Using DSTs for a Simple Real Estate Inheritance Your Heirs Can Divide

One building forces heirs to agree; a basket of DST interests lets each heir act alone

Three children who inherit a $1,500,000 apartment building inherit a management job and a negotiation: sell, refinance, or buy each other out. Three children who inherit three DST interests of $500,000 each simply own one-third of each, re-registered by the sponsor, and each can hold or, at the trust's sale, take their share of the proceeds.

The difference is structural. A DST investor holds an undivided fractional interest that Rev. Rul. 2004-86 treats as ownership of the underlying real estate, and the trust agreement governs transfers, so an executor allocates percentages instead of deeds; transferring DST interests covers the forms.

Unequal shares are just as simple: a 50/25/25 estate plan becomes 50/25/25 of each trust, with no argument about which child gets which building.

Worked example: $1,500,000 exchanged into DSTs, $1,650,000 at death, and $1,200,000 of deferred gain disappears

Assume an owner sells a building for $1,500,000 with a $300,000 basis and exchanges the full amount into three DSTs, deferring $1,200,000 of gain, part of it 25%-rate recapture. She dies eight years later when the three interests are worth $1,650,000 in total.

Her three children take a combined basis of $1,650,000 under §1014(a), so the deferred $1,200,000 and every dollar of depreciation, hers and the trusts', is never taxed. When the trusts sell, each child's gain is measured only from the date-of-death value, and §1223(9) makes even a quick sale long-term.

Had she paid the tax in year one instead, about $300,000 of federal tax would have left the family, and the children would have inherited cash with no reset to speak of. The DST estate planning page goes deeper on the mechanics, including nonrecourse debt and Form 706.

When heirs want different things: hold, cash out at the trust's sale, exchange again or take the 721 track

Each option is exercised interest by interest and heir by heir, so a child who wants cash does not block a sibling who wants to keep deferring. That independence is the practical reason DST baskets travel better than a jointly owned building.

The one thing heirs cannot do is sell a DST interest on demand: there is no public market, and early exits depend on the sponsor or a private buyer, as DST illiquidity describes.

• Hold: distributions continue to each heir in proportion, with no action required beyond re-registration.
• Cash: at the trust's sale the heir takes proceeds, and after the reset the taxable gain is only post-death appreciation.
• Exchange again: the heir's share of proceeds goes to a qualified intermediary within the 45-day and 180-day rules, see heirs exchanging out of a DST for the steps.
• 721 roll-up: where the sponsor offers it, an heir contributes their interest for operating-partnership units under §721(a) and gives up future exchanges.

Titling the interests: individual, revocable trust or community property, and the irrevocable-trust mistake

Hold DST interests in your own name or in a revocable living trust; both reset at death, the trust under §1014(b)(2) and (b)(3), and the successor trustee can re-register without a court appointment. Match the title on the DST subscription to the title on the exchange, since the same taxpayer must sell and buy.

Married owners in community-property states should title as community property: §1014(b)(6) resets both halves at the first death, while joint tenancy resets only the decedent's portion, as Publication 551 explains. Put the community-property designation on the subscription documents, not just in the estate plan.

Do not move DST interests into an irrevocable trust designed to keep them out of your estate unless estate tax is the bigger problem: Rev. Rul. 2023-2 holds that assets a trust keeps out of the gross estate get no §1014 adjustment. Below the $15,000,000 exclusion, that trade gives up the reset for nothing.

What the heirs will actually deal with: grantor statements, state filings, illiquidity and accreditation

A DST is a grantor trust, so each owner receives an annual statement of their share of income, deductions and credits under Reg. §1.671-4 rather than a Schedule K-1, and reports it on their own return; three trusts mean three statements per heir. Properties in several states can require nonresident returns, which multi-state DST filing covers.

An heir who receives an interest by inheritance is not buying a security, but an heir who later wants to exchange into a new DST is: Regulation D offerings apply the accredited-investor tests in Rule 501(a): net worth above $1,000,000 leaving out the primary residence, or income above $200,000 on your own, $300,000 counting a spouse. A child who will not qualify should plan on cash or direct property at the trust's sale.

Above the $15,000,000 exclusion, the executor files Form 706 and reports each heir's basis, and heirs must use those values under §1014(f). Keep the sponsor's valuation letters with the estate file.

Conversations and documents to complete while you are alive

Heirs resent surprises more than paperwork. A half-hour walk-through of the inventory while you can answer questions does more for family peace than any clause in the will.

• A one-page inventory of each DST: sponsor, property, your percentage, purchase date, PPM location and the deferred gain carried in.
• Which child is executor or successor trustee, and confirmation that they know a DST cannot be sold on demand.
• Whether each child would want cash, income or another exchange at the trust's sale, so the estate plan does not force one answer on all.
• The sponsor's procedure for a death and its transfer forms, so re-registration starts within weeks rather than months.
• A note that we can help heirs run an exchange out of an inherited DST when the trust sells, if that is what they choose.