DST Income and the Qualified Business Income (QBI) Deduction

The deduction is permanent, but rental income must first be a qualified trade or business

Section 199A allows a deduction generally equal to 20% of qualified business income from each qualified trade or business, subject to wage and property limits above a taxable income threshold. The July 2025 tax act, Public Law 119-21, struck the rule that ended the deduction after 2025 and widened the phase-in range to $75,000, or $150,000 for joint returns. Under Rev. Proc. 2025-32, the 2026 threshold is $403,500 for joint returns and $201,750 for most other filers, with phase-in ranges ending at $553,500 and $276,750.

The gate is the trade or business definition. Reg. section 1.199A-1(b)(14) defines a trade or business as a section 162 trade or business, and adds rental activity that does not rise to that level only where the property is rented to a trade or business commonly controlled by the owner. A DST leases to unrelated tenants or a master tenant, so the common-control route rarely applies.

The rental safe harbor excludes triple-net leases, which is how most DSTs are built

Rev. Proc. 2019-38 treats a rental real estate enterprise as a trade or business for section 199A if separate books are kept, 250 or more hours of rental services are performed each year (in three of five years once the enterprise is four years old), contemporaneous records of the hours, services, dates and who performed them are kept, and a statement is attached to the return. Each interest must be held directly or through a disregarded entity.

Section 3.05 then excludes several arrangements, including real estate rented or leased under a triple-net lease, defined as a lease requiring the tenant to pay taxes, fees and insurance and to pay for maintenance in addition to rent and utilities. The model trust in Rev. Rul. 2004-86 is net leased exactly that way, and single-tenant net lease DSTs follow it. For those trusts the safe harbor is closed.

Multifamily and other operating DSTs are usually master leased to an affiliated master tenant rather than net leased to occupants. Whether a particular master lease is triple-net within the revenue procedure's definition depends on its terms; read it in the PPM with your CPA. Even if it is not, the 250-hour and record-keeping tests remain, and the services would have to be performed for the trust with records you can produce.

Outside the safe harbor, the section 162 question turns on facts that cut against a passive trust

The revenue procedure says an enterprise that fails the safe harbor may still be a trade or business if it meets the regulation's definition. Under Reg. section 1.199A-6(d)(2), a grantor computes the deduction as if they directly conducted the activities of the trust, so the question is whether the trust's activities, attributed to you, amount to a section 162 trade or business.

The ruling that qualifies the DST for section 1031 describes a trustee whose activities are limited to the collection and distribution of income, who may not renegotiate leases or debt, and who may make only minor non-structural modifications. That is the profile of an investment, not an active business. A trust with a large multifamily property and an operating master tenant has more activity, but it is the master tenant's activity. Your CPA has to make the call trust by trust; a position that DST rent is QBI should be documented.

Where QBI is allowed, the limits and the new minimum deduction still need checking

Above the threshold, the deduction for each trade or business is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property. A DST typically has no employees, so any allowance above the threshold would rest on the property's basis.

The 2025 act also added a minimum deduction of $400 for a taxpayer with at least $1,000 of qualified business income from active trades or businesses, defined as those in which the taxpayer materially participates under section 469(h). A DST owner does not materially participate, as explained at DST passive losses and sale, so DST income does not count toward it.

Hypothetical: a single filer below the threshold with $20,000 of net DST rental income. If the trust qualified, the deduction would be up to $4,000; if it does not, it is zero. The tax saved is that $4,000 times your marginal rate. Run your own numbers with your CPA.

If 199A matters to you, compare the alternatives on their own terms

Section 199A(b)(1)(B) separately allows 20% of qualified REIT dividends, with no trade or business test. Investors who may later take operating partnership units in a REIT through a DST roll-up should review how that income would be characterized, as discussed at 721 UPREIT roll-ups from a DST.

For direct rental owners who might meet the safe harbor, the full rules are at the QBI deduction for landlords. The deduction is one input among many; distributions from any DST are not assured, and income tax follows the income the trust actually earns, including the 3.8% tax covered at DST income and the NIIT.