Paying Estate Costs: DST Interests vs Real Property as Liquidity for Heirs

The deadline is nine months, and real estate rarely sells on that schedule without planning

The estate tax return is due nine months after death under section 6075(a), and section 6151(a) makes the tax payable when the return is due, without regard to any filing extension. For 2026, Rev. Proc. 2025-32 confirms a $15,000,000 basic exclusion, and the rate on amounts above it is 40% under section 2001(c).

Settlement costs come on top: appraisals, legal fees, debts and the carrying costs of property while it sits in the estate. An estate whose value is mostly real estate, held directly or through DSTs, needs a plan for that cash before the owner dies.

Income tax is usually the small part. Property in the gross estate takes a section 1014 basis equal to date-of-death value, and stepped-up property sold within a year is still long-term under section 1223(9), so a prompt sale of either a building or a DST interest often produces little gain.

Section 6166 can stretch the tax on an actively run building, but probably not on DST interests

Section 6166 lets the executor pay the estate tax attributable to a closely held business in up to ten annual installments, the first due up to five years after the normal due date, when the business is worth more than 35% of the adjusted gross estate. Rev. Proc. 2025-32 sets the 2026 amount on which deferred tax bears 2% interest at $1,940,000.

Real estate qualifies only if the owner ran it as an active business. In Rev. Rul. 2006-34, an owner who personally handled a strip mall's operations qualified, while an owner who relied entirely on an unrelated management company for an office park did not: reliance on the manager and lack of any significant participation weighed heavily against an active business.

A DST investor is further removed than that office-park owner. Rev. Rul. 2004-86 describes a trustee with no power to vary the investment and investors with no management role, so treat DST interests as ineligible for section 6166 unless estate counsel finds authority otherwise.

Selling, exchanging or distributing can end a section 6166 deferral

Section 6166(g)(1) accelerates the unpaid installments if 50% or more of the business interest is distributed, sold, exchanged or otherwise disposed of, or if that much money is withdrawn from the business. The statute lists exchanges by name, so plan on a 1031 exchange of the qualifying building counting as a disposition unless counsel confirms otherwise.

Section 6166(g)(1)(D) excludes transfers to the people entitled to the property under the will, intestacy or the decedent's trust, so distributing the building to heirs does not by itself end the deferral. The heirs then inherit the constraint: if they sell or exchange half the building, the remaining tax comes due.

If no installment election is available, section 6161(a)(2) lets the IRS extend payment for reasonable cause for up to ten years. That is discretionary and interest accrues, so it is a fallback, not a plan.

Hypothetical: a $25,000,000 estate with $10,000,000 of building and $6,000,000 of DST interests

Hypothetical: a 2026 decedent leaves a $10,000,000 apartment complex the decedent managed personally, $6,000,000 of DST interests, $7,000,000 of other investments and $2,000,000 of cash, with no debts. The tax on the $10,000,000 above the exclusion is about $4,000,000, due in nine months.

Run your own numbers with your CPA and estate counsel; deductions, prior gifts, portability and state estate tax all change the figure.

• The building is 40% of the adjusted gross estate, above the 35% threshold, so if it passes the active-business test about $1,600,000 of the tax, the same 40% share, could be paid in installments.
• The other $2,400,000 is due at nine months. Cash covers $2,000,000; the rest must come from the investment account or a sale.
• The DST interests contribute nothing to the nine-month deadline. They can be redeemed only when each trust sells its property, and a private sale needs an accredited buyer and sponsor consent, as covered in DST illiquidity.
• Selling the building instead would end the deferral and take months, but the stepped-up basis means little income tax on the sale.

Plan the liquidity source while the owner is alive, and let DSTs do the job they are suited to

DST interests solve a different estate problem: they divide cleanly among heirs, need no management and keep the deferral and step-up intact, which is why simple DST inheritances work well. They are poor at raising cash on a deadline. Size DST holdings so the estate's tax and costs can be paid from other assets.

Directly held property gives the executor more levers: list it, refinance it, sell part of a portfolio, or elect installments if the owner was active. Under section 2032, the executor may also value the estate six months after death, or at the sale date for property sold within those six months, but only if the election lowers both the gross estate and the tax.

Build the plan with estate counsel and the CPA: the expected tax, which assets pay it and when, whether section 6166 is realistic, and how DST interests will be retitled at death. The executor's 1031 guide covers exchanges the estate itself may need to finish.