible 00:05:49] or some risky stock. This is, basically, a sophisticated person that either knows what they’re doing or should know what they’re doing and they understand the risk.

Basically, on the one hand, the Congress is trying to protect the unsophisticated investor from losing their money, but not hampering somebody that says, “Look, they’re sophisticated. They know what they’re doing, and they’re willing to take the risk because there could be a tremendous return.” Essentially, that’s how I would explain it in English.

Chip Franklin:

I love the sarcasm of the infinite wisdom of Congress. Here’s a question for you guys. When a person goes to invest, is it true that you have to know more than just their portfolio? You also have to know and understand their risk tolerance?

Steve Moskowitz:

Chip, that is super important. The banks call it, “Know your customer.” And, as attorneys, the example that I give is I could have twin siblings in my office that are identical in all respects financially, that have very, very different wishes. One person could be very conservative. One person could be a risk taker. One person is concerned with their kids and their grandkids. Somebody else said, hey, they don’t even have any kids so much less. They’re not planning for them.

So I always ask clients, “Tell me what you personally want. We’ll figure out the taxes and the dollars later. Tell me what it is you want to do.” And then my job is to achieve their goals in the best possible financial tax way.

Chip Franklin:

Cole, what do you guys have for accredited investors? Is it international only? Or is it also domestic?

Cole Shepard:

Most of the assets, let’s take Green Coffee Company for instance, it’s a Delaware holding company with all the subs held by that holding company. It’s a typical international corporate structure, headquartered out of the United States, with substantial assets outside. For our investors who are all high net worth US, all accredited, just like Steve said, all of our offerings are 506(c) Reg D’s. So we only accept accredited investors. We can’t take, as much as you’d like, if grandma comes to you and she only has 5,000 dollars to invest, we’re not allowed to take that cap. But, really, most people use the net worth accreditation. Most of our investors are worth minimum five million, upwards of north of a hundred million dollars.

Chip Franklin:

Wow. Cole, what is impact investing and why is it so important?

Cole Shepard:

So I think you’re going to get differing opinions on who you talk to, if you talk to the Larry Fink at Blackstone, or some of these other guys. To me, it’s about investing in companies. One, that you’re proud of. And then, two, that are changing some kind of business in the world for the better. So the three that I would always say are probably the most important that you’re going to see are environmentally focused. I think you’ll see a lot in, especially with coffee and what we do, it’s a very environmentally focused business where you’re changing how coffee [inaudible 00:08:47] is done at origin and you’re changing it for the better.

And a lot of the other big … the big three would be what goes on in construction. I think there’s a lot of green projects going on in construction due to the amount of carbon offset that you’re seeing. And then in energy. Those are the three that I’d say that make up the primary bunch of what I would call is impact investing. But to me, us personally at Legacy, we invest in businesses and we try to run businesses that we’re proud of.

Chip Franklin:

Cole, thank you so much for being with us today on Practical Tax with tax attorney, Steve Moskowitz.

Cole Shepard:

Absolutely. Thank you, gentlemen.

Steve Moskowitz:

Thanks very much. Hasta la vista.

Cole Shepard:

Hasta la vista, baby.

Steve Moskowitz:

What’s the difference between a white collar criminal defense attorney and a tax criminal defense attorney? With a lot of white collar criminal defense attorneys, they’re used to the more common corporate or business crimes, embezzlement, insider trading, financial things. But in a tax crime, they’re not tax attorneys. The heart and soul, the guts of the case, is the tax law. The punishments and the rights are criminal, but the case itself is a tax case. And the heart of a tax case is showing that no tax irregularity, no tax crime, no tax wrongdoing was done.

You need to know the tax code, you need how it’s applied, this is not just reading something in a book. This is being in the trenches for all the years. When you say, “Look, this is how the tax law is applied. This is what’s done. This is what’s practical in a business. This is what really happens.” And this is a skill that is honed by a good, experienced tax attorney. You can go to federal prison and that’s the punishment. The case itself is a tax case. That’s why you have to understand it.

And also, bear in mind, the attorneys on the other side are very familiar with the tax law. And if they allege this and that, you need to be able to respond and say, “Well, wait a minute. Let’s see what this really is.” And there’s so much in the back room negotiations. It’s kind of like watching the Olympics. You see the people competing, but most of the work is the training and the sweating the four years in the gym before you get to that event. That’s why it’s so critically important. That attorney who is literally defending your life, your livelihood, your assets, and your family and its reputation, understands the tax law, and then all the criminal protections you have around them.

That’s why a criminal tax case is so different than even a civil tax case that a civil tax attorney is familiar with. There’s so many skills in a criminal tax case that are needed, it’s really quite the art.

Chip Franklin:

One of the things that, Steve, you and I love to talk about is the value of real estate investing, especially here in the Bay Area. It’s been a wild ride. Right? I mean the last, what? How long has it been since … you’ve been here for 30 plus years. But just every year, watching people trying to make a home out of what seems to be incredibly high rates that just don’t know when they’re going to stop. I’ve always thought it’d be interesting to talk to realtors and to see how they feel. So why not go to the very best, right?

Steve Moskowitz:

Absolutely.

Chip Franklin:

Yeah. Okay, good.

Steve Moskowitz:

And we’ve been very blessed.

Chip Franklin:

And this is the very best. And not only is she the very best, Donna Marie Baldwin is nice enough to join us in here. She has not only sold more than 2,500 homes and transactions under her belt, but she’s been doing this for, and I don’t believe 40 years. I’m looking at you …

DonnaMarie Baldwin:

46.

Chip Franklin:

No, that’s got to be a mistake.

Steve Moskowitz:

My, God. You started doing this when you were in kindergarten? Did you start in the sandbox?

DonnaMarie Baldwin:

I was [inaudible 00:12:36] years old. Yes.

Steve Moskowitz:

It sounds like when I started practicing law from the sandbox.

Chip Franklin:

Yes.

DonnaMarie Baldwin:

And you were just going to law school. You weren’t even practicing yet when I started real estate.

Chip Franklin:

And I was delivering your papers.

DonnaMarie Baldwin:

That’s right.

Chip Franklin:

So before we get too deep into this, I want to remind everybody about your seminar, or webinar I should say, coming up on Tuesday, August the 23rd. And at the end of this we’ll have the ability for everybody to see and follow that so they can be a part of it. It’s about 90 minutes long. And who is it open to? And what are you guys going to be talking about?

DonnaMarie Baldwin:

Well, it’s going to be open to the public. I’ve invited my clients. And interestingly enough, I was on a webinar with agents this morning. Everyone wants to listen in. And, Steve, what I wanted to say to you is I’ve been doing seminars for six years, talking about converting your owner-occupied residence into a 1031 exchange in order to save 200, 300, 500. And what started me was a client with one million dollars of capital gain out the door.

In my seminars I always say, “Talk to your licensed real estate tax attorney.” I was listening to you on the radio and I went, “Hey, Dummy. This is the best real estate tax attorney.” So I’m so excited about having you talk to everyone and just planting seeds to let them know that there are alternatives to just throwing money out the door.

Steve Moskowitz:

I’m excited about it too. And one of the things I just love to do is talk about taxes. Now, when people first meet me, they think I’m joking. They laugh. “Hahaha.” People that know me, like Chip, know I really mean it. I get excited talking about taxes. And there’s so many things. It’s your life.

For example, a common situation that I’m sure you experience all the time, and we’re going to talk about in the webinar, is you have some nice couple who bought their home 40 years ago when they were young, they raised their six kids there. Now the home is going through the sky with the value, it’s way too big for them, they want to move into another area. But they say, “I don’t want to pay maybe seven figures in cap gains taxes. How can I do it?” And one of the things we’re going to talk about is, well first, how can you convert that principle residence into a 1031?

But then somebody says, “Well, okay, look. I know what a 1031 is. A 1031 is an investment property. I’m in my golden years. I really don’t want to be a landlord.” And then I have good news for you. We’re going to talk about something called DST. Delaware Statutory Trust. And what a Delaware Statutory Trust is, is it’s a financial instrument. You obtain them from the financial institution of your choice. It’s basically a portfolio of real property. It’s like a mutual fund for real estate.

But the big deal is it qualifies for 1031 exchange. So we’ll go into more detail, but this is a teaser for anybody that’s watching. You start off in saying, “Look, I want to move out of my home, but I have tremendous capital gains here and I don’t want to pay the taxes, legally.” So we convert it to 1031, but we’re not going to become landlords. Once we’re 1031, we’re going to do our exchange of the real property for the stock portfolio. Now we have a stock portfolio. And unlike selling a real property, where sometimes that’s somebody’s life savings, and the year they sell it they pay a tremendous tax. And that money’s got to last for a lifetime.

With the DST, you don’t pay any taxes. And then over a lifetime, when you do want to cash out, you just sell those shares and only pay tax on the shares you’ve sold. So instead of having that big tax hit, you have the asset that’s earning for you. And then you say, “Well, okay, this is terrific.” And when somebody gives you something nice, what do you say? Most people say, “Thank you.” But a lawyer says, “More. I want more.” And what happens with the DST is we say, “Well, okay, if we’re leaving a legacy to your loved ones, you get something called a stepped-up basis.”

So for those of you that are not familiar with a stepped-up basis, suppose we have a situation where grandpa bought something, anything, let’s say a building for 10,000 dollars when grandpa was a young man. And now grandpa is in his senior years and the property’s worth a million. If grandpa sells it, he’d say, “Well, okay, a million minus 10,000.” He’d have a cap gain of nine 990. If he gives it to his beneficiary, they essentially have the same gain. But if you give it through your estate and you get a stepped-up basis, that means that the beneficiary’s basis is not grandpa’s basis, but fair market value at the date of the passing of the decedent.

So now we sell the property the next day. We go sales price, a million, minus a million in stepped-up basis, tax is zero. Not on the 990. Zero. That’s just one of the things. Another thing with our little teaser with a property, let’s say you have husband and wife and they say, “We’d like to live in this house for the rest of our lives. But when the second of us passes, we’d like to give this house to the charity of our choice.” Well, that’s nice, but you don’t get any tax benefit unless you set up a CRT. Charitable Remainder Trust.

So what happens is, once again, you live in that house for the rest of your life, and the spouse for the rest of his or her life, but when the second of you passes the charity gets the house. Say, “Well, physically, that’s the same thing as the first way.” But with the CRT, right now, today, you get a charitable deduction for what you gave away. And, basically, what happens is an actuary comes in, values it based on the ages, and let’s just make up a number. Let’s say there was a million dollars in equity and the actuary says, “Okay, what you kept was worth 300. What you gave away was worth 700. You have a 700,000 dollar tax deduction.”

You pay less income taxes for doing what you wanted to do anyway. And you say, “Well, Steve, that’s great, but I don’t have 700,000 dollars of income. That’s too much for me.” No problem. You can carry it forward. And I could go on, and on, and on, and on. But Donna Marie might say, “Well, why’d you invite me? I have things to say, too.” Your turn, Donna Marie.

DonnaMarie Baldwin:

I just worked with an 89 year old and 91 year old couple. And I tried to figure out how they could do a 1031 exchange. And I actually said, “This won’t work for you.” Only because it was for many reasons, but I think you’ve just hit on what could work for you. And the stepped-up basis is the most important part because this is what they want to leave to their children. Now, Steve, that investment also rises in value? Is that correct?

Steve Moskowitz:

Sure.

DonnaMarie Baldwin:

All right. So I think you just may have given me my answer to bring to them when there was no other alternative.

Steve Moskowitz:

You call them right back and you say, “I have good news for you. If you watch our webinar, you’re going to find out how to do this. And then I’ll tell you personally how to do it.”

Chip Franklin:

Can I ask you guys a question?

DonnaMarie Baldwin:

Yes.

Chip Franklin:

Because this is something I’ve wondered. A few years ago, those of us in California were told that the interests that we pay on our homes would not be as tax deductible as it was in the past. Is that going to change soon or what’s the status of that?

Steve Moskowitz:

Well, what I’d like to do is refer you to the Voss case. So what happened was, it used to be you could deduct unlimited amount of interest from your home and other things too, and then the government capped it at a mil. Then they capped it at 750. So what happened with Mr. Voss, Mr. Voss bought a home with his girlfriend. And Mr. Voss took a 750 deduction and his girlfriend took a 750 deduction.

And the IRS said, “Hey, Mr. Voss, what are you trying to pull here, Buddy? It’s limited 750 per house.” And Mr. Voss says, “No, no, no, no. It’s limited per taxpayer, not per house.” And the IRS said, “You are wrong, Mr. Voss.” And Mr. Voss says, “No, IRS, you are wrong.” So he went to tax court and the tax court decided that Mr. Voss was, in fact, correct. So the bottom … Oh. Oh. See, Donna Marie, you’re going to enjoy the webinar too.

DonnaMarie Baldwin:

Woohoo.

Steve Moskowitz:

So under the Voss case, Mr. Voss can deduct his 750 and the girlfriend can deduct 750. So that is a very big deal because a lot of times boyfriend and girlfriend will buy a house together. If you do, you double your tax deduction there. By the way, this is only for unmarried people. It does not work if you’re married. It does not work if you say you’re married, and married/filing separately. You have to be unmarried. It’s per taxpayer.

Chip Franklin:

But, Steve, this is California. What if you’re a throuple?

Steve Moskowitz:

Well, what happened? Not a problem. Because under the Voss case, it’s per person. So that means, let’s say there are three business partners and they decide, “Hey, let’s buy a three million dollar house. We each put in a mil.” Then they each have a 750 deduction. That is a big deal. So then … Go ahead.

Chip Franklin:

But that wasn’t the question, though. Right? The question was, is I used to be able to deduct, I forget what percentage of the interest I paid on my mortgage. And then a previous administration went after New York and California, the big homes in the … and they said you can’t do as much. Has that been reversed? Really reversed?

Steve Moskowitz:

It’s not that it’s reversed, but that’s a different area. So that’s not going to affect us here. That’s a different area.

Chip Franklin:

Oh, good.

Steve Moskowitz:

And the bottom line is real estate is a very favored investment with Congress. So the bottom line is there’s things you can do with real estate that you couldn’t do elsewhere. Even, look at capital gains. You pay a lot less taxes if you sell a property than if you sold something else, but we don’t want to even pay those. And the government gives us so many good avenues. And knowledge is so powerful, because what’s the difference between paying these taxes and not knowing about it? And what happens is wealthy people have an army of people like us. And those people basically say, “Sign here.”

The average person says, “The taxes are so unfair, and I’m paying so much, and I work so hard. And the big boys don’t pay, how do they do that?” Well, those are some of the things, and these are just teasers for our webinar, those are some of the things we’re going to talk about. And, again, the grand teaser is no matter what we talk about in the webinar, there’s a lot of stuff we’re not going to cover in other areas. One of the things I always talk about, Donna Marie, is that there’s two purposes to the tax law.

Everybody knows about one of them, that’s collecting taxes from us. We all know that one. But the second one is, in a democracy, the government can’t order us to do something even though it’s good for the economy and they want us to do it. So how does the government get us to do something they want us to do, but they can’t order us to do it?

Chip Franklin:

They scare us?

Steve Moskowitz:

They pay us for it, and the way they pay us for it is through tax incentives. And that’s what tax planning is all about. And that’s what I’ve dedicated my career to. And a lot of these things you wanted to do anyway, but if you do it this way, you get a [inaudible 00:24:49] tax benefit.

Chip Franklin:

Donna Marie, can you tell us a little bit about your take on that? The seminar for everybody is going to be Tuesday, August the 23rd, that it’s going to be at 6:00 PM. We can, obviously, if you’re watching this now, at the end of this you’ll see the link so you can be part of it. And, Donna Marie, I want to hear what you want to contribute to it. But I also want to ask you about your experience with the market in the last 10 years. And do you see it plateauing? And do you see affordable options for people that might be listening here to buy?

DonnaMarie Baldwin:

There’s about three questions in there, but I have one for Steve, if I can ask quickly? And I find this one terribly exciting. Clients of mine rented their property for over two years. They purchased and are living in another property for over two years. We’re selling the rental and cashing out with the 500,000 exemption. And that’ll be in the year 2022. We qualify for two years out of five on the property they are currently occupying. Can we get that Section 121 again? And do we have to wait until 2023?

Steve Moskowitz:

So what’s going to happen is, the minute you ask me about a specific client, I’m going to need all the facts to do it. So, the webinars, we give general types of advice. And one of the things that Donna Marie is looking to do is take the exemption for the married couple. But with the individuals, we’ll just get their facts, then I’ll tell you.

DonnaMarie Baldwin:

All right. So you also asked about the market. I’ve been through this 46 years and I’ve been through at least three downturns.

Steve Moskowitz:

Honest to God, you don’t look like you could have been doing this for 46 years.

Chip Franklin:

Oh, stop it.

DonnaMarie Baldwin:

Good staging.

Steve Moskowitz:

Our last guest was a doctor that talked about live until you’re 112. We should get the two of you guys together.

DonnaMarie Baldwin:

Oh, my God. So I have to work until I’m 90. By the way, Steve, my father’s picture is back there. I found him when I was 53 and he worked until he was 89, as Steve wins executive host.

Steve Moskowitz:

Warren Buffet is in his nineties now and he’s still working. I don’t think it’s because he needs the money. And he chastised one of his employees who left because of early retirement. That employee was only 103.

Chip Franklin:

Well, I hate to jump in here, but we are short on time. Steve has a commitment in just a couple minutes. But, Donna Marie, you got to come back.

DonnaMarie Baldwin:

Well I want to say one last thing that I think is exciting. Rates are high, but I want you to date the interest rate, but marry the house. So, as God awful as interest rates are, someday it will be over and you can refinance. And, Steve, I think we were brother and sister …

Chip Franklin:

What was that saying? That was great. Say that saying again. One more time.

DonnaMarie Baldwin:

Date the interest rate, but marry the home.

Chip Franklin:

I love it.

DonnaMarie Baldwin:

I do, too. I had to make sure that I didn’t tongue tie on that.

Chip Franklin:

Somewhere in that …

Steve Moskowitz:

Date the rates, marry the house.

Chip Franklin:

Somewhere inside of that is why get the milk if the cow is free or something?

DonnaMarie Baldwin:

Well, I’m excited about this webinar because I love taxes.

Steve Moskowitz:

Me too.

DonnaMarie Baldwin:

Not being licensed in it, so it’ll be so exciting to see someone who has devoted their lifetime to it.

Chip Franklin:

Tuesday, August 23rd, Donna Marie Baldwin. Thank you so much.

Steve Moskowitz:

Thank you so much.

Chip Franklin:

We’ll see you soon.

Steve Moskowitz:

Bye, bye.

Chip Franklin:

All right. Thank you so much.

DonnaMarie Baldwin:

Goodbye.

Chip Franklin:

Bye, bye. Well, that’s another edition of Practical Tax. We do it, and you get to see it anytime you want to. Go to MoskowitzLLP.com or YouTube. That’s Steve Moskowitz, tax attorney. I’m Chip Franklin. Til next time.

Outro:

Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.