DST Tax Return Reporting: How to Report Your 1031 DST Investments

Form 8824 belongs to the year you gave up the property, and its lines 24 and 25 set every number that follows

The instructions are explicit: if during the tax year you transferred property in a like-kind exchange, Form 8824 goes with that year's return. A rental sold on December 10 and replaced with a DST interest that closed on February 20 is reported on the December year's Form 8824, with the DST's closing date on line 6 and the written identification date on line 5.

Part III does the arithmetic. Line 19 is the gain realized, line 20 the gain recognized, line 24 the deferred gain and line 25 the basis of the like-kind property received; lines 25a to 25c split that basis between section 1250 property, section 1245 property and intangibles. Recognized gain, if any, leaves the form for Form 4797 line 5 or 16 when the relinquished property was a rental, or for Schedule D when it was a capital asset.

One sale placed into three DSTs is still one exchange and one Form 8824, with the trusts described on line 2 or an attached statement. Reg. 1.1031(j)-1(c) then allocates the aggregate basis across the properties received in proportion to their fair market values.

• Hypothetical: you sell a debt-free rental for $1,000,000 with an adjusted basis of $400,000 and buy $600,000 of DST A and $400,000 of DST B.
• Form 8824: gain realized $600,000 (line 19), gain recognized $0 (line 20), deferred gain $600,000 (line 24), basis received $400,000 (line 25).
• Basis allocation by value: DST A carries $240,000 and DST B $160,000, and each is tracked separately from then on.

The sponsor sends a grantor trust statement rather than a K-1, and it may not arrive until the trust's own deadline

Rev. Rul. 2004-86 treats each investor as the owner of an aliquot portion of a grantor trust, so the trust's income, deductions and credits land directly on your return under section 671. Reg. 1.671-4 lets the trustee report either by filing Form 1041 with a separate statement attached or, for a trust owned by two or more grantors, by giving the trust's TIN to payors, filing Forms 1099 that show each owner as payee, and furnishing each owner a statement of the items attributable to their portion.

That statement is what sponsors call the grantor letter. Section 6034A(a) requires it on or before the day the trust's return was due, and a calendar-year Form 1041 is due April 15 with an automatic 5½-month extension to September 30, so a letter that arrives in late summer is late for you but not for the trustee.

Reed CPA, which prepares these returns, reports that grantor letters frequently arrive in March, sometimes later, and recommends planning to extend in any year you hold a DST. Filing Form 4868 with a payment based on last year's DST figures is the practical fix.

Each DST fills its own Schedule E column, and the trust's share of interest, taxes and depreciation goes where your old rental's did

Schedule E Part I lists up to three properties per schedule; the instructions say to attach as many Schedules E as you need for additional properties, filling in lines 23a through 26 on only one. A holder of five DSTs therefore files two Schedules E, keying the sponsor's figures for rents, management, insurance, property tax and mortgage interest into the matching lines for each trust.

The mortgage interest line carries your share of the trust's nonrecourse loan, which you never signed but are treated as owning under the ruling. Depreciation goes on line 18, and Form 4562 must be attached only for a year in which property is first placed in service.

A trust that holds buildings in several states adds nonresident returns for each of them; Reed CPA notes that a four-property DST can create four state filings. The thresholds and withholding rules by state are on state tax and multi-state filing issues for DST investors.

Carryover basis keeps the relinquished property's depreciation clock, and only new cash starts a fresh 27.5- or 39-year schedule

Reg. 1.168(i)-6 splits your DST basis into exchanged basis (the lesser of your section 1031(d) basis or the relinquished property's adjusted depreciable basis) and excess basis (anything above it). Under paragraph (c), exchanged basis continues to be depreciated using the same recovery period and method as the relinquished property over what remains of that period; under paragraph (d)(1), excess basis is treated as property placed in service in the year of replacement.

The recovery period can lengthen but never shorten. If a 27.5-year residential rental is exchanged into a DST holding a 39-year nonresidential building, paragraph (c)(4)(i) treats the exchanged basis as placed in service on the old date but using the longer 39-year period; Pub. 527 confirms the 27.5- and 39-year GDS periods and the mid-month convention.

Paragraph (i) lets you elect out and depreciate the whole basis as newly placed in service, an election made simply by claiming depreciation that way on a timely filed original return for the replacement year. The sponsor's letter computes depreciation on the trust's purchase price, not on your exchanged basis, so an exchanger's preparer replaces that figure with one built from Form 8824 line 25.

• Hypothetical: $240,000 of exchanged basis in DST A came from a residential rental placed in service in 2015, so it continues at 27.5 years with about 17 years left, while $60,000 of added cash is excess basis on a new 27.5-year schedule starting in the DST's closing month.
• Land is not depreciable, so apply the trust's land-to-building allocation from the PPM or grantor letter to each basis layer before computing the deduction.

A permanent file per trust holds the 8824, both closing statements and every grantor letter until the property sells and you exchange again

Reed CPA's advice is to keep every Form 8824 and closing statement permanently in one file, because reconstructing basis years later, after a second exchange, becomes expensive archaeology. Each DST's file should also hold the purchase confirmation showing your percentage interest, the PPM's loan summary and the annual grantor letters.

When the trust sells, the sponsor reports your share of the sale price and of the loan paid off; the amount realized includes the discharged nonrecourse debt under Reg. 1.1001-2(a)(4)(i). The gain goes on Form 4797, and the part attributable to depreciation is unrecaptured section 1250 gain taxed at up to 25 percent under section 1(h)(1)(E), unless you roll it into the next exchange as described on what happens when a DST sells.

Losses from a DST are passive, and the $25,000 allowance in section 469(i) requires active participation you do not have as a fractional owner, so they are usually suspended on Form 8582 until disposition; see DST passive losses and what happens on sale.

• Spreadsheet columns worth keeping per DST: closing date, your percentage interest, your share of the trust's purchase price and loan, exchanged basis, excess basis, land percentage, method and remaining period for each layer, and accumulated depreciation before and after the exchange.

A revocable trust or single-member LLC changes nothing on the 1040; a partnership or non-grantor trust files its own return

Under Reg. 301.7701-3(b)(1), a domestic LLC with a single owner is disregarded and a multi-member LLC defaults to partnership status. A DST interest held in your revocable living trust or a disregarded LLC is reported exactly as above on your Form 1040, while an LLC taxed as a partnership files Form 1065, files the Form 8824 itself as the exchanging taxpayer, and passes the Schedule E figures to members on Schedules K-1.

An irrevocable non-grantor trust reports the DST on its own Form 1041, and the owner on the DST's books must match the taxpayer that sold the relinquished property. Confirm the entity chain with your CPA or attorney before closing, because the qualifying-use and same-taxpayer conditions on 1031 eligibility requirements are tested at that level.