How is a DST interest valued inside my IRA?

The custodian has to put a number on it every year, and the IRS makes that its responsibility

Section 408(i) requires the trustee of an IRA to make reports to the IRS and to you. The vehicle is Form 5498, and its instructions tell the trustee to enter the fair market value of the account on December 31 in box 5 and to furnish a statement to each participant by February 1, 2027 for 2026. The same instructions say trustees and custodians are responsible for ensuring that all IRA assets are valued annually at their fair market value.

Assets without a ready market get their own lines. Box 15a reports the value of specified hard-to-value investments and box 15b carries a letter code for the type, from A for non-tradable stock through D for real estate and E for an ownership interest in a partnership, trust or similar entity to G for any other asset without a readily available value and H when more than two types are held. A DST beneficial interest fits code E or D depending on how the custodian characterizes it; either tells the IRS the box 5 number is an estimate.

Buying a DST inside a self-directed IRA or solo 401(k) covers choosing a custodian that holds private placements; this page covers what it must then do every December.

There is no market price because the interest cannot be traded, so the sponsor's number fills the gap

The facts in Rev. Rul. 2004-86 describe interests that are freely transferable but not publicly traded on an established securities market, and that is still the structure. DST illiquidity and exits explains why a resale is rare; so there is no closing price to pull from. Custodians generally ask the sponsor for an annual value for each interest, and most sponsors supply one.

How a sponsor arrives at that figure is not fixed by any IRS rule we found. Some carry the purchase price until an appraisal or sale changes it; others update annually. Your custodian's agreement may also let it demand an independent appraisal at your cost, and may charge for holding a hard-to-value asset. Ask for the method in writing before the account subscribes.

One feature deserves attention: the purchase price of a DST interest includes offering costs that do not buy real estate, so a value carried at cost can overstate what the property would fetch. A stale figure still drives every calculation below.

Four moments when the reported value becomes a tax number

Required minimum distributions. Publication 590-B figures each year's amount from the account balance at the end of the preceding year divided by a life-expectancy factor from its tables. A high reported value on a DST interest raises the amount that has to come out of an account whose main asset cannot be sold.

Roth conversions and in-kind distributions. The Form 1099-R instructions require a distribution of property to be reported at its fair market value on the date of distribution, and a conversion to be reported in boxes 1 and 2a; Form 5498 box 3 then shows the amount converted. Converting a DST in a traditional IRA to a Roth and taking a DST interest out of an IRA in kind both turn on this figure, and the instructions direct the trustee to use code K in box 7 for a traditional IRA distribution of assets that do not have a readily available value.

Prohibited transactions. If you engage in a transaction described in section 4975(c)(1) with the account, section 408(e)(2) strips the account of IRA status as of the first day of that year and treats every asset as distributed at its fair market value on that day. The custodian's value for the DST interest becomes taxable income for the whole account.

Worked example: one interest, three values, three different bills

Hypothetical and rounded. Your IRA pays $100,000 for a DST interest in year one. The custodian reports $100,000 in box 5 for that December and the next two. In year four the sponsor supplies an appraisal-based value of $90,000; in year six $110,000.

If you reach 73 in year five, the year-five required amount is figured from the year-four value of $90,000. If you convert the interest to a Roth in year six, the custodian reports $110,000 as the conversion amount and that is your ordinary income. If you take the interest in kind in year four instead, you report $90,000. Same property, three numbers, each set by whatever the custodian reported for the relevant date.

None of those values affect the trust's own tax calculations. Unrelated debt-financed income under section 514 is figured from the property's average adjusted basis and average acquisition debt, not from the custodian's fair market value. Check each year's Form 5498 against the sponsor's statement, and have your CPA review any year you plan a conversion or distribution.

What to ask the custodian before the account subscribes

Ask who supplies the value, how often it is updated, whether the custodian accepts the sponsor's figure without an appraisal, what it charges for a hard-to-value asset and whether it requires an appraisal before an in-kind distribution or conversion.

A DST interest cannot be redeemed, distributions can be reduced or stopped, and the property can sell for less than the account paid. Keep liquid assets in the same account so that no required amount depends on the custodian's valuation of the one asset you cannot sell.