The short answer
Usually yes. Publication 590-A treats a conversion as a rollover of whatever leaves the traditional IRA and requires the same property to land in the Roth, so a custodian that already holds the DST interest can move it across by a trustee-to-trustee or same-trustee transfer. The cost is ordinary income tax on the interest's fair market value in the year of the conversion, with no cash from the trust to pay it. The 10% additional tax does not apply to the conversion itself, but a separate five-year clock starts on the converted amount, and section 514 follows the interest into the Roth, so a financed trust keeps producing unrelated business taxable income. In either account the interest is an illiquid private placement that can lose principal.
At a glance
| Conversion method | Trustee-to-trustee transfer, same-trustee transfer or redesignation; every method is treated as a rollover |
|---|---|
| What moves | The property distributed must be the property rolled into the Roth, so the DST interest itself can cross |
| Tax on conversion | The interest's fair market value is included in income for the year of the conversion |
| 10% additional tax | Does not apply to the conversion; it can apply if converted amounts come out within five years |
| Required distributions | The year's required minimum distribution cannot be converted |
| Once-a-year rollover rule | Does not limit conversions |
| UBTI after conversion | Section 514 applies to a Roth IRA exactly as to a traditional IRA |
| Undoing it | Conversions made after 2017 cannot be recharacterized |
A conversion moves property, so the DST interest itself can cross into the Roth
Publication 590-A lists three ways to convert: a 60-day rollover, a trustee-to-trustee transfer, or a same-trustee transfer or redesignation. It adds that a conversion is treated as a rollover whatever the method, and the rollover rules require the same property you received to go into the Roth.
That same-property rule is what makes an in-kind conversion work. The custodian re-registers the holding to the Roth account and the sponsor updates its records. The facts in Rev. Rul. 2004-86 describe interests that are freely transferable but not publicly traded, and a trust agreement may add consent or minimum-interest conditions, so both the custodian and the sponsor must agree before anything moves.
Publication 590-A says the one-year waiting period does not apply to conversions and that conversions are not counted against the once-a-year rollover limit. What stays is the required-distribution rule: the amount that must be distributed for the year, including the year you reach 73, cannot be converted, so an owner past that age takes the year's distribution first. Our page on buying a DST inside a self-directed IRA or solo 401(k) covers the aggregation rule that lets that distribution come from a different account.
The tax bill is the interest's fair market value in the year you convert, and the trust will not pay it
Section 408A(d)(3)(A) includes the converted amount in gross income and switches off section 72(t), so there is no 10% additional tax on the conversion even if you are under 59 and a half. The instructions for Forms 1099-R and 5498 require the custodian to report a distribution of property at its fair market value on the date of distribution, to report a conversion in boxes 1 and 2a of Form 1099-R with code 2 or 7, and to show the converted amount in box 3 of Form 5498. You then report the conversion on Form 8606.
Everything turns on the value the custodian assigns to an asset with no market price; how a DST interest is valued inside an IRA covers where that number comes from.
The cash for the tax must come from outside the account: the trust pays the account, not you, and using IRA money for the tax is itself a distribution under section 408(d)(1). Publication 590-A warns that a conversion can require more withholding or estimated payments.
Worked example: a $200,000 interest converted in one year
Hypothetical and rounded, not a projection. Your traditional IRA holds a DST interest the custodian values at $200,000, all of it pre-tax money. Your return for the year shows $200,000 of extra ordinary income; at an assumed 24% marginal federal rate the bill is about $48,000, before state tax, paid from your taxable savings.
The trust does not change. If it is financed at 50%, half of the Roth's share of the trust's income is still debt-financed income under section 514, and the Roth files Form 990-T under its own employer identification number.
Spreading the conversion over two or three years lowers the marginal rate on each slice, but only if the sponsor will split the interest. Test the slices against your other income with your CPA before the custodian moves anything.
Two five-year clocks and the section 514 tax follow the interest into the Roth
A Roth distribution is tax-free only if it is a qualified distribution, and section 408A(d)(2)(B) denies that status to anything paid within the five-taxable-year period beginning with the first year you contributed to any Roth IRA. Publication 590-B adds a second clock: if you withdraw converted money within the five-year period starting with the first day of the conversion year, the 10% additional tax applies to the part that was taxable on conversion, and a separate five-year period applies to each conversion.
Under the ordering rules converted amounts come out after regular contributions and before earnings, so for an account whose only asset is one DST interest the first dollars out are the converted dollars; a conversion makes sense only if you can leave the interest alone for at least five years.
Publication 598 lists Roth IRAs among the accounts subject to the tax on unrelated business income, so nothing about the conversion reduces the debt-financed share of a leveraged trust. What the Roth does remove is the lifetime required minimum distribution: Publication 590-B says the minimum distribution rules for traditional IRAs do not apply to a Roth IRA while the owner is alive, which is the strongest reason to put an asset that cannot be sold in slices into a Roth.
When the conversion fits and when it does not
It fits when the trust is all-cash, when you have outside money for the tax, when you expect to hold through the trust's full cycle, and when required distributions would otherwise force an in-kind distribution. It fits badly when the trust is financed, because the conversion changes nothing about Form 990-T, and when you may need the money within five years.
One feature is permanent. Publication 590-A says a conversion made in a tax year beginning after 2017 cannot be recharacterized, so if the trust's property loses value after you convert, you have paid tax on a number you cannot revise. A DST interest is a private placement with no public market; distributions can be cut or stopped and the trust can return less than you put in.
Self-directed IRA versus 1031 exchange sets the two wrappers side by side for new money, and can I buy a DST in my IRA or 401k plan covers the purchase itself.
Related questions
Do I have to sell the DST interest before converting?
No. Publication 590-A requires the same property distributed to be the property rolled into the Roth, so an in-kind transfer is the normal route. The custodian and the sponsor both have to process the re-registration.
Does the 10% early distribution tax apply if I convert before 59 and a half?
Not to the conversion; section 408A(d)(3)(A) switches section 72(t) off. It can apply later if you withdraw the converted amount within the five-year period that starts with the conversion year.
Can I undo the conversion if the trust loses value?
No. Publication 590-A says conversions made in tax years after 2017 cannot be recharacterized back to a traditional IRA.
Does a Roth IRA stop the tax on debt-financed income from a leveraged DST?
No. Publication 598 lists Roth IRAs among the accounts subject to unrelated business income tax, and section 514 applies the same debt-to-basis fraction to the Roth's share of income and gain.
Can I convert only part of the interest?
Publication 590-A allows a partial conversion, but a DST interest can be split only if the sponsor will register a smaller interest in each account. Ask the sponsor before you plan a multi-year conversion.
Sources
Checked against these publications on October 8, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 408A, Roth IRAs (conversions, qualified distributions, five-year period)
- 26 U.S.C. section 408, individual retirement accounts (cash contributions, distributions)
- 26 U.S.C. section 514, unrelated debt-financed income
- IRS Publication 590-A, Contributions to Individual Retirement Arrangements (conversions)
- IRS Publication 590-B, Distributions from Individual Retirement Arrangements (Roth ordering rules, five-year periods)
- IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations
- IRS, Instructions for Forms 1099-R and 5498 (2026)
- IRS, Rev. Rul. 2004-86