1031 Exchange DST Noob Question

[Jose Amer]

Hi Folks! Thank you very much for all the SAGE knowledge provided by all of you regarding DST. I am a Noob in this space.

Found this entry in PPM of a 50% LTV DST offering and I would like to know what this specifically means:

"In connection with the acquisition of an Interest, each Investor will be treated, for tax purposes, as the borrower of his, her or its pro rata share of the Loans, expected to be equal to $82,797.68 per $100,000 Interest."

Your inputs very much appreciated.

Thank you and have a BLESSED day!

[Jon Taylor]

@Jose Amer

Good question… Happy to provide clarity (I hope!)

Most DSTs have non-recourse debt at a fixed percentage across the entire portfolio of properties (or one larger property).

As an investor in a given portfolio, you are assigned your pro-rata share of the debt based on the portfolio and treated as the borrower.

"For tax purposes" means that this debt counts in your replacement requirement calculation on the 1031 exchange. And it also means that your cost basis and depreciation schedule calculation should take into account the equity and debt. 

In the example above, every investor who invests in this DST will assume the same debt as a percentage of their equity. In your example above $100k of equity invested would likely show at least $182,797.68 as the total purchase price on your closing statement (perhaps more if there were investor-funded reserves).

"Non-recourse" debt means that you, as the borrower, do not have personal liability for the loan. Your liability only reaches as far as the equity you've invested. 

The debt terms should be studied carefully because not all DSTs are structured the same. Amortizing, interest-only, fixed-rate, variable-rate, term length and cash sweep options should all be understood prior to making an investment.

Many investors appreciate the opportunity to trade their recourse (personally liable) debt for non-recourse debt in a DST. Or, investors who exchange out of a debt-free relinquished property appreciate the opportunity to add additional basis to depreciate.

Each PPM has a page called the "Estimated Use of Proceeds" (or similar) that clearly lays out the allocation of funds in the Trust as various line items. This is a page every investor should understand as a part of your own due diligence.

Happy to provide more insight if needed.