Investing in a Delaware Statutory Trust (DST) through a 1031 exchange carries forward not just your deferred gain but also the tax attributes of your old property — and understanding how cost basis and depreciation work is essential to understanding the real economics of the investment. When you exchange into a DST, you take a carryover basis from your relinquished property rather than a fresh, stepped-up basis equal to what you 'paid.' Depreciation then passes through to you as a beneficial owner, sheltering part of the income you receive. Each year, the DST reports your share of income, expenses, and depreciation on a grantor letter. And when the DST property is eventually sold in a full-cycle event, your gain is computed against your depreciation-reduced basis — at which point you can defer again through another 1031 or, if held until death, pass it to heirs with a step-up that can erase the deferred tax. This guide explains carryover basis in a DST, how depreciation passes through, your annual tax statement, basis at full-cycle sale, and coordinating with your CPA. Note that Baker 1031 does not provide tax advice — these are technical tax matters you should confirm with your CPA; this is educational information, not investment advice.
Carryover Basis in a DST
When you complete a 1031 exchange into a DST, you take a carryover basis — your tax basis from the relinquished property carries forward to the DST interest, rather than resetting to the property's current market value. This is the mechanism that makes the exchange tax-deferred rather than tax-free: by carrying the old (typically lower) basis forward, the gain you deferred isn't erased — it's embedded in the new investment's basis and will surface later unless you keep deferring. So your basis in the DST starts from where your old property's basis left off, not from the full value of what you acquired.
The carryover basis is adjusted for the specifics of your exchange. If you added cash to the deal (for example, to meet the minimum, replace debt with equity, or trade up in value), that additional cash generally adds to your basis. If you received boot (cash or non-like-kind value) or didn't fully reinvest, you may recognize some gain, and your basis is adjusted accordingly. Debt also matters: the relief of debt on your old property and the assumption of (or share of) debt in the DST factor into the calculation. So the carryover basis isn't simply a copy of the old number — it's the old basis adjusted for cash, boot, and debt changes in the exchange.
So carryover basis means your DST basis equals your relinquished property's basis carried forward, adjusted for any additional cash, boot, and debt changes — which is what preserves the deferred gain. Carryover basis in a DST — your tax basis from the relinquished property carrying forward to the DST interest (rather than resetting to market value), adjusted for additional cash invested, any boot received or shortfall in reinvestment, and changes in debt — is the mechanism that keeps your 1031 deferral intact by embedding the deferred gain in the new investment's basis. It's an adjusted carryover, not a fresh basis. Understanding carryover basis frames the rest of your DST tax picture. Carryover basis means your DST basis equals your old property's basis carried forward, adjusted for added cash, boot, and debt changes — which preserves the deferred gain in the new investment.
How Depreciation Passes Through
Because a DST is a grantor trust for tax purposes, the trust's income, expenses, and depreciation pass through to you as a beneficial owner — you're taxed as if you directly owned your fractional share of the real estate. This means depreciation, one of real estate's most valuable tax benefits, flows through to shelter part of the income you receive. Your share of the DST's depreciation deduction reduces the taxable portion of your distributions, so a meaningful part of the cash you receive may be tax-deferred (sheltered) rather than currently taxable income.
The depreciation that passes through has two components in a 1031 context. The carried-over basis continues to depreciate on its existing schedule — you essentially step into the remaining depreciation of the value you carried forward. Any additional basis from new cash you invested generally starts a new depreciation schedule, depreciated over the applicable recovery period for the property type. So your total pass-through depreciation combines the continuation of the old schedule (on the carryover portion) and a new schedule (on the added-cash portion). This is more nuanced than a fresh purchase, where the entire basis would depreciate on one new schedule — a key reason DST depreciation is best handled with your CPA.
So depreciation passes through to you because a DST is a grantor trust — your share shelters part of your income, with the carryover basis continuing its old schedule and any new-cash basis starting a fresh one. How depreciation passes through — the DST being a grantor trust, so its depreciation flows through to shelter part of your distributions, with the carried-over basis continuing to depreciate on its existing schedule and any additional basis from new cash starting a new schedule over the property's recovery period — is what gives a DST the income-sheltering benefit of direct real estate ownership. It's a split schedule, not a single fresh one. Understanding the pass-through shows why DST income is partly sheltered. Depreciation passes through because a DST is a grantor trust: your share shelters part of your income, with the carryover basis continuing its old schedule and new-cash basis starting a fresh one.
A portion of every DST distribution may be sheltered by depreciation — which is why the cash you receive and the income you're taxed on are often two different numbers.
Your Annual Tax Statement
Each year, your DST reports your tax information on a grantor letter — not a Schedule K-1. Because a DST is structured as a grantor trust rather than a partnership, it doesn't issue a K-1; instead, the grantor letter (sometimes called a grantor tax letter or grantor trust statement) reports your pro-rata share of the trust's income, expenses, and depreciation. You and your CPA use this letter to report the DST's activity on your individual tax return, generally on Schedule E, as if you directly owned your fractional share of the property.
This distinction matters and is a common point of confusion: investors sometimes expect a K-1 because DSTs are private real estate investments, but a DST issues a grantor letter, reflecting its grantor-trust character. The grantor letter typically arrives during tax season and breaks down the rental income, operating expenses, interest, and your share of depreciation — giving your CPA what's needed to calculate the taxable portion of your distributions (after the depreciation shelter). Keeping these letters, along with your exchange documents establishing your carryover basis, is important for accurate reporting each year and for computing gain when the DST eventually sells.
So your annual tax statement is the grantor letter — not a K-1 — reporting your share of income, expenses, and depreciation, which you and your CPA use to report the DST on your return. Your annual tax statement — the grantor letter (not a Schedule K-1, because a DST is a grantor trust) that reports your pro-rata share of the DST's rental income, operating expenses, interest, and depreciation, used by you and your CPA to report the activity on Schedule E as if you directly owned your fractional share — is how a DST's tax activity reaches your return each year. Expect a grantor letter, not a K-1. Understanding the annual statement clarifies your reporting. Your annual tax statement is the grantor letter — not a K-1 — reporting your share of income, expenses, and depreciation, which your CPA uses to report the DST on your return, typically on Schedule E.
Basis at Full-Cycle Sale
When the DST reaches a full-cycle event — the sponsor sells the underlying property, typically after a multi-year hold — your gain is computed against your adjusted basis, which has been reduced by all the depreciation that passed through to you over the hold. Because depreciation lowered your basis each year (even as it sheltered your income), the gain on sale is larger than your simple economic profit might suggest, and part of it is depreciation recapture (taxed at a higher rate than the long-term capital-gains rate on the remaining gain). This is the trade-off of depreciation: the shelter you enjoyed during the hold is effectively recaptured at sale.
But a full-cycle sale isn't necessarily a taxable event for you. You typically have choices: you can roll the proceeds into another 1031 exchange — into another DST or other like-kind real property — and continue deferring the gain (including the recapture), keeping the deferral chain going. Or, if you hold the DST interest until death, your heirs generally receive a step-up in basis to fair market value, which can eliminate the entire deferred gain and recapture — the 'swap till you drop' strategy. So a full-cycle sale presents a decision point: defer again, or let the basis step up at death, rather than necessarily paying the tax.
So at full-cycle sale, gain is computed against your depreciation-reduced basis (including recapture), but you can defer again via another 1031 or get a step-up at death rather than paying. Basis at full-cycle sale — your gain being computed against your adjusted basis, reduced by all the pass-through depreciation (so the gain includes depreciation recapture), when the sponsor sells the property after a multi-year hold — is a decision point rather than a forced tax event, because you can roll the proceeds into another 1031 to keep deferring or hold until death for a step-up that can erase the deferred gain and recapture. The depreciation shelter is recaptured unless you keep deferring. Understanding the sale completes the basis picture. At full-cycle sale, gain is computed against your depreciation-reduced basis (including recapture), but you can defer again via another 1031 or get a step-up at death rather than paying the tax.
The full-cycle sale is a decision, not a tax bill — defer again into another exchange, or hold until death and let the step-up erase a gain that may have compounded across years of deferral.
- In a 1031 into a DST, you take a carryover basis from your relinquished property, adjusted for added cash, boot, and debt changes.
- Depreciation passes through (a DST is a grantor trust), sheltering part of your income — carryover basis continues its schedule, new cash starts a new one.
- Your annual tax statement is a grantor letter, not a K-1 — it reports your share of income, expenses, and depreciation for Schedule E.
- At full-cycle sale, gain is computed against your depreciation-reduced basis (with recapture), but you can 1031 again or get a step-up at death.
Coordinating With Your CPA
Because DST basis and depreciation are technical, coordinating with your CPA is essential at every stage — and Baker 1031 does not provide tax advice. At the front end, your CPA helps establish your carryover basis: tracking the basis from your relinquished property, the adjustments for cash, boot, and debt, and how that basis splits between the continuing (carryover) depreciation schedule and any new schedule from added cash. Getting this right at the outset sets up accurate reporting for the entire hold, so it's worth doing carefully with the exchange documents in hand.
During the hold, your CPA uses each year's grantor letter to report the DST's income, expenses, and depreciation on your return (typically Schedule E), calculating the taxable portion of your distributions after the depreciation shelter. At the exit, your CPA computes the gain against your depreciation-reduced basis, identifies the depreciation-recapture component, and helps you decide whether to 1031 again, take the gain, or plan for a step-up at death. Throughout, your CPA coordinates with your qualified intermediary (on exchange mechanics) and your attorney (on titling and estate planning). So the CPA is the central player in turning the DST's tax features into correct, optimized reporting for your specific situation.
So coordinating with your CPA — at setup, during the hold, and at exit — is essential because DST basis and depreciation are technical, and Baker 1031 doesn't provide tax advice. Coordinating with your CPA — who establishes your carryover basis and depreciation schedules at the outset, uses each year's grantor letter to report income, expenses, and depreciation during the hold, and computes the gain (including recapture) and exit options at full-cycle sale, coordinating with your QI and attorney throughout — is essential because the DST's basis and depreciation mechanics are technical and Baker 1031 doesn't provide tax advice. Your CPA turns the features into correct reporting. Understanding the CPA's role ensures the tax benefits are captured accurately. Coordinating with your CPA at setup, during the hold, and at exit is essential, because DST basis and depreciation are technical — your CPA establishes the basis, reports the grantor letter, and computes the exit gain, while Baker 1031 doesn't provide tax advice.
Why the Tax Treatment Matters
Understanding DST basis and depreciation isn't an academic exercise — it directly affects the real, after-tax return of your investment and the decisions you'll face. The pass-through depreciation means a portion of your distributions is sheltered, so your after-tax cash flow is higher than the headline taxable income suggests; an investor who ignores this may underestimate the true economic benefit of the DST during the hold. Conversely, an investor who forgets that depreciation reduces basis may be surprised by the size of the gain (and the recapture) at sale.
The basis and depreciation picture also shapes your exit strategy. Because the deferred gain and recaptured depreciation are embedded in your basis, the choice at full-cycle sale — defer again via 1031, recognize the gain, or hold for a step-up at death — has large tax consequences that depend on your basis math. The step-up at death is especially powerful precisely because it eliminates a deferred gain that has grown across one or more exchanges. So the tax treatment isn't a side detail; it's central to evaluating whether a DST fits your goals, how much after-tax income it really produces, and how to plan your eventual exit. That's why these technical points deserve careful attention with your CPA.
So the tax treatment matters because it determines your real after-tax income during the hold and drives your exit decision — making it central, not incidental, to the investment. Why the tax treatment matters — the pass-through depreciation raising your after-tax cash flow above the headline income during the hold, and the depreciation-reduced basis (with embedded deferred gain and recapture) shaping the high-stakes exit decision among deferring again, recognizing gain, or stepping up at death — is that DST basis and depreciation directly determine your real, after-tax return and your planning. It's central to evaluating the investment. Understanding why it matters underscores coordinating with your CPA. The tax treatment matters because it determines your real after-tax income during the hold and drives the high-stakes exit decision — making DST basis and depreciation central to evaluating the investment, not incidental.
How Baker 1031 Helps With DST Tax Coordination
Baker 1031 Investments helps investors understand how cost basis and depreciation work in a DST — carryover basis from the relinquished property, how depreciation passes through to shelter income, the annual grantor-letter tax statement, basis at full-cycle sale, and how to coordinate with your CPA — so you can evaluate a DST's real, after-tax economics and plan your exit.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review. Crucially, Baker 1031 does not provide tax advice — DST basis and depreciation are technical tax matters, and your CPA is the right professional to establish your carryover basis, set up the depreciation schedules, report each year's grantor letter, and compute the gain and recapture at exit. Our role is to help you understand the structure (the grantor-trust character, the pass-through depreciation, the grantor letter rather than a K-1, and the full-cycle exit options) so you can have an informed conversation with your CPA, and to coordinate with your qualified intermediary on the exchange mechanics that establish your basis. We help you see how a DST's tax features affect its after-tax return and your planning, while leaving the tax determinations to your CPA and the legal and estate-planning details to your attorney. Distributions, yields, and returns are never promised, and past performance does not guarantee future results. Our role is to help you understand and access a suitable DST while your tax professionals handle the technical tax work.
Frequently Asked Questions
What is carryover basis in a DST?
Carryover basis means that when you complete a 1031 exchange into a DST, your tax basis from the relinquished property carries forward to the DST interest, rather than resetting to the property's current market value. This is the mechanism that makes a 1031 tax-deferred rather than tax-free: by carrying the old (typically lower) basis forward, the gain you deferred isn't erased — it's embedded in the new investment's basis and will surface later unless you keep deferring through additional exchanges. The carryover basis is then adjusted for the specifics of your exchange: additional cash you invested generally adds to basis; boot you received or a shortfall in reinvestment may trigger some recognized gain and adjust basis; and changes in debt (relief of old debt and assumption of new debt) factor in. So your DST basis isn't a fresh number equal to what you 'paid' — it's your old basis carried forward and adjusted for cash, boot, and debt. This carryover basis is the foundation for your depreciation and your eventual gain calculation. Confirm the specifics with your CPA.
How does depreciation work in a DST?
Because a DST is a grantor trust for tax purposes, its income, expenses, and depreciation pass through to you as a beneficial owner — you're taxed as if you directly owned your fractional share of the real estate. So depreciation, one of real estate's most valuable tax benefits, flows through to shelter part of the income you receive: your share of the DST's depreciation deduction reduces the taxable portion of your distributions, meaning a meaningful part of the cash you receive may be sheltered rather than currently taxable. In a 1031 context, the depreciation has two pieces: the carried-over basis continues to depreciate on its existing schedule (you step into the remaining depreciation of the value you carried forward), and any additional basis from new cash you invested generally starts a new depreciation schedule over the property's applicable recovery period. So your total pass-through depreciation combines the continuation of the old schedule and a new schedule — more nuanced than a fresh purchase. This is a technical area best handled with your CPA, who sets up and tracks the schedules.
Does a DST issue a K-1?
No — a DST does not issue a Schedule K-1. Because a DST is structured as a grantor trust rather than a partnership, it reports your tax information on a grantor letter (sometimes called a grantor tax letter or grantor trust statement) instead. This is a common point of confusion, because investors often expect a K-1 from private real estate investments — but a DST's grantor-trust character means you receive a grantor letter. The grantor letter reports your pro-rata share of the trust's income, expenses, and depreciation, and you and your CPA use it to report the DST's activity on your individual tax return, generally on Schedule E, as if you directly owned your fractional share of the property. The letter typically arrives during tax season and breaks down rental income, operating expenses, interest, and depreciation. So expect a grantor letter, not a K-1, and keep each year's letter along with your exchange documents for accurate reporting and for computing your gain when the DST eventually sells. Your CPA uses it to prepare your return.
What is a grantor letter?
A grantor letter is the annual tax statement a DST provides to each investor, reporting your pro-rata share of the trust's income, expenses, and depreciation. Because a DST is a grantor trust rather than a partnership, it issues a grantor letter (also called a grantor tax letter or grantor trust statement) rather than a Schedule K-1. The letter breaks down the items you need to report: your share of the rental income, the operating expenses, the mortgage interest, and the depreciation deduction. You and your CPA use the grantor letter to report the DST's activity on your individual return, typically on Schedule E, as if you directly owned your fractional share of the underlying real estate. The depreciation figure on the letter is what shelters part of your distributions, so the taxable income you report is generally less than the cash you received. Grantor letters usually arrive during tax season. So a grantor letter is essentially the DST's version of an annual tax statement — keep it with your records, and give it to your CPA, who uses it to prepare your return accurately each year.
What happens to my basis when the DST property is sold?
When the DST reaches a full-cycle event — the sponsor sells the underlying property, typically after a multi-year hold — your gain is computed against your adjusted basis, which has been reduced by all the depreciation that passed through to you over the hold. Because depreciation lowered your basis each year (even as it sheltered your income), the gain on sale is larger than your simple economic profit might suggest, and part of it is depreciation recapture, which is taxed at a higher rate than the long-term capital-gains rate on the remaining gain. So the shelter you enjoyed during the hold is effectively recaptured at sale. However, a full-cycle sale isn't necessarily a taxable event: you can typically roll the proceeds into another 1031 exchange (into another DST or other like-kind property) to keep deferring the gain and recapture, or, if you hold until death, your heirs generally receive a step-up in basis that can eliminate the deferred gain entirely. So the sale is a decision point — defer again or step up at death — rather than a forced tax bill. Plan it with your CPA.
Is depreciation recapture a concern with a DST?
Yes — depreciation recapture is a real consideration, because the depreciation that shelters your DST income during the hold also reduces your basis, which increases your gain at sale and creates a recapture component. When the DST property is sold, the portion of your gain attributable to depreciation you took (or that passed through to you) is generally taxed as depreciation recapture, at a rate higher than the long-term capital-gains rate that applies to the rest of the gain. This is the inherent trade-off of depreciation: you get a current shelter, but it's effectively repaid at sale through recapture. The important point is that you don't have to pay it at the DST's full-cycle sale if you keep deferring: rolling the proceeds into another 1031 exchange defers the recapture along with the rest of the gain, and holding until death can eliminate both via a step-up in basis. So recapture is a concern to plan for, not to fear — the deferral strategies that apply to capital gains also defer recapture. Coordinate the calculation and the exit decision with your CPA, since the numbers are technical.
How is my carryover basis calculated in a 1031 into a DST?
Your carryover basis in a DST starts from the adjusted basis of your relinquished property and is then modified for the specifics of the exchange. The starting point is your old property's basis (original cost plus improvements, minus depreciation taken). To that, additional cash you invest in the DST — to meet the minimum, replace debt with equity, or trade up in value — generally adds to basis. If you received boot (cash or non-like-kind value) or didn't fully reinvest your proceeds and equity, you may recognize some gain, which adjusts the calculation. Debt changes matter too: the relief of debt on your relinquished property and your share of debt in the DST both factor in, since debt relief can be treated like boot if not offset. The result is an adjusted carryover basis that embeds your deferred gain. This calculation is genuinely technical and depends on your exact numbers, so it should be done by your CPA using your closing statements and exchange documents. So your carryover basis is the old basis carried forward and adjusted for cash, boot, and debt — confirm it with your CPA.
Why is part of my DST distribution not taxable?
Part of your DST distribution is often not currently taxable because depreciation shelters it. As a beneficial owner of a grantor-trust DST, your share of the property's depreciation deduction passes through to you and reduces the taxable portion of the income you receive. So if the DST distributes cash to you, the taxable income you must report (after subtracting your share of depreciation and other expenses) is generally less than the cash you received — meaning a portion of the distribution is effectively tax-deferred rather than currently taxed. This is one of the core tax benefits of real estate: depreciation is a non-cash deduction that shelters cash income. It's important to understand, though, that this isn't free money — the depreciation reduces your basis, so the sheltered amount is generally recaptured (as part of your gain) when the property is sold, unless you keep deferring through another 1031 or step up at death. So the shelter is a timing benefit, not a permanent exclusion, but it meaningfully improves your after-tax cash flow during the hold. Your CPA quantifies the sheltered portion from the grantor letter.
Can I 1031 exchange out of a DST when it sells?
Yes — when a DST reaches its full-cycle sale, you can generally roll your proceeds into another 1031 exchange, deferring the gain (and depreciation recapture) again. Because your DST beneficial interest is treated as a direct interest in like-kind real property under Revenue Ruling 2004-86, the proceeds from its sale can be exchanged into other like-kind real estate — including another DST — just as you exchanged into the DST in the first place. To do so, you must follow the same 1031 rules: use a qualified intermediary to hold the proceeds, identify replacement property within 45 days, and complete the acquisition within 180 days. This ability to chain exchanges is central to the 'swap till you drop' strategy, where an investor keeps deferring across successive exchanges and ultimately passes the property to heirs with a step-up in basis that eliminates the accumulated deferred gain. So a DST's eventual sale doesn't force you to recognize the gain — you can keep deferring through another exchange. Plan the timing and identification with your QI and CPA well before the DST sells, so you're ready to act when the full-cycle event occurs.
What is the step-up in basis at death for a DST?
The step-up in basis at death is a powerful estate-planning benefit that can eliminate the deferred gain embedded in a DST. When you hold a DST interest (or any 1031-deferred property) until your death, your heirs generally inherit it with a basis 'stepped up' to its fair market value at the date of death. Because your deferred gain and recaptured depreciation were embedded in your low carryover basis, stepping the basis up to market value can erase that entire deferred gain — your heirs could potentially sell shortly after inheriting with little or no taxable gain. This is the culmination of the 'swap till you drop' strategy: defer gains across one or more 1031 exchanges (including into and out of DSTs), hold until death, and let the step-up wipe out the accumulated deferred tax. The step-up makes DSTs particularly attractive for older investors focused on legacy planning, since it can pass real estate wealth to heirs without the deferred tax ever being paid. So the step-up at death can permanently eliminate the deferred gain — confirm the current rules and your specifics with your CPA and estate attorney, as estate-tax laws can change.
Do I report DST income on Schedule E?
Yes — DST income is generally reported on Schedule E of your individual tax return, because a DST is a grantor trust and you're treated as if you directly owned your fractional share of the underlying real estate. Each year, the DST provides a grantor letter reporting your pro-rata share of the rental income, operating expenses, mortgage interest, and depreciation. You and your CPA use those figures to report the DST's rental activity on Schedule E (Supplemental Income and Loss), the same schedule used for directly owned rental real estate — rather than reporting from a Schedule K-1, which a DST doesn't issue. The depreciation from the grantor letter offsets part of the income on Schedule E, so the net taxable amount is typically less than the cash distributions you received. Keeping each grantor letter and your exchange documents (which establish your carryover basis and depreciation schedules) ensures accurate Schedule E reporting year to year. So yes, DST income flows onto Schedule E via the grantor letter — your CPA handles the mechanics, since the depreciation and basis tracking are technical and specific to your situation.
How does additional cash I invest in a DST affect my basis and depreciation?
Additional cash you invest in a DST — beyond your exchanged equity — generally increases your basis and can start a new depreciation schedule. Investors add cash for several reasons: to meet a DST's minimum investment, to replace debt from the relinquished property with equity (avoiding new leverage), or to trade up in total value. That additional cash adds to your carryover basis, raising your total basis in the DST interest. For depreciation, the picture splits: the carried-over portion of your basis continues to depreciate on its existing schedule (the remaining life of the value you carried forward), while the additional basis from your new cash generally begins a new depreciation schedule over the property's applicable recovery period. So you can end up with two depreciation streams — a continuing one on the carryover and a fresh one on the added cash — which together determine your annual pass-through depreciation. This is more complex than a single fresh purchase, which is why it's important for your CPA to set up and track the schedules correctly. So additional cash raises your basis and adds a new depreciation schedule — confirm the details with your CPA.
Why should I involve my CPA in a DST investment?
You should involve your CPA because DST basis and depreciation are genuinely technical, and getting them right affects your taxes every year and at exit — and Baker 1031 does not provide tax advice. At the front end, your CPA establishes your carryover basis from the relinquished property, accounts for cash, boot, and debt adjustments, and sets up the split between the continuing carryover depreciation schedule and any new schedule from added cash. During the hold, your CPA uses each year's grantor letter to report the DST's income, expenses, and depreciation (typically on Schedule E) and to calculate the taxable portion of your distributions after the depreciation shelter. At exit, your CPA computes the gain against your depreciation-reduced basis, identifies the recapture component, and helps you decide whether to 1031 again, recognize the gain, or plan for a step-up at death. Your CPA also coordinates with your qualified intermediary and attorney. So your CPA turns the DST's tax features into accurate, optimized reporting for your specific situation — which is why involving them from the outset, not just at tax time, is important.
Does pass-through depreciation make DSTs better than REITs for taxes?
For tax sheltering during the hold, pass-through depreciation is a meaningful advantage of DSTs over REITs, but the comparison depends on your goals. In a DST, because the trust is a grantor trust, depreciation passes through directly to you and shelters part of your distributions — and, importantly, a DST interest is 1031-eligible like-kind real property, so you can defer gains into and out of it. A REIT, by contrast, is a corporation: you own shares (a security, not real property), so depreciation is absorbed at the REIT level and doesn't pass through to you the same way, and REIT shares aren't 1031-eligible. REIT dividends do benefit from the 20% Section 199A deduction, which lowers their effective tax rate, so REITs have their own tax features. So for an investor focused on 1031 deferral and pass-through depreciation on real estate, a DST has clear tax advantages; for an investor wanting liquid, diversified real estate exposure with new capital, a REIT's features may suit better. They're different tools — confirm the tax comparison for your situation with your CPA before deciding.
How does Baker 1031 help with DST tax coordination?
We help investors understand how cost basis and depreciation work in a DST — carryover basis from the relinquished property, how depreciation passes through to shelter income, the annual grantor-letter tax statement, basis at full-cycle sale, and how to coordinate with your CPA — so you can evaluate a DST's real, after-tax economics and plan your exit. DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review. Crucially, Baker 1031 does not provide tax advice — DST basis and depreciation are technical, and your CPA is the right professional to establish your carryover basis, set up the depreciation schedules, report each year's grantor letter, and compute the gain and recapture at exit. Our role is to help you understand the structure — the grantor-trust character, the pass-through depreciation, the grantor letter rather than a K-1, and the full-cycle exit options — so you can have an informed conversation with your CPA, and to coordinate with your QI on the exchange mechanics. Distributions, yields, and returns are never promised, and past performance doesn't guarantee future results.
Glossary
- Cost Basis
- Your tax investment in the property, used to compute gain.
- Carryover Basis
- The relinquished property's basis carried forward to the DST interest.
- Adjusted Basis
- Basis modified for cash, boot, debt, and depreciation taken.
- Depreciation
- A non-cash deduction that shelters part of real estate income.
- Pass-Through Depreciation
- Depreciation that flows from the DST to the investor.
- Grantor Trust
- A trust whose income is taxed directly to the beneficial owner.
- Grantor Letter
- The DST's annual statement of your income, expenses, and depreciation.
- Schedule E
- The tax form for reporting rental real estate income, including DSTs.
- Depreciation Recapture
- Tax on the gain attributable to prior depreciation at sale.
- Full-Cycle Sale
- The eventual sale of the DST's underlying property.
- Boot
- Cash or non-like-kind value received that may be taxable.
- Recovery Period
- The number of years over which an asset is depreciated.
- Step-Up in Basis
- Reset of basis to market value at death, erasing deferred gain.
- Swap Till You Drop
- Deferring gains across exchanges until death's step-up.
- Revenue Ruling 2004-86
- The IRS ruling making DST interests 1031-eligible like-kind real property.
- Qualified Intermediary (QI)
- The party that holds and wires 1031 exchange proceeds.
Sources & References
- IRS. Revenue Ruling 2004-86
- IRS. Like-Kind Exchanges — Real Estate Tax Tips
- Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
- Cornell Legal Information Institute. 26 CFR § 1.1031(k)-1 — Treatment of deferred exchanges
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
