If you've placed 1031 exchange proceeds into a Delaware Statutory Trust (DST), one of the first practical questions is: how does this show up on my taxes? The answer flows from the DST's structure. A DST is typically treated as a grantor trust, which means its income, expenses, and depreciation pass through to each investor's proportional share rather than being taxed at the trust level — and that pass-through includes valuable depreciation that can shelter part of your DST income. You'll receive reporting from the sponsor (often a grantor letter or substitute Form 1099) showing your share, you'll track your basis (carried over from the relinquished property and reduced by depreciation), and at the eventual full-cycle sale your gain will be calculated — and can be deferred again through another 1031, or potentially erased for heirs through a step-up in basis at death. This guide walks through each piece. Note that Baker 1031 does not provide tax or legal advice — this is educational information; coordinate with your CPA and verify the current rules for your specific situation.
How DST Income Is Reported
DST income is reported through the grantor-trust structure. For federal tax purposes, a DST holding real estate for 1031 investors is typically treated as a grantor trust, which means the trust itself is generally disregarded for income-tax purposes — its income, expenses, and depreciation flow through to each beneficial owner in proportion to their interest. You report your share of the rental income, operating expenses, and depreciation on your own return, much as you would if you owned a fractional interest in the property directly. This pass-through treatment is part of what makes a DST work as 1031 replacement property under IRS Revenue Ruling 2004-86.
In practice, this means the cash distributions you receive and the income you report aren't necessarily the same number. Your taxable income is your share of net rental income after expenses and after depreciation, while your cash distribution is your share of net cash flow. Because depreciation is a non-cash deduction, it reduces your taxable income without reducing your cash — so it's common to receive a cash distribution while reporting a smaller amount of taxable income (or, in some years, a paper loss). The sponsor provides the figures you need, typically through a grantor letter or substitute information statement.
So DST income is reported by passing the trust's income, expenses, and depreciation through to your individual return in proportion to your interest — not by taxing the trust itself. How DST income is reported — through grantor-trust pass-through, where the disregarded trust's rental income, operating expenses, and depreciation flow to each beneficial owner's return in proportion to their interest, consistent with Revenue Ruling 2004-86 — means you're taxed roughly as if you owned a fractional slice of the property directly. Your taxable income and your cash distribution differ because depreciation is non-cash. The sponsor supplies the figures. Understanding the pass-through frames the rest of DST tax reporting. DST income is reported through the grantor-trust structure, passing rental income, expenses, and depreciation through to each investor's return — so your taxable income differs from your cash distribution because depreciation is a non-cash deduction.
Depreciation Pass-Through Benefits
Depreciation is one of the most valuable features of DST tax reporting. Real estate can be depreciated — the tax code lets you deduct a portion of the building's value each year as a non-cash expense, reflecting wear and tear, even as the property may hold or grow its value. In a DST, this depreciation passes through to you in proportion to your interest, sheltering part of the income you receive. The practical result is that some of your cash distribution may be partially or wholly tax-deferred in a given year, because depreciation offsets the taxable income.
The amount of depreciation that passes through depends on the property and on your carryover basis. When you complete a 1031 exchange into a DST, your basis carries over from the relinquished property (with adjustments), and depreciation is generally calculated on the depreciable portion attributable to your interest. A DST that holds a building with substantial depreciable basis can pass through meaningful depreciation; one holding land or a fully depreciated asset passes through less. This is one reason the income you report can be lower than the cash you receive — the depreciation shelter works in your favor during the hold.
So depreciation passing through a DST shelters part of your income, often making some of your cash distribution tax-deferred during the hold — a real benefit of the structure. Depreciation pass-through benefits — the building's annual non-cash depreciation deduction flowing to each investor's return in proportion to their interest, sheltering part of the income so that some of the cash distribution may be tax-deferred in a given year, with the amount depending on the property and your carryover basis — are among the most attractive features of DST tax reporting. The shelter reduces taxable income without reducing cash. Note that depreciation also reduces basis, which matters at sale. Understanding the depreciation benefit is central to DST tax planning. Depreciation passes through a DST and shelters part of your income, so some of your cash distribution can be tax-deferred during the hold — though depreciation also reduces your basis, which affects gain at sale.
Depreciation is the quiet workhorse of DST tax reporting — a non-cash deduction that can shelter part of your distribution, so the income you report is often less than the cash you receive.
Your Substitute Form 1099 / Grantor Letter
Because a DST is typically a grantor trust, you generally won't receive a Schedule K-1 the way you would from a partnership. Instead, the DST sponsor provides a grantor letter (sometimes called a grantor tax information letter) or a substitute Form 1099 that reports your proportional share of the trust's income, expenses, and depreciation. This is an important distinction: DST investors often expect a K-1 but receive a grantor letter instead, which lays out the figures you and your CPA need to report your share on the appropriate schedules of your return.
A grantor letter typically breaks down your share of rental income, operating expenses, mortgage interest (if the DST is leveraged), and depreciation, so your tax preparer can report the net result. The timing of these statements can vary by sponsor, and they sometimes arrive later than a typical 1099, so it's worth knowing your sponsor's schedule when you plan your filing. Keep these statements with your tax records each year — along with your original exchange documents — because they track the income and depreciation that affect your basis over the life of the investment.
So instead of a K-1, a DST sends a grantor letter (or substitute 1099) reporting your share of income, expenses, and depreciation for you and your CPA to report on your return. Your substitute Form 1099 or grantor letter — the grantor-trust reporting statement that breaks down your proportional share of rental income, operating expenses, mortgage interest, and depreciation, rather than the Schedule K-1 a partnership would issue — is how a DST communicates the figures you need to file. Timing can vary by sponsor and may run later than a typical 1099. Keep these statements with your records, as they track income and depreciation affecting basis. Understanding the grantor letter prevents the common K-1 confusion. A DST issues a grantor letter or substitute 1099 — not a K-1 — reporting your share of income, expenses, and depreciation for you and your CPA to file.
Basis Tracking in a DST
Tracking your basis is one of the most important and most overlooked parts of DST tax reporting. When you complete a 1031 exchange into a DST, you don't start with a fresh cost basis — instead, your basis carries over from the relinquished property (adjusted for any boot, additional cash invested, and debt differences). This carryover basis is what defers your gain: because your basis is low, the deferred gain rides along inside the DST. Knowing your starting basis is essential, so keep your original exchange records and your prior depreciation history.
Over the hold, your basis changes. Depreciation that passes through to you reduces your basis each year — the depreciation that shelters your income today lowers your basis, which increases the gain you'll calculate at sale. Additional capital and changes in your share of debt can also adjust basis. This is why depreciation is often described as deferral rather than elimination: it postpones tax during the hold but recaptures (as depreciation recapture) at sale, unless the gain is deferred again or stepped up at death. Maintaining an accurate basis record year by year, with your CPA, keeps your eventual gain calculation correct.
So your DST basis carries over from the relinquished property and is reduced by depreciation over the hold, which is why careful basis tracking matters for the gain you'll calculate at sale. Basis tracking in a DST — beginning with carryover basis from the relinquished property (adjusted for boot, added capital, and debt), then reduced each year by pass-through depreciation, with further adjustments for capital and debt changes — determines the gain you recognize at the full-cycle sale. The depreciation that shelters income now reduces basis and increases later gain (subject to recapture). Keeping an accurate basis record with your CPA is essential. Understanding basis tracking ties together the income, depreciation, and eventual sale. Your DST basis carries over from the relinquished property and is reduced by pass-through depreciation each year — careful tracking, with your CPA, keeps your eventual gain calculation accurate.
- A DST is typically a grantor trust, so income, expenses, and depreciation pass through to your individual return.
- Depreciation passes through and can shelter part of your DST income, so taxable income is often less than the cash distribution.
- You generally receive a grantor letter or substitute Form 1099 — not a Schedule K-1.
- Basis carries over from the relinquished property and is reduced by depreciation, which affects gain at the full-cycle sale.
Tax at Full-Cycle Sale
When a DST reaches full cycle and the sponsor sells the property, the deferred gain comes into focus. Your gain is calculated as your share of the net sale proceeds minus your adjusted basis — and because depreciation has reduced your basis over the hold, the gain includes both capital appreciation and depreciation recapture (the recapture taxed at its own rate). This is the moment when the tax that was deferred through your original 1031 exchange, and sheltered by depreciation during the hold, would ordinarily come due.
But you typically have choices that preserve deferral. You can complete another 1031 exchange into new replacement property (including another DST), continuing to defer the gain. You can pursue a 721 UPREIT exchange into a REIT's operating partnership, deferring through that structure (though a 721 generally ends the ability to do future 1031 exchanges on that interest). Or you can take the cash, which is a taxable event recognizing the deferred gain and recapture. There is also the estate-planning path: if you hold the DST until death, your heirs may receive a step-up in basis under Section 1014 that can erase the deferred gain entirely. Each path has different tax and timing consequences best mapped with your CPA.
So at the full-cycle sale, the deferred gain (including depreciation recapture) is calculated — but you can defer again via another 1031 or a 721, take taxable cash, or hold until death for a potential step-up. Tax at the full-cycle sale — gain calculated as your share of proceeds minus adjusted basis (including depreciation recapture because depreciation lowered basis), with options to defer again through another 1031 or a 721 UPREIT, take taxable cash, or hold until death for a Section 1014 step-up that can erase the gain for heirs — is the culminating tax event of a DST. The choice among these paths shapes your tax outcome. Coordinate the decision with your CPA well before the sale. Understanding the full-cycle tax event completes the DST reporting picture. At full cycle, gain (including depreciation recapture) is calculated, but you can defer again via 1031 or 721, take taxable cash, or hold until death for a possible step-up that erases the gain for heirs.
The full-cycle sale is when deferred gain and depreciation recapture come due — but another 1031, a 721 UPREIT, or holding until death can keep the tax deferred, or even erase it for heirs.
Coordinating With Your CPA
DST tax reporting is technical enough that coordinating with a qualified CPA is not optional — it's essential. Your CPA needs your original 1031 exchange documents (to establish carryover basis), each year's grantor letter or substitute 1099 (to report income, expenses, and depreciation), and a running record of basis adjustments. Sharing these promptly each year keeps your reporting accurate and avoids scrambling at the full-cycle sale, when the gain calculation depends on years of correctly tracked depreciation and basis.
Because grantor letters can arrive later than typical tax forms, and because depreciation, recapture, and the carryover-basis mechanics are nuanced, it's wise to give your CPA a heads-up that you hold DST interests and to plan filing timing accordingly. When a full-cycle sale approaches, loop your CPA in early to model the gain and evaluate your options — another 1031, a 721 UPREIT, taking cash, or estate-planning considerations — so the tax consequences are understood before you act. Baker 1031 does not provide tax advice; we help you understand the mechanics and coordinate with the professionals who do.
So working closely with your CPA — sharing exchange documents, annual grantor letters, and basis records, and planning ahead for the full-cycle decision — is what keeps DST tax reporting accurate and your options open. Coordinating with your CPA — providing original exchange documents, each year's grantor letter or substitute 1099, and a running basis record, while flagging that you hold DST interests and planning for the full-cycle decision in advance — is essential because the carryover-basis, depreciation, and recapture mechanics are nuanced. Early planning prevents surprises at sale and preserves your deferral options. Baker 1031 supports the process but does not give tax advice. Understanding the CPA's role completes responsible DST tax management. Coordinating with your CPA — sharing exchange documents, annual grantor letters, and basis records and planning ahead for full cycle — keeps DST tax reporting accurate and your deferral options open.
How Baker 1031 Helps With DST Tax Reporting
Baker 1031 Investments helps investors understand DST tax reporting — how income is reported through the grantor-trust structure, how depreciation passes through to shelter income, what a grantor letter or substitute Form 1099 contains, how basis carries over and is tracked, and what happens at the full-cycle sale — so you can hold DST interests with a clear understanding of the tax mechanics and coordinate effectively with your tax professionals.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review. We help you understand how a DST's grantor-trust reporting works, how depreciation can shelter part of your income, and how the eventual full-cycle sale triggers a gain calculation (including depreciation recapture) that you may defer again through another 1031, defer through a 721 UPREIT, recognize by taking cash, or potentially erase for heirs through a Section 1014 step-up at death. Baker 1031 does not provide tax or legal advice — these are tax and estate topics that belong with your CPA and attorney, who handle your specific situation; the mechanics are technical and the rules can change, so verify the current rules. Our role is educational: we help you understand DST tax reporting clearly, keep your records organized, and coordinate with the professionals who provide the advice, so you can manage your DST investment responsibly.
Frequently Asked Questions
How is DST income reported on my taxes?
DST income is reported through the grantor-trust structure. For federal tax purposes, a DST holding real estate for 1031 investors is typically treated as a grantor trust, so the trust itself is generally disregarded — its income, expenses, and depreciation flow through to each beneficial owner in proportion to their interest. You report your share of rental income, operating expenses, and depreciation on your own return, much as if you owned a fractional interest in the property directly. This pass-through treatment is part of what makes a DST work as 1031 replacement property under IRS Revenue Ruling 2004-86. Importantly, the cash you receive and the income you report aren't necessarily the same number: your taxable income is your share of net rental income after expenses and depreciation, while your distribution is your share of net cash flow. Because depreciation is non-cash, it reduces taxable income without reducing cash. The sponsor provides the figures, usually through a grantor letter. So you're taxed roughly as if you owned a slice of the property directly.
What is a grantor letter for a DST?
A grantor letter — sometimes called a grantor tax information letter — is the statement a DST sponsor provides to report your proportional share of the trust's income, expenses, and depreciation. Because a DST is typically a grantor trust, you generally won't receive a Schedule K-1 the way you would from a partnership; instead, you receive a grantor letter (or a substitute Form 1099) laying out the figures you and your CPA need to report your share on your return. A grantor letter typically breaks down your share of rental income, operating expenses, mortgage interest if the DST is leveraged, and depreciation, so your preparer can report the net result on the appropriate schedules. The timing can vary by sponsor and may run later than a typical 1099, so plan your filing accordingly. Keep these statements with your tax records each year, along with your original exchange documents, because they track the income and depreciation that affect your basis. So a grantor letter is how a DST communicates your tax figures — not a K-1.
Do I get a K-1 from a DST?
Generally no — because a DST is typically structured as a grantor trust, you usually receive a grantor letter (or substitute Form 1099) rather than a Schedule K-1. This is a common point of confusion: investors familiar with partnerships and LLCs expect a K-1, but the grantor-trust structure works differently. In a grantor trust, the trust is generally disregarded for income-tax purposes, and the income, expenses, and depreciation pass through directly to each beneficial owner. The grantor letter reports your proportional share of these items — rental income, operating expenses, mortgage interest, and depreciation — so you and your CPA can report them on your own return. The figures end up on the appropriate schedules much as if you held a fractional interest in the property directly. So if you're expecting a K-1 from your DST and instead receive a grantor letter or substitute 1099, that's normal and correct for the structure. Share whatever statement you receive with your CPA, and confirm with the sponsor what reporting to expect and when.
How does depreciation work in a DST?
Depreciation is one of the most valuable features of DST tax reporting. The tax code lets you deduct a portion of a building's value each year as a non-cash expense, reflecting wear and tear, even as the property may hold or grow its value. In a DST, this depreciation passes through to you in proportion to your interest, sheltering part of the income you receive — so some of your cash distribution may be partially or wholly tax-deferred in a given year because depreciation offsets the taxable income. The amount that passes through depends on the property and on your carryover basis: a DST holding a building with substantial depreciable basis can pass through meaningful depreciation, while one holding land or a fully depreciated asset passes through less. Note that depreciation also reduces your basis, which increases the gain you'll calculate at sale (subject to depreciation recapture) unless you defer again or hold until death. So depreciation shelters income during the hold but is a deferral, not a permanent elimination, absent a step-up.
Why is my DST taxable income different from my cash distribution?
Your DST taxable income and your cash distribution differ mainly because of depreciation, a non-cash deduction. Your cash distribution is your share of the property's net cash flow — rent left after operating expenses and debt service. Your taxable income is your share of net rental income after expenses and after depreciation. Because depreciation reduces taxable income without reducing the cash the property actually generates, it's common to receive a cash distribution while reporting a smaller amount of taxable income — and in some years a paper loss. This is one of the appealing features of DST tax reporting: part of your distribution can be tax-deferred during the hold thanks to the depreciation shelter. The sponsor's grantor letter or substitute 1099 provides the figures, separating the income, expenses, and depreciation so your CPA can compute your taxable result. So the gap between cash received and income reported is normal and largely driven by depreciation. Just remember that depreciation lowers your basis, which increases gain at the eventual sale.
What is carryover basis in a DST?
Carryover basis is the basis that follows you from your relinquished property into the DST when you complete a 1031 exchange. Rather than starting with a fresh cost basis equal to what you invested, your basis carries over from the property you sold, adjusted for any boot, additional cash invested, and debt differences. This carryover basis is the mechanism that defers your gain: because your basis is low, the deferred gain rides along inside the DST rather than being recognized. Over the hold, your basis changes — pass-through depreciation reduces it each year, and additional capital or debt changes can adjust it. Knowing your starting basis is essential, so keep your original exchange records and prior depreciation history. The carryover basis, reduced by depreciation over time, determines the gain you'll calculate at the full-cycle sale. So carryover basis is what makes the 1031 deferral work inside a DST, and tracking it accurately year by year with your CPA keeps your eventual gain calculation correct. Don't discard those original exchange documents.
What happens to taxes when a DST sells?
When a DST reaches full cycle and the sponsor sells the property, the deferred gain comes into focus. Your gain is your share of the net sale proceeds minus your adjusted basis — and because depreciation reduced your basis over the hold, the gain includes both capital appreciation and depreciation recapture (recapture taxed at its own rate). This is when the tax deferred through your original 1031, and sheltered by depreciation during the hold, would ordinarily come due. But you typically have choices that preserve deferral: complete another 1031 exchange into new replacement property (continuing deferral), pursue a 721 UPREIT into a REIT's operating partnership (deferring through that structure, though it generally ends future 1031s on that interest), or take the cash (a taxable event). There's also the estate path: holding the DST until death may give your heirs a Section 1014 step-up that can erase the deferred gain. Each path has different consequences, so model them with your CPA before the sale. So full cycle triggers a gain calculation you can defer, recognize, or potentially erase.
What is depreciation recapture in a DST?
Depreciation recapture is the portion of your gain at sale attributable to depreciation you previously deducted. During the hold, depreciation passes through and shelters part of your DST income, reducing your taxable income — but it also reduces your basis. When the DST sells at full cycle, the gain is your share of proceeds minus your now-lower adjusted basis, and the part of that gain corresponding to prior depreciation is 'recaptured' and taxed, generally at a rate that can differ from the long-term capital-gains rate on the appreciation portion. This is why depreciation is described as a deferral rather than a permanent elimination: it postpones tax during the hold but comes back at sale unless you avoid recognizing the gain. You can defer recapture along with the rest of the gain by completing another 1031 exchange or a 721 UPREIT, or potentially erase it if you hold until death and your heirs receive a step-up in basis. So recapture is the trade-off for the depreciation shelter — real and valuable during the hold, but recognized at sale absent further deferral. Coordinate with your CPA.
Can I defer DST taxes again at full cycle?
Yes — at the full-cycle sale you can generally defer your gain again rather than recognizing it. The most direct path is another 1031 exchange: when the DST sells, you can exchange your share of the proceeds into new like-kind replacement property — including another DST — continuing to defer the capital-gains tax and depreciation recapture. This is one reason investors use DSTs as a serial deferral tool, chaining exchanges over time. Alternatively, you can pursue a 721 UPREIT exchange, contributing into a REIT's operating partnership to defer through that structure (though a 721 generally ends the ability to do future 1031 exchanges on that interest). A third path is purely estate-driven: if you hold until death, your heirs may receive a Section 1014 step-up in basis that can erase the deferred gain entirely. Each option has its own rules, timelines, and consequences, and the 1031 path requires meeting exchange deadlines. So you have meaningful ways to keep deferring at full cycle, but coordinate the choice with your CPA well before the sale to preserve your options.
Does a step-up in basis erase DST gains?
A step-up in basis at death can erase the capital gain that has been deferred inside a DST. Under Section 1014, when you die, the basis of your assets is generally reset to fair market value as of your death — so the low carryover basis that had been deferring your gain is stepped up to the asset's current value, eliminating the previously deferred capital gain (and the depreciation that reduced basis) for your heirs. This means a DST held until death can pass to heirs with the deferred 1031 gain effectively erased, which is a powerful estate-planning feature. The fractional nature of DST interests can also make them easier to divide among multiple heirs than a single indivisible property. That said, this is a tax and estate topic with technical rules that interact with your overall estate plan, and the rules can change. Baker 1031 does not provide tax or legal advice. So a step-up can erase deferred DST gain for heirs, but coordinate with your CPA and estate attorney and verify the current rules.
When do I get my DST tax documents?
The timing of DST tax documents depends on the sponsor. Because a DST is typically a grantor trust, you'll generally receive a grantor letter (or substitute Form 1099) rather than a Schedule K-1, and these statements can sometimes arrive later than a typical 1099. The grantor letter breaks down your proportional share of rental income, operating expenses, mortgage interest, and depreciation for the year, giving you and your CPA the figures to report on your return. Because the timing varies and may run later, it's wise to confirm your sponsor's reporting schedule and to let your CPA know you hold DST interests so filing can be planned accordingly — you may occasionally need to extend your return if statements arrive late. Keep each year's grantor letter with your tax records, along with your original exchange documents, since these track the income and depreciation that affect your basis over the life of the investment. So plan for grantor letters that may arrive later than standard forms, confirm the schedule with your sponsor, and coordinate timing with your CPA.
Is DST income passive for tax purposes?
DST income generally arises from rental real estate, which is typically treated as passive activity income under the tax rules, though the precise characterization depends on your overall tax situation. As a beneficial owner in a grantor trust, you report your share of the rental income, expenses, and depreciation, and rental real estate income is generally passive for most investors — meaning passive losses and the passive-activity rules can apply. Depreciation passing through can reduce your reportable income, sometimes producing a paper loss, and how such losses are used depends on the passive-activity loss rules and your other income. The interaction of passive-activity rules, depreciation, basis, and your broader return is technical and specific to you. Baker 1031 does not provide tax advice, and this is exactly the kind of question to take to your CPA, who can apply the rules to your situation and confirm how DST income and any losses are characterized and used. So DST rental income is generally passive, but verify the specifics with your tax professional, since the rules and your circumstances govern the result.
Do I owe tax on DST distributions I reinvest?
Tax on DST income is based on your share of the trust's taxable income, not simply on whether you spend or reinvest the cash you receive. Even if you choose to set aside or redirect your distributions, your taxable income is your proportional share of the DST's net rental income after expenses and depreciation, as reported on your grantor letter — so reinvesting the cash elsewhere doesn't change the income you must report from the DST itself. Conversely, because depreciation shelters part of the income, the cash you receive may exceed your reportable taxable income in a given year. Note that DSTs generally don't have a formal distribution-reinvestment feature like some REITs; the cash is distributed to you, and what you do with it is separate from the DST's tax reporting. The deferral mechanism that matters is the 1031 exchange at full cycle, not reinvesting current distributions. Baker 1031 does not provide tax advice; confirm the treatment of your distributions with your CPA. So your DST tax is driven by reported income, not by how you use the cash you receive.
How does state tax affect DST reporting?
State tax can add complexity to DST reporting, because a DST may hold real estate located in a state different from where you live. Income from real property is generally taxable in the state where the property is located, so if your DST owns property in another state, you may have a state-level filing obligation there in addition to your home-state return — and your home state typically taxes your worldwide income while offering a credit for taxes paid to other states. This means a single DST can create a multi-state reporting picture, and a diversified portfolio of DSTs in several states can multiply the state returns involved. The grantor letter generally reports the income by source so your CPA can allocate it appropriately. State rules, rates, and filing thresholds vary widely and can change, so this is exactly the kind of issue to map with a CPA familiar with multi-state taxation. Baker 1031 does not provide tax advice. So factor potential multi-state filing into your DST tax planning, and coordinate with your CPA, since the state dimension is easy to overlook but can matter.
How does Baker 1031 help with DST tax reporting?
We help investors understand DST tax reporting — how income is reported through the grantor-trust structure, how depreciation passes through to shelter income, what a grantor letter or substitute Form 1099 contains, how basis carries over and is tracked, and what happens at the full-cycle sale — so you can hold DST interests with a clear understanding of the mechanics and coordinate effectively with your tax professionals. DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review. We help you understand how grantor-trust reporting works, how depreciation can shelter part of your income, and how the full-cycle sale triggers a gain calculation (including depreciation recapture) that you may defer again via another 1031, defer via a 721 UPREIT, recognize by taking cash, or potentially erase for heirs through a Section 1014 step-up. Baker 1031 does not provide tax or legal advice — these topics belong with your CPA and attorney, the rules are technical and can change, so verify the current rules. Our role is educational: we help you understand the mechanics and coordinate with the professionals who advise you.
Glossary
- Grantor Trust
- A trust disregarded for income tax, passing items to owners.
- Pass-Through Income
- Income reported on your return, not taxed at the trust.
- Grantor Letter
- The DST statement reporting your share of tax items.
- Substitute Form 1099
- Alternative DST reporting in place of a K-1.
- Schedule K-1
- A partnership form a DST generally does not issue.
- Depreciation
- A non-cash deduction sheltering part of DST income.
- Depreciation Recapture
- Gain from prior depreciation, taxed at sale.
- Carryover Basis
- Basis carried from the relinquished property into the DST.
- Adjusted Basis
- Basis after depreciation and other adjustments.
- Boot
- Non-like-kind value that can be taxable in an exchange.
- Full Cycle
- The eventual sale of the DST's property.
- 1031 Exchange
- A like-kind exchange deferring capital-gains tax.
- 721 UPREIT
- Contributing property to a REIT for OP units, deferring gain.
- Step-Up in Basis
- A §1014 reset to fair market value at death.
- Section 1014
- The code section providing the step-up at death.
- Revenue Ruling 2004-86
- The IRS ruling making DST interests 1031-eligible.
Sources & References
- IRS. Revenue Ruling 2004-86
- Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
- Cornell Legal Information Institute. 26 U.S. Code § 1014 — Basis of property acquired from a decedent
- FINRA. Real Estate Investments
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.
