DST Cost Basis & Depreciation Schedules

Delaware Statutory Trusts · Baker 1031 Research · Updated June 2026 · 17 min read

I start with the tax basis an investor brings into the DST. A 1031 exchange carries forward more than deferred gain. It also carries the tax attributes of the relinquished property, and those attributes help determine how distributions are taxed, how depreciation works, and what happens at a later full-cycle sale.

First-order thinking says the exchange acquires a new DST at its current value. Second-order thinking sees carryover basis: the older, often lower basis follows the investor into the DST, is adjusted for cash, boot, and debt, and is reduced by depreciation over time. That is the reason the exchange is tax-deferred rather than tax-free.

This guide explains carryover basis, pass-through depreciation, annual grantor letters, the full-cycle sale, and CPA coordination. Baker 1031 does not provide tax advice. These are technical tax matters to confirm with a CPA; this is educational information, not investment advice. The broader framework appears in our in-depth DST pillar guide.

Carryover Basis in a DST

In a 1031 exchange into a DST, the tax basis of the relinquished property carries forward to the DST beneficial interest. It does not reset to the current market value of what the investor acquires. The deferred gain remains embedded in the lower basis and can surface later unless the investor keeps deferring it.

The result is an adjusted carryover basis, not simply a copied number. Additional cash invested—for a DST minimum, debt replacement with equity, or a trade-up in value—generally adds to basis. Boot, cash or non-like-kind value received, or a shortfall in reinvestment can create recognized gain and affect the calculation. Debt matters too: relief of old-property debt and the investor's share of DST debt both affect the exchange math.

The old basis, adjusted for cash, boot, and debt changes, is the starting point for depreciation and future gain. A CPA should calculate it from closing statements and exchange documents.

How Depreciation Passes Through

A DST is a grantor trust for tax purposes. Its income, expenses, and depreciation pass through to each beneficial owner as though the owner directly held a fractional share of the real estate. That pass-through is why depreciation, one of real estate's most valuable tax benefits, can shelter part of DST distribution income.

The cash received and taxable income reported can differ. Depreciation is a non-cash deduction. An investor's depreciation share reduces the taxable portion of distributions, so part of the cash flow may be sheltered rather than currently taxable.

In a 1031 context, the schedules can be split. The carryover-basis portion continues along its existing remaining depreciation schedule. Any basis from new cash generally begins a fresh schedule over the applicable recovery period. This differs from a fresh purchase in which the whole basis begins one new schedule. It is a technical distinction that belongs with the CPA.

Your Annual Tax Statement

A DST generally provides a grantor letter, also called a grantor tax letter or grantor trust statement, not a Schedule K-1. A partnership issues K-1s; a grantor-trust DST reports each owner's pro-rata share of rental income, operating expenses, interest, and depreciation through the grantor letter.

The investor and CPA normally use that information to report activity on Schedule E, as if the investor directly owned the fractional property interest. The letter typically arrives during tax season and supplies the figures needed to determine the taxable portion of distributions after depreciation.

Keep every grantor letter along with exchange documents that establish carryover basis. They support accurate annual reporting and the eventual gain calculation when the DST sells.

Basis at Full-Cycle Sale

When the sponsor sells the DST property after a multi-year hold, gain is calculated against the investor's adjusted basis, which has been reduced by pass-through depreciation. Depreciation shelter during the hold improves after-tax cash flow, but reduced basis can make gain at sale larger than simple economic profit suggests. Part of that gain can be depreciation recapture, generally taxed at a higher rate than the remaining long-term capital gain.

The full-cycle event need not force tax recognition. The investor can generally exchange into another DST or other like-kind real property through a new 1031 exchange, deferring the gain and recapture again. Or a DST interest held until death may receive a step-up in basis to fair market value for heirs, potentially eliminating deferred gain and recapture under current law. That is the “swap till you drop” idea.

The sale is therefore a decision point: defer again, recognize gain, or plan to hold for a step-up. It is not merely a tax bill. The facts and law require CPA and estate-attorney review.

Key Takeaways

• A 1031 into a DST carries forward the relinquished property's basis, adjusted for added cash, boot, and debt changes.
• Because a DST is a grantor trust, depreciation passes through and can shelter part of income; carryover basis continues its schedule and new cash generally starts a new one.
• The annual tax statement is a grantor letter, not a K-1. It reports income, expenses, and depreciation for Schedule E reporting.
• At full-cycle sale, gain is measured against depreciation-reduced basis and can include recapture, but another 1031 exchange or a step-up at death can continue or eliminate deferral under current law.

Coordinating With Your CPA

CPA coordination matters at every stage. At setup, the CPA establishes carryover basis, tracks adjustments for cash, boot, and debt, and identifies the continuing carryover schedule and any new schedule from added cash. Doing that accurately at the outset supports the whole hold period.

During the hold, the CPA uses annual grantor letters to report income, expenses, and depreciation, generally on Schedule E, and to calculate taxable distribution income after the depreciation shelter. At exit, the CPA computes gain against adjusted basis, identifies recapture, and helps evaluate another 1031 exchange, gain recognition, or estate planning for a step-up.

The CPA coordinates with the qualified intermediary for exchange mechanics and an attorney for titling and estate planning. Baker 1031 does not provide tax advice; the CPA is central to correct reporting for the investor's actual facts.

Why the Tax Treatment Matters

Basis and depreciation are not academic. Pass-through depreciation can mean after-tax cash flow is higher than headline taxable income during the hold. Ignoring it can understate the investment's economic benefit.

The opposite error happens at sale. Forgetting that depreciation lowered basis can leave an investor surprised by gain and recapture. The embedded deferred gain and depreciation recapture make the exit choice—another 1031 exchange, recognizing gain, or holding for a step-up—material to the investor's outcome.

The step-up at death is especially powerful precisely because it can erase gain compounded across one or more exchanges, subject to current law and the investor's facts. Basis and depreciation shape after-tax income, eventual exit, and whether a DST fits the investor's planning. That is why close CPA attention is warranted.

How Baker 1031 Helps With DST Tax Coordination

Baker 1031 Investments helps investors understand carryover basis, pass-through depreciation, grantor letters, adjusted basis at full-cycle sale, and the role of a CPA. The aim is to help an investor understand a DST's after-tax economics and prepare informed questions for tax professionals.

DST interests are securities offered through Aurora Securities, Inc. (member FINRA/SIPC) to accredited investors after suitability review. Baker 1031 does not determine tax treatment. A CPA establishes basis and depreciation schedules, reports grantor letters, calculates gain and recapture, and advises on tax consequences. We can coordinate with a qualified intermediary on the exchange mechanics that set the basis and help clarify grantor-trust treatment, full-cycle options, and the difference between a grantor letter and a K-1.

Distributions, yields, and returns are not promised, and past performance does not guarantee future results. Legal and estate-planning determinations belong with the attorney; technical tax work belongs with the CPA.

Frequently Asked Questions

What is carryover basis in a DST?

It is the tax basis of the relinquished property carried into a DST beneficial interest through a 1031 exchange, rather than a fresh basis at current market value. The old basis is generally adjusted for additional cash invested, boot received or reinvestment shortfalls, and debt changes. It embeds deferred gain, which may surface later unless exchanges continue. The adjusted carryover basis is the foundation for depreciation and the future gain calculation. A CPA should confirm the numbers.

How does depreciation work in a DST?

Because a DST is a grantor trust, its income, expenses, and depreciation pass through to beneficial owners as if they directly owned a fractional property interest. Depreciation shelters part of distribution income. The carryover portion continues its remaining depreciation schedule, while additional cash invested generally begins a new schedule over the applicable recovery period. That can create two depreciation streams rather than one fresh-purchase schedule. The CPA should set up and track the schedules.

Does a DST issue a K-1?

No. A DST generally issues a grantor letter rather than a Schedule K-1 because it is a grantor trust, not a partnership. The letter reports the investor's pro-rata share of rental income, operating expenses, mortgage interest, and depreciation. The CPA generally uses it to report fractional real-estate activity on Schedule E. Keep the letter each year with the exchange documents.

What is a grantor letter?

It is the DST's annual tax statement, sometimes called a grantor tax letter or grantor trust statement. It reports the investor's share of the trust's income, expenses, interest, and depreciation. It supplies the information needed to report activity on Schedule E and determine taxable income after depreciation shelter. It is not a K-1.

What happens to my basis when the DST property is sold?

At full-cycle sale, gain is measured against adjusted basis after all pass-through depreciation reductions. Since depreciation lowers basis, reported gain can be greater than simple economic profit, and a portion can be depreciation recapture. An investor can generally use a new 1031 exchange to defer gain and recapture into like-kind property, or hold a DST interest until death for a potential step-up under current law. The CPA calculates the gain and helps assess the choice.

Is depreciation recapture a concern with a DST?

It is an important planning issue. The depreciation that shelters income lowers basis. At sale, gain attributable to prior depreciation is generally recapture and may be taxed at a higher rate than remaining long-term capital gain. The current shelter is therefore not free money; it is often repaid through recapture unless the investor keeps deferring. A new 1031 exchange can defer recapture with the gain, and a step-up at death may eliminate both under current law. A CPA should calculate it.

How is my carryover basis calculated in a 1031 into a DST?

Start with the adjusted basis of the relinquished property: original cost plus improvements minus depreciation taken. Add new cash invested to meet a minimum, replace debt with equity, or trade up. Account for boot or incomplete reinvestment that can trigger recognized gain. Include debt relief on the old property and the investor's share of DST debt, since unoffset debt relief may be treated like boot. The result is an adjusted carryover basis that embeds deferred gain. Closing statements and exchange documents are needed for the calculation.

Why is part of my DST distribution not taxable?

Depreciation is a non-cash deduction that passes through from the grantor-trust DST to the investor. Taxable income after depreciation and other expenses can be less than cash distributed, so part of the distribution may be tax-deferred rather than currently taxable. But depreciation reduces basis, and that sheltered amount can be recaptured at sale unless the investor continues deferral through another 1031 exchange or receives a step-up at death. It is a timing benefit that can improve after-tax cash flow; the CPA quantifies it from the grantor letter.

Can I 1031 exchange out of a DST when it sells?

Generally yes. A DST beneficial interest is treated as like-kind real property under Revenue Ruling 2004-86, so proceeds from a full-cycle sale can generally be exchanged into other like-kind real estate, including another DST. Use a qualified intermediary to hold proceeds, identify replacement property within 45 days, and complete acquisition within 180 days. The chain can defer gain and recapture, supporting “swap till you drop.” Plan identification and timing with the QI and CPA before the sale.

What is the step-up in basis at death for a DST?

Under current law, heirs generally receive inherited qualifying property at fair market value at the date of death. The higher basis may erase the deferred gain and depreciation recapture embedded in the investor's lower carryover basis, allowing heirs to sell with little or no taxable gain. This can be a key legacy-planning feature for investors holding real estate through successive exchanges. Estate and tax law can change, so confirm current treatment and personal facts with CPA and estate attorney.

Do I report DST income on Schedule E?

Generally yes. Because the DST is a grantor trust, the investor is treated as owning a fractional interest in the underlying real estate. The annual grantor letter reports rental income, operating expenses, mortgage interest, and depreciation for Schedule E, the schedule used for rental real-estate income and loss. Depreciation can make net taxable income lower than cash distributions. Keep grantor letters and exchange documents to support accurate reporting.

How does additional cash I invest in a DST affect my basis and depreciation?

New cash generally increases basis. It can be invested to meet a DST minimum, replace relinquished-property debt with equity, or acquire more value. The carryover-basis portion continues on its existing remaining schedule; the added-cash portion generally begins a new depreciation schedule over the appropriate recovery period. Thus, there may be a continuing schedule and a fresh schedule. It is more complicated than one new purchase, so CPA setup is important.

Why should I involve my CPA in a DST investment?

The CPA establishes adjusted carryover basis at the front end, accounts for cash, boot, and debt, and sets up the depreciation schedules. During the hold, the CPA uses grantor letters to report income, expenses, and depreciation, usually on Schedule E. At exit, the CPA calculates gain and recapture and helps assess another exchange, gain recognition, or a step-up plan. The CPA also coordinates with the qualified intermediary and attorney. Baker 1031 does not provide tax advice.

Does pass-through depreciation make DSTs better than REITs for taxes?

For a 1031 investor seeking pass-through depreciation, a DST can have advantages, but the tools differ. DST depreciation passes through directly to beneficial owners and a DST interest can be 1031-eligible. A REIT is a corporation; shareholders own securities, so depreciation is absorbed at the REIT level and shares are not 1031-eligible. REIT dividends can benefit from the 20% Section 199A deduction, so REITs have different tax features. DSTs may fit tax-deferred real-estate ownership; REITs may suit liquid diversified real-estate exposure with new capital. Confirm the comparison with a CPA.

How does Baker 1031 help with DST tax coordination?

We explain the structure—carryover basis, pass-through depreciation, grantor letters, full-cycle options—and coordinate with the qualified intermediary on exchange mechanics. DST interests are offered through Aurora Securities, Inc. to accredited investors after suitability review. We do not provide tax advice. A CPA establishes basis, tracks schedules, reports grantor letters, and calculates gain and recapture; an attorney handles legal and estate-planning issues. Distributions, yields, and returns are not guaranteed, and past performance does not guarantee future results.

Glossary

Cost Basis
The tax investment in 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 annual statement of income, expenses, and depreciation.

Schedule E
The tax form for reporting rental real-estate income, including DSTs.

Depreciation Recapture
Tax on 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

1. IRS. Revenue Ruling 2004-86
2. IRS. Like-Kind Exchanges — Real Estate Tax Tips
3. Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
4. 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.

Filed under: Delaware Statutory Trusts · DSTs · 1031 Exchange

About the author

Jerry Baker
Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE

Jerry founded Baker 1031 to bring institutional underwriting discipline to the 1031 exchange. He spent more than a decade on Wall Street working on $10B+ of real estate before building diversified DST portfolios for individual investors. Read full bio →

Reviewed by: Lori Kamen — President & CCO, Aurora Securities, Inc. (FINRA Series 4 / 7 / 24 / 53 / 63 / 66), the supervising registered principal. Last reviewed June 2026. Baker 1031 reviews its educational content periodically for accuracy and regulatory compliance. Securities offered through Aurora Securities, member FINRA/SIPC.

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I would manage this risk by preserving every basis record and grantor letter, confirming the schedules with a CPA, and deciding on a full-cycle plan before the property sells. Which part of DST tax reporting would you want your CPA to walk through first? Share your perspective in the comments.