Is there a required minimum distribution on a DST?

RMDs are a condition of tax-deferred retirement accounts, and a DST bought with exchange proceeds is not one

Section 401(a)(9)(A) makes a plan qualified only if each employee's entire interest 'will be distributed to such employee not later than the required beginning date' or begins to be distributed by then over the employee's life. Section 401(a)(9)(C) sets that date at April 1 of the year after the later of retirement or reaching the applicable age: 73 for anyone reaching 72 after 2022, 75 for anyone reaching 74 after 2032. Section 408(a)(6) carries the same rules into traditional IRAs, and Publication 590-B puts the start at 'April 1 of the year following the year you reach the age 73'.

The penalty is in section 4974(a): 'a tax equal to 25 percent of the amount by which such minimum required distribution exceeds the actual amount distributed', cut to 10 percent under section 4974(e) if the shortfall is taken and reported inside the correction window. Every one of those rules is written for plans and IRAs, which were funded with untaxed money.

A DST interest bought in a 1031 exchange is a different kind of asset: purchased with after-tax proceeds whose gain is deferred, and held in your own name or your revocable trust. Rev. Rul. 2004-86 treats each owner as holding an undivided fractional interest in the trust's real estate, so the rent, depreciation and expenses flow to your return every year whether or not cash is paid. There is nothing to force out, and no section of the Code tries.

What a DST pays is set by the trust agreement and the property, never by your age

The trust in the ruling is 'required to distribute all available cash less reserves quarterly to each beneficial owner'. The trustee may set a reasonable reserve, may not accept new money and may not renegotiate the loan, so distributions track the property's net rent, not a schedule tied to the investor.

That cuts both ways. Nothing obliges you to take money out, and nothing obliges the trust to pay it: a vacancy, a rent cut or a loan reserve can reduce or suspend distributions, as DST distribution cuts and suspensions explains. The interest cannot be redeemed and has no public market, so a shortfall cannot be made up by selling part of the position, and the property can be worth less at the trust's sale than you paid. Treat a taxable DST as income property, not a withdrawal account; rental income versus DST income in retirement compares it with the rent you used to collect.

Because nothing must come out, you can hold the interest until death and let section 1014 finish the plan

An IRA empties on a schedule, and every dollar that leaves is ordinary income. A taxable DST interest can stay in place for as long as the trust holds the property, and when you die section 1014(a) gives your heirs a basis equal to its fair market value at that date. The gain deferred through the exchange, and the depreciation taken inside the trust, are never recaptured; how the step-up applies to 1031 property has the detail.

That is why the absence of an RMD matters more than it sounds. A retiree at 75 with a traditional IRA and a DST can take the IRA's required amount, spend the DST's distributions if they arrive, and leave the real estate to pass at a reset basis. Planning the final exchange sets that sequence out, and DSTs for owners over 70 covers what the structure gives up in control.

The one case where an RMD reaches a DST: the interest sits inside an IRA

An IRA can buy a DST interest for cash, outside any 1031 exchange, as buying a DST in an IRA or 401(k) explains. The IRA's year-end balance then includes the interest, the owner's RMD is computed on that balance, and the IRA owes a distribution it may not be able to take from that asset.

Publication 590-B gives the way out: 'you must determine a separate required minimum distribution for each IRA. However, you can total these minimum amounts and take the total from any one or more of the IRAs.' An investor with a liquid traditional IRA alongside the one holding the DST can take the whole amount from the liquid account. An investor whose only IRA holds DST interests has a problem: the trust cannot redeem the interest and an in-kind distribution depends on the sponsor accepting the transfer.

The same publication adds that an original Roth IRA owner 'does not have to take distributions regardless of your age', and that an IRA holding 'nonpublicly traded assets or assets that you directly control' carries a higher risk of a prohibited transaction. Neither applies to a DST bought with exchange proceeds in your own name.

Worked example: two 75-year-olds, one DST outside an IRA and one inside

Hypothetical figures, rounded; have your CPA re-run them. The first owner exchanged a $1,000,000 rental into DST interests held in her living trust. At 75 she has no required withdrawal: she reports her share of the trust's income on Schedule E, receives whatever the trustee distributes, and if she dies holding the interests her children take them at date-of-death value.

The second owner holds a $1,000,000 traditional IRA: $400,000 in a DST interest and $600,000 in funds. Publication 590-B's Uniform Lifetime Table gives a distribution period of 24.6 at 75, so his RMD is about $40,650, all ordinary income. He takes it from the $600,000 side, leaves the DST untouched and owes no excise tax. Had the whole IRA been in DST interests, the same $40,650 would still be due, with a 25% penalty on any part he could not raise.