Settling an Estate That Holds Both DST Interests and Real Property

Both assets get a new basis at death, so the decision is about handling and heirs, not tax deferral

Section 1014(a) gives property acquired from a decedent a basis equal to its fair market value at the date of death, or at the alternate valuation date if the executor elects it. Because Rev. Rul. 2004-86 treats a DST owner as owning an undivided fractional interest in the trust's real estate, the DST interest resets just as a directly owned building does. The deferred gain and the unrecaptured depreciation from every earlier exchange are gone for the heirs.

For property held as community property, section 1014(b)(6) extends the reset to the surviving spouse's half as well. For joint tenancy between a decedent and someone other than a spouse, IRS Publication 559 explains that only the part included in the decedent's estate takes the new value.

Under section 1223(9), an heir who sells inherited property within a year of death is treated as having held it more than a year. Any gain since death is long-term. None of this depends on whether the estate owes estate tax: the reset applies to estates far below the exemption too.

Value each asset on the willing-buyer standard, and expect the DST interest to need more work

Reg. section 20.2031-1 defines fair market value as 'the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.' For a rental building that usually means a date-of-death appraisal. For a DST interest there is no public market, so ask the sponsor what valuation information it provides and whether a qualified appraisal of the interest is needed for the estate's purposes.

The alternate valuation election values property six months after death, or at the date of an earlier sale or distribution, but section 2032(c) permits it only if it decreases both the gross estate and the estate tax. Most estates below the exemption cannot use it.

For 2026 deaths the basic exclusion amount is $15,000,000, and Form 706 is required above the filing threshold or to elect portability. When a Form 706 is filed, the Form 8971 instructions require Schedule A to each beneficiary within 30 days after the return is due or filed, and section 1014(f) caps the heir's basis at the value finally determined for estate tax.

Retitling differs: a deed for the building, the sponsor's transfer process for the DST interest

Real property passes by deed from the executor or the successor trustee, under state probate or trust law, and the lender and insurer need notice. A DST interest is different. Under the Delaware Statutory Trust Act, a beneficial interest 'is personal property notwithstanding the nature of the property of the statutory trust' and is 'freely transferable except to the extent otherwise provided in the governing instrument.'

That makes the trust agreement and the sponsor's transfer procedure the controlling documents. Contact the sponsor early with proof of death and of the executor's or trustee's authority, ask what forms it requires to re-register the interest, and confirm where distributions will go in the meantime. Because Delaware law expresses each owner's share as a percentage of the whole, dividing an interest among heirs is usually a matter of re-registration rather than a new deed, subject to any limits the trust agreement sets.

Transferring DST interests to heirs and trusts covers the paperwork in more detail.

Heirs who want cash and heirs who want income: assign the assets to fit, if the documents allow it

The building can be sold by the estate on the executor's timeline, and with a stepped-up basis the taxable gain is usually only the change in value since death. A DST interest generally cannot be redeemed; the cash comes when the sponsor sells the trust's property, at a time the heir does not control. DST illiquidity and exits covers the options.

Hypothetical: an estate holds a $3,000,000 rental building and $2,000,000 of DST interests, split equally between two heirs. If the will or trust permits non-pro-rata distributions, the heir who wants cash can take $2,500,000 of the building's sale proceeds and the heir who wants income can take the $2,000,000 of DST interests plus $500,000 of proceeds. If the documents require pro rata shares, each heir takes half of each. The figures are hypothetical; run your own numbers with your CPA and the estate's attorney.

Basis on a distribution matters too. Publication 559 says an heir's basis in property distributed in kind is the estate's basis immediately before the distribution, adjusted for any gain or loss the estate recognized.

An heir who wants to keep deferring can exchange later, from either asset

An heir who keeps the building and later sells it can exchange the proceeds, provided the heir held it for investment; inherited rental property options covers that decision. An heir who keeps the DST interest can exchange that heir's share of the proceeds when the trust sells, as exchanging out of an inherited DST explains.

Because the basis has just reset, the gain at that later sale may be small, and an exchange with new loads may cost more than the tax it defers.