While this sounds somewhat dramatic and ominous, there are some definite no-no’s and rules that have been developed by the IRS when it comes to Delaware Statutory Trusts (DSTs). The reason for these rules is not to challenge the investor. Instead, they are in place to allow DSTs to qualify as an optional investment for a tax-deferred 1031 exchange. And like all rules, they have consequences if not taken seriously.
Sin #1 Once the DST is closed, there can be no new contributions by new or current investors. This preserves the beneficiaries’ interests because additional borrowing can dilute ownership percentages.
Sin #2 Existing loans and terms cannot be renegotiated, and no new loans can be secured. The only exception to this rule is if the loan is in default or in risk of default or the tenant declares bankruptcy.
Sin #3 Similar to Sin #2, leases like loans, cannot be renegotiated unless the loan is in danger of being defaulted upon or the tenant is facing or has become insolvent or bankrupt. Typically DSTs are structured with a master lease to avoid this risk.
Sin #4 Capital expenditures are limited and can only be used to maintain the property and its value. Specifically, expenditures are only valid if they are for normal repairs and maintenance; minor non-structural capital improvements; and those required by law.
Sin #5 All cash must be distributed on a regular and current basis. Except for reserves for repairs or unexpected expenses, potential earnings and proceeds need to be dispersed in a timely manner.
Sin #6 All potential proceeds earned by the DST can only be distributed to the beneficiaries. This prevents the trustees from reinvesting the proceeds and allows each beneficiary to determine how to use the capital earned from his/her investment.
Sin #7 Any cash held can only be invested in short-term debt obligations. And it must be able to be easily converted back to cash so that can be distributed to the beneficiaries.
Diversified Investment Strategies represents a team of experienced and trusted professionals specializing in real estate investment and services – including buying, selling, leasing, retirement planning and wealth growth and management through strategic, informed investment choices and a meticulous real estate investment analysis. As knowledgeable replacement property professionals, they help clients build a customized strategy that identifies suitable investments pursuing successful completion of a 1031 Tax-Deferred Exchange. Visit them at www.diversified1031 or call 866-261-0104.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and
softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
Diversified 1031 does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS.
Bryan Hakola
Diversified Investment Strategies
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