1031/DSTs Debt, and Depreciation

[Mike Mosk]

As I am considering what DSTs to invest in, I am wondering about DSTs with Debt, and if/how that relates to depreciation.

My situation is that i am getting ready to invest the proceeds from the sale of an inherited commerical property, so i am looking to rollover these proceeds into several DSTs in a 1031 exchange. The property was paid off years ago - there is no remaining debt on the property.

Questions:

- if i invest in a DST that has debt, what does that imply for the next time i rollover from that DST: do i have to invest in a DST with the same debt ratio (or higher), or is that not a factor.

- is the debt ratio related at all to the depreciation i can take against the property?

thanks!

[Dave Foster]

@Mike Mosk, that's not quite correct. Depending on what the depreciation schedule shows you may have depreciable basis left that can roll over into the new property. Buying more than you sold also gives you more depreciable basis. Debt really doesn't have much to do with that other than debt as a fixed function that correlates with % interest purchased in a DST investment.

When you come out of your DST there will be a sale price that will equal your cash proceeds plus the debt relief. Your responsibility with a 1031 is to purchase at least as much as that sales price and to use all of your cash proceeds to that if you want to avoid a taxable event.

If you are buying a DST that has a lower debt ratio then you will probably need to add cash in order to meet the reinvestment requirement. If you are buying a DST with a higher debt ration then you would need to buy a higher % interest in the DST to burn up your cash proceeds.

There is no requirement to carry or replace debt just because it is a 1031 exchange. If you have other sources of cash available you may use those to replace debt. The reality of life is that most people do replace debt but there is no requirement to do so. Debt obviously plays into a DST but not in a requirement to carry but as structured function of how much interest you can purchase and what that impact is on your 1031.

The easiest way to think about any property in a 1031 exchange whether property or fractional syndicated product is to look at total tax deferral if you purchase at least as much as you sell and if  you use all of your proceeds in the next purchase.