Depreciation on Single DST with Multiple Properties

[Arman Ohanian]

Hi all,

In 2020, I acquired a DST that contains four properties. 

The sponsor sent separate 1099-MISC and 1098 for each.   So, I listed them separately and have all of the addresses with rent/expense show up on Sch E.

However, since I only purchased ONE asset (the DST), I am taking depreciation against only one of the properties/addresses.

Is this OK?  Will this be a problem or raise any flags?

Thanks in advance,

-Arman.

[DianeW777]

No. A problem will not occur by listing one asset for depreciation, and this will not raise any flags. The difficulty comes for you if only one of them is sold at a time (assuming this is not one building with four units). If this occurs, then a breakdown of the cost will need to be adjusted and a sale will be a manual entry or another asset created while the first asset is changed.

Depreciation Rules for Section 1031 Exchange:

The following information is included for clarification.

The basic concept of a 1031 exchange is that the basis of your old property rolls over to your new property. In other words, if you sold your old property for $100,000, and bought your New Property for the same, your basis on the new property would be the same. It makes sense then that your depreciation schedule would be exactly the same, which it is. In other words, you continue your depreciation calculations as if you still own the old property (your acquisition date, cost, previous depreciation taken, and remaining undepreciated basis remain the same).

In a case where there are several properties in exchange for one property, and if you did want to separate them, the best way to divide the asset cost basis is by determining a percentage of cost basis for each property.  Then setting them up exactly as the one asset is now (assumes there was one property and now four). To do this you can use the tax assessed value of each property and divide that by the total value of all properties to arrive at the percentage for each property.  Then use that percentage against your old property cost basis (land should be accounted for separately using the same method).

If you pay additional money in the exchange or have improvements to the new property, then that alone becomes a new asset for depreciation and begins it's 27.5 year recovery on the date of the exchange. And if  you decide to separate the properties, use the same method.

You can wait until you sell one or all of the properties, it's up to you.

[Arman Ohanian]

@DianeW777 , thanks for the response.

I'd rather report these as one as it is a single DST.  What I am having difficulty with is understanding which of the four addresses needs to go on the Sch E.  I am able to lump the 1099-miscs and 1098s together, but can't figure out what address to use.

With my other DSTs, each contained a single property and it was clearer.

Please share your thoughts on this.

[DianeW777]

You must decide an address to use for the combined properties. Always keep your accounting separately for each house so that you know what expenses belong to each house. This is very important for capital improvements which are listed as separate assets.

[Arman Ohanian]

I see.  So I can use either of the address?  

I assumed I must list all addresses.

Again, huge thanks for your feedback, @DianeW777 

[Carl]

Is this OK?

No, It's not okay. You are required by law to depreciate any and all assets used in a rental business (which is what you have here - a rental business). Based on this statement from you:
I am taking depreciation against only one of the properties/addresses.

You are required to depreciate "all" units that are classified as rental property. You don't have a choice on this really.

I am assuming that you have each of the four units entered into the program as individual rental properties. This is perfectly fine, and the way I would probably do it.

The fact is, you have "FOUR" assets, as each unit is it's own physically self-contained living facility with all the amenities needed for each to function independently.

-Each unit has it's own physically separate cooking, bathing, and cleaning facilities.

-I am also assuming each unit has it's utilities metered separately (gas, electric, water, etc.) but it's really not a requirement.

You need to divide your expenses across all four units. Should be easy since you just divide everything by four.

So if you paid $100,000 for the building that contains four units, your cost basis would be $25K for each unit. I'd probably allocate at least $5K per unit to the land. So for each unit cost would be $25K and cost of land would be $5K.

One advantage of splinting things like this, is that if you later dicide to sell one of the units, you most certainly can and the paperwork (tax-wise) will be much easier to deal with on your taxes. Likewise, if you decide to move into one of the units as your primary residence, that too makes the tax paperwork simpler.

[Arman Ohanian]

@Carl it's not four separate units.  It's one DST that owns 4 different apartment complexes.  There are hundreds of units in total.

For each apartment complex,  they send me 1099-misc and 1098.   I bought ownership percentage in the DST as one deal.  

I am trying to figure out whether I need 4 separate items in Schedule E or just one for the DST.  The later would be easier, as these complexes can not be sold one at a time.  They have to sell them as a bundle, portfolio, and DST breaks up at that point.

[Carl]

I'm not quite sure what "DST" stands for. My only known meaning for that is Delaware Statutory Trust. Does this have something to do with a trust perhaps?

[M-MTax]

DSTs are grantor trusts so they're disregarded and they're used for 1031 exchanges. I WOULD NOT enter this as anything other than ONE property IF the properties have to be sold as a bundle. 

[M-MTax]

@Arman Ohanian: They have to sell them as a bundle, portfolio, and DST breaks up at that point.

Enter this as one item if that's the case. Entering them separately is not the right approach and will cause nothing but problems in the future.

[Arman Ohanian]

@M-MTax I believe you are right.  But what do I use as 'address' for Sch E?  There are four addresses/properties associated with the one DST.

[Arman Ohanian]

@Carl , yes, DST is Delaware Statutory Trust.  So, one trust, 4 properties.  🙂

Each property has an address, so it becomes confusing, at least for me, doing the schedule E.

I think I may have reached my DIY limit on this.

[Carl]

If you want, continue working with Arman on this. It's obvious to me that he is much more informed and educated on DST's than I am. Heck, I didn't even know what DST stood for until I googled it. 🙂

[Arman Ohanian]

Quick update for those following.

I had a discussion with the broker and they said that each property needs to be on Schedule E separately.

The DST sent me a cost segregation reports, one per property, to help break down the depreciation.  The report breaks down the cost into 27.5, 15, and 5-year bundles.  I am supposed to use this numbers to figure out my portion of the depreciation.

[Carl]

Excuse me for butting in here, but your last post raised a question with me.

had a discussion with the broker and they said that each property needs to be on Schedule E separately.

The question this raises, (hopefully, without sounding sarcastic) is this: Is your broker a tax professional or tax specialist? I doubt it. That's what makes me lean away from the broker advice when it comes to taxes, and more towards @M-MTax  at this point. Maybe the broker can cite specific guidance for this in an IRS publication?