The short answer
DST income is taxed as your share of the trust's rent less its expenses and depreciation, and that net figure counts toward the income test that decides how much of your Social Security is taxable and toward the Medicare IRMAA surcharge two years later. The biggest effect is in the year of the sale: a taxable sale can lift one year's income enough to make 85% of benefits taxable and raise both spouses' Medicare premiums, while an exchange keeps the gain out of adjusted gross income entirely. After that, depreciation passed through from the DST keeps taxable income below the cash you receive. Distributions are not guaranteed, so do not plan essential spending on them alone.
At a glance
| Benefit taxation test | Other income plus tax-exempt interest plus half your benefits, against fixed base amounts |
|---|---|
| Joint base amounts | $32,000 and $44,000; single $25,000 and $34,000; not indexed |
| Maximum taxable | 85% of benefits |
| IRMAA lookback | 2026 premiums generally use 2024 tax returns |
| 2026 Part B premium | $202.90 standard; $284.10 to $689.90 with IRMAA |
| IRMAA starts | MAGI above $218,000 joint, $109,000 single |
| Senior deduction | $6,000 per person 65+ for 2025 to 2028, phasing out above $150,000 joint MAGI |
Social Security is taxed on a formula that counts DST income, and the thresholds never move
Section 86 adds your modified adjusted gross income, tax-exempt interest and half your benefits. Above the base amount, $32,000 on a joint return or $25,000 single, up to 50% of benefits becomes taxable; above the adjusted base amount, $44,000 joint or $34,000 single, up to 85%. Those amounts are fixed in the statute, and Publication 915 has the worksheets.
Net income from a DST is in that adjusted gross income. Because each additional dollar above $44,000 can pull 85 cents of benefits into taxable income, an extra $1,000 of rental income in that range can raise taxable income by $1,850.
Tax-exempt interest is added back in the test, so moving savings into municipal bonds does not shrink it. The levers that do work are how much taxable income you report and in which year, and those are exactly what an exchange and DST depreciation change. Pension income counts in full, so a couple with a sizeable pension often starts above the $44,000 line before any rental income at all.
Depreciation from the DST keeps taxable income below the cash you receive
A DST that meets Rev. Rul. 2004-86 is a grantor trust, so you report your share of its rent, expenses and depreciation as if you owned the property directly. The distribution you receive and the income you report are different numbers; DST depreciation and bonus explains how the deduction is figured.
In an exchange your share of depreciation starts from your carried-over basis, which for a long-held rental is often small, and continues on the old schedule under Reg. section 1.168(i)-6 unless you elect out. Any basis added through the DST's allocated debt or your added cash is depreciated as new. Ask the sponsor for a sample of the year-end tax package before you invest.
Worked model: $10,000 less taxable DST income keeps $8,500 of benefits untaxed
Hypothetical round numbers for a married couple filing jointly, both over 65. They show the formula, not a projection of any DST's income; run your own numbers with your CPA.
- Social Security $40,000, pension $20,000. With depreciation, the DST reports $15,000 of taxable income; without it, $25,000.
- With depreciation: $20,000 + $15,000 + half of benefits $20,000 = $55,000. That is $11,000 over $44,000: 85% of $11,000 is $9,350, plus $6,000 (half the gap between $32,000 and $44,000) = $15,350 of benefits taxable.
- Without depreciation: $65,000 of combined income, $21,000 over $44,000: $17,850 + $6,000 = $23,850 of benefits taxable.
- So $10,000 more of DST taxable income raises total taxable income by $18,500, because it also pulls $8,500 more of Social Security into tax.
The sale year is where an exchange matters most, because Medicare looks back two years
Medicare Part B and Part D premiums rise with income. Under SSA POMS HI 01101.010 the income measure is adjusted gross income plus tax-exempt interest, usually from the return two years before the premium year, so 2026 premiums use 2024 returns. The CMS 2026 tables start the surcharge above $218,000 joint or $109,000 single, with the standard Part B premium at $202.90 a month.
Hypothetical: the couple above sells a rental with $400,000 of gain for cash in 2026. Their income lands in the tier above $410,000 and below $750,000 joint, so at 2026 table amounts each spouse's Part B premium would be $649.20 instead of $202.90, plus a $83.30 Part D adjustment. That is about $12,710 more for the couple in the premium year two years later, on top of the tax on the gain and the 85% inclusion of benefits.
SSA lets you ask for a newer tax year after certain life-changing events, but its rule for loss of income-producing property, POMS HI 01120.035, covers losses beyond your control such as a natural disaster, arson or theft. A gain from a sale you chose is not on the list. An exchange avoids the spike: gain deferred under section 1031 is not in adjusted gross income.
Use DST distributions for flexible spending and keep the essentials on your fixed benefits
Social Security and a pension arrive on fixed schedules. DST distributions depend on the tenants paying and the sponsor's decisions; the trust in the ruling distributes quarterly, offerings set their own schedules, and payments can be reduced or suspended. The trust cannot raise new capital, and the sponsor decides when the property sells, which ends the income until you reinvest. DST distributions: timing and reliability covers what to read in the offering documents.
Two more items affect the plan. The IRS senior deduction adds $6,000 per person 65 or older for 2025 through 2028, phasing out above $150,000 of joint MAGI, so a sale year can cost you that deduction as well. And DST net income is investment income for the 3.8% tax under section 1411 once MAGI passes $250,000 joint or $200,000 single.
Our traditional DST offerings typically take $100,000 to $250,000 per trust, which allows spreading across several sponsors so no single property carries the whole income. Replacing rental income in retirement compares selling with exchanging at that stage.
Related questions
Would the 0% capital gains rate make a cash sale cheap enough?
Only the part of the gain that fits under the 0% band, which ends at $98,900 of joint taxable income in 2026 counting the gain itself, plus pension and taxable benefits. The 0% rate on real estate works through the stacking.
Can I time a taxable sale to limit the Medicare effect?
The surcharge is set by one year's income, so a large gain in a single year moves you up the tiers for the premium year two years later. Spreading recognition, for example by exchanging part and selling part, changes the tier.
Does a zero cash flow DST help with Social Security taxation?
A cash out DST pays no current distributions, but its tax result depends on the trust's income and interest expense, which it reports to you. Ask for the projected tax reporting before relying on it.
Will my IRA required minimum distributions interact with DST income?
Both count toward adjusted gross income, so together they decide your benefit taxation and IRMAA tier. A DST is bought with exchange proceeds, not retirement account money, in a 1031.
What happens to the deferred gain when I die?
Section 1014 gives heirs a basis equal to fair market value, so the deferred gain on DST interests held at death is not taxed to them. DSTs in estate planning covers how interests pass.
Sources
Checked against these publications on September 30, 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.
- IRC section 86, Social security and tier 1 railroad retirement benefits
- IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
- Rev. Rul. 2004-86, Delaware statutory trusts
- Treas. Reg. section 1.168(i)-6, Like-kind exchanges and involuntary conversions
- SSA POMS HI 01101.010, Modified Adjusted Gross Income (MAGI) for IRMAA
- CMS, 2026 Medicare Parts A and B Premiums and Deductibles (IRMAA tables)
- SSA POMS HI 01120.035, Life-changing event: loss of income-producing property
- IRS Fact Sheet FS-2025-03, Tax deductions for working Americans and seniors (Public Law 119-21)
- IRC section 1411, Net investment income tax
- IRC section 1014, Basis of property acquired from a decedent
- Rev. Proc. 2025-32, 2026 inflation-adjusted amounts