What happens to a zero cash flow DST at my death?

Your heirs receive a share of real estate, and its basis resets to date-of-death value

A zero cash flow DST, which the client calls a cash out DST, holds triple-net leased property backed by investment-grade tenants and a high-leverage loan, with the rent going to debt service instead of distributions. For tax purposes your interest is not a certificate: Rev. Rul. 2004-86 treats each owner as owning "an undivided fractional interest" in the trust's property.

That share passes at death like any real estate. Section 1014(a) gives the person acquiring property from a decedent a basis equal to "the fair market value of the property at the date of the decedent's death," or the alternate valuation date if the executor elects it under section 2032.

The general estate-planning mechanics, including how heirs divide positions, are in using DSTs in estate planning. What is different about a zero is the size of the loan relative to your equity.

High leverage makes the step-up larger, because basis is measured before the mortgage

In Crane v. Commissioner, the Supreme Court held that the basis of inherited property "is the value of the property, undiminished by mortgages thereon." Your heirs' basis is therefore the value of the whole share of the building, not your small slice of equity.

The client's pages describe leverage often in the 80 to 90 percent range. On a structure like that, your old carried-over basis can sit far below the debt, which is the setup that makes a foreclosure or a sale during your life expensive. At death that gap is closed by the reset instead of by a tax bill.

The yearly phantom income stops being your problem too: the reasons it arises are in why a zero creates taxable income with no cash.

The non-recourse loan passes with the property, and your estate reports only the equity

The client's cash out DSTs use only non-recourse financing, so no investor is personally liable. In the ruling's own facts the trust assumed the loan and "neither DST nor any of its beneficial owners are personally liable" on the note. Your death changes the owner of the beneficial interest, not the borrower.

For estate tax, Reg. section 20.2053-7 says that when the estate is not liable for a mortgage, "only the value of the equity of redemption (or the value of the property, less the mortgage or indebtedness) need be returned." Value is the willing-buyer, willing-seller price under Reg. section 20.2031-1(b), which for an illiquid interest with no distributions needs a defensible appraisal.

For most families the estate tax is not the issue: Rev. Proc. 2025-32 sets the 2026 basic exclusion at $15,000,000. The income tax reset under section 1014 applies whether or not a return is due.

Worked example: $1.2 million of deferred gain that the heirs never pay

Hypothetical, round numbers, state tax ignored; run your own numbers with your CPA. You invested $300,000 into a zero cash flow DST. At your death your share of the building is worth $2,100,000, your allocated share of the non-recourse loan has amortized to $1,500,000, and your adjusted basis in the share, carried over from earlier exchanges, is $900,000.

Had you sold the day before, your amount realized would include the debt relief, so the gain would be $2,100,000 minus $900,000, or $1,200,000. At death your heirs take a $2,100,000 basis and the $1,200,000 disappears. Your estate reports equity of about $600,000, before any valuation discount an appraiser supports.

If the trust sells two years later for a share worth $2,200,000, the heirs' gain is about $100,000, measured from the new basis.

Your heirs can hold to the trust's sale, sell early at a discount, or exchange again

Holding is the default. The loan keeps absorbing the rent, so the heirs receive no income either, and the client describes the payout as realized at disposition. When the trust sells, each heir's share of proceeds can be taken as cash or rolled into a new exchange, though with a fresh basis there may be little gain left to defer.

Selling early is possible but not dependable. The client's own guidance is that the secondary market for DST interests is thin, sales typically come at a discount and involve delays, and early exits are subject to sponsor approval in many structures.

• Executor: get a date-of-death appraisal of the interest and the trust's loan balance as of that date.
• Executor: if a Form 706 is required, Form 8971 and its Schedules A are due within 30 days of the return's due date or filing date, whichever is earlier.
• Executor: retitle the interest through the sponsor's transfer process, covered in transferring DST interests to heirs.
• Heirs: record the new basis now; it is the figure every later sale is measured against.