Rental Income vs DST Income: How the Taxes Differ in Retirement

Both go on Schedule E, but you build one return yourself and the trustee hands you the other

With a rental you own, you or your CPA assemble rent, repairs, taxes, insurance, interest and depreciation for Schedule E. If you provide hotel-type services such as regular cleaning or linen changes, Publication 527 moves the income to Schedule C, which matters for some short-term rentals.

A DST is a grantor trust, so you are taxed as if you owned your share of the building directly. Under Reg. section 1.671-4, the trustee must give you a statement showing all items of income, deduction and credit, and your CPA carries those lines to Schedule E. There is no K-1, and you no longer keep the books; DST tax forms and reporting covers the statement line by line.

The practical retirement change is timing: you file when the trustee's statements arrive, not when your own ledger is closed. Several trusts mean several statements, so an extension becomes routine for some owners.

Keep your own basis file for each trust interest. The trustee reports each year's items, but the basis you carried into the trust comes from the Form 8824 you filed for the exchange, and only you and your CPA hold that number. It decides both how much depreciation you can claim and how much gain is waiting when the trust eventually sells.

Depreciation follows your old basis into the trust, so a fully depreciated rental produces mostly taxable DST income

Under Reg. section 1.168(i)-6, the exchanged basis keeps depreciating over the remaining recovery period, and if the replacement has a longer period (39 years for nonresidential property against 27.5 for residential, per section 168(c)) the longer one applies. Only excess basis, the part financed with new debt or added cash, is treated as placed in service new. An election in the same regulation lets you treat the whole basis as new property instead; ask your CPA whether it helps.

Hypothetical: a couple sells a rental for $1,000,000 net. Its building is fully depreciated, so the $150,000 of remaining basis is all land. The rental netted $45,000 of cash and $45,000 of taxable income. If they exchange into debt-free DST interests and receive the same $45,000, almost all of it is still taxable, because no depreciable basis came across.

If instead the $1,000,000 buys interests in trusts with 50% leverage, they hold $2,000,000 of property and $1,000,000 of excess basis. With 80% allocated to buildings, that is $800,000 of new depreciation basis: about $29,100 a year over 27.5 years for apartments or $20,500 over 39 years for commercial. Taxable income then runs below cash by roughly that amount, less any principal the trust repays. Run your own numbers with your CPA.

Both are passive, but only the rental you manage yourself can use the $25,000 allowance

Section 469(c)(2) makes any rental activity passive, so rent and DST income alike can absorb passive losses but not offset wages, IRA withdrawals or pensions. The $25,000 allowance in section 469(i) lets a landlord who actively participates deduct rental losses against other income, phasing out by 50% of AGI above $100,000.

A DST owner cannot use it, because section 469(i)(6) denies active participation to anyone holding less than 10% by value, and the trustee makes the decisions. In retirement this matters less than it did while working, since most fully depreciated rentals show income, not losses.

Losses already suspended on the old rental are freed under section 469(g) only by a fully taxable disposition, which an exchange is not. They stay suspended until a taxable sale; suspended passive losses and a 1031 shows how they carry forward.

Net investment income tax, the QBI deduction and Social Security read the two streams almost the same way

Rents are net investment income under section 1411(c), so the 3.8% tax applies to rental and DST income alike once modified AGI passes $250,000 joint or $200,000 single. Lower taxable income from fresh DST depreciation lowers that exposure.

The QBI deduction differs. Rev. Proc. 2019-38 offers a safe harbor for rental enterprises with 250 or more hours of rental services a year, but excludes property leased under a triple net lease. A self-managed rental may qualify; DST interests, often leased on net terms, usually fall outside it. The QBI deduction for landlords covers the tests, and Rev. Proc. 2025-32 sets the 2026 threshold at $403,500 joint.

Net rental income of either kind enters the section 86 formula for taxing Social Security, which starts at $32,000 joint and reaches up to 85% of benefits above $44,000. It also counts toward Medicare premiums: CMS puts the 2026 standard Part B premium at $202.90, with surcharges above $218,000 joint or $109,000 single.

State returns: one state for a local rental, possibly several for a DST portfolio

Rent from property inside a state is generally taxable there even if you live elsewhere. A rental down the street means one state return; three DSTs owning buildings in five states can mean nonresident returns in each one that taxes income, as DST multi-state tax issues explains.

Retirees moving to a state without an income tax should look at where each trust's property sits before they choose interests. Your state of residence may also tax the income, with a credit for tax paid elsewhere; the state pages cover each state's treatment of exchanges.

The trade, then, is fewer hours and more forms. For the income side of the same decision, see replacing rental income one-for-one.