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For Real Estate Agents

Why a DST Interest Gets the Same Stepped-Up Basis as Direct Real Estate

Clients use a DST to defer capital gains tax through a 1031 exchange, but few agents know what happens to that investment if the client dies while still holding it. A DST interest gets the exact same stepped-up basis at death as a building owned directly, and it splits far more cleanly among heirs.

By Melissa Breyer, Esq. 6 min read

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If you sell NNN or DST investment property, you already know clients use these deals to defer capital gains tax through a 1031 exchange. What most clients, and some agents, do not know is what happens to that investment if the client dies while still holding it.

A DST interest gets the exact same tax treatment at death as a building the client owns directly. This article covers what that step-up means, why it matters more for a DST than for a single building, and when it is worth a call to an estate planning attorney before the deal closes.

What a DST Interest Actually Is

A Delaware Statutory Trust, or DST, lets an investor own a share of a bigger property. Think of a shopping center or an apartment building. That is instead of one building owned alone. A DST usually holds one or more properties. Each investor buys a percent share of the trust. They do not get a direct deed to the land. Investors often use a DST to replace property in a 1031 exchange. The IRS treats a qualifying DST share as real property for this purpose.

The Same Step-Up Rule Applies to a DST Interest

Property held until death gets a stepped-up basis under federal tax law. The heir’s basis resets to fair market value on the date of death, wiping out the deferred capital gains and any depreciation recapture the owner had been carrying. A DST share gets this exact same treatment. No tax rule treats a DST worse, or better, than a building owned directly.

Why That Matters More for a DST Than One Building

A single NNN building creates a real problem when a client has more than one heir. Picture a $2,000,000 building split three ways. The heirs are adult children who do not agree on much. That forces a sale. Or it forces siblings into shared ownership none of them wanted. A DST share avoids this problem. It splits into clean ownership units. A $2,000,000 DST share can divide into three $666,667 pieces. No building to fight over. No forced sale.

How a 721 Exchange Changes (or Doesn’t Change) This

Some DST sponsors later convert the DST into an operating partnership. This step is called a Section 721 exchange. That operating partnership interest can later convert into REIT shares too, but that is its own separate step, not the same thing. If the client dies while still holding the DST, before any of this happens, the step-up applies just like before. If the client already holds the operating partnership units or REIT shares at death, those get a stepped-up basis too, under the same rule that covers any inherited investment. What matters is simple: was the client still holding the investment when they died. The stage of the process does not matter.

What This Means for Your Client Conversations

Raise this with any client choosing between a straight 1031 exchange and a DST share. This matters most if they have more than one child in mind. One more thing worth saying clearly. The step-up at death does not by itself keep the DST out of probate. The share still needs to sit inside a revocable trust for the family to skip a court process. That is exactly where an estate planning attorney should get involved, before the deal closes, not after. A trust also matters for a related client question. Does an executor have the power to sell estate property without a court order? Does a family co-owner have the right to buy out land before a court forces a sale? For a broader look at protecting real estate in Georgia, see the Real Estate Investor hub.

For Agents

How to Bring This Up With a Client

Ask About Their Heir Situation Before Recommending a Structure

If a client has more than one child or beneficiary in mind, that is the moment to mention a DST's split-friendly ownership units.

Explain the Stepped-Up Basis in Plain Terms

Let them know: hold it until death, and the deferred gain and depreciation recapture disappear for their heirs.

Flag the Titling Question Separately From the Tax Question

The step-up does not avoid probate by itself. The DST interest still needs to sit inside a trust for that.

Loop In an Estate Planning Attorney Before the Deal Closes

Especially when multiple heirs, a large deal size, or an existing trust that needs updating are part of the picture.

For Real Estate Agents

Become a Referral Partner

Send a client who's choosing between a 1031 exchange and a DST interest, especially one with multiple heirs. We confirm the titling and trust details directly with you.

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Melissa Breyer

Melissa Breyer

Georgia Estate Planning Attorney

Melissa Breyer is a Georgia-licensed estate planning attorney focused exclusively on trust-based planning for individuals and families. She personally meets with every client and designs every plan from scratch. No templates. No associates handling your case. Every plan is built for your specific family, your specific assets, and your specific wishes.

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The whole process of creating a family trust felt simple, clear, and stress-free. We really appreciated how patient, helpful, and easy to communicate with the team was throughout everything. Shawn and Melissa gave us great guidance and helped us feel confident every step of the way. We're grateful for their support and would definitely recommend them.

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After my father passed away, my mother had to rely on my father's employer to navigate the estate. It was a disaster. After this experience, I knew I needed a plan. I turned to Atlanta Estate Planning Attorneys to set up a trust. I no longer have to worry about my wife and children going through a difficult process if something happens to me. I highly recommend Atlanta Estate Planning Attorneys!

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Working with Melissa Breyer to set up our Living Trust was one of the best decisions Scott and I have made. We did this so our boys are protected from confusion and chaos if something happens to us. Melissa was knowledgeable, patient, and made what felt overwhelming completely manageable. I would absolutely recommend Melissa Breyer.

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Frequently Asked Questions

Yes. A DST interest gets exactly the same stepped-up basis treatment at death as a building owned outright. The heir’s basis resets to fair market value on the date of death, wiping out the deferred capital gains and depreciation recapture.

A single building has to be sold or shared as a whole. A DST interest is sold in ownership units, so it can be split into proportional shares among heirs without forcing a sale or creating shared ownership between siblings.

Not in any way that matters for this purpose. Whether the client dies holding the DST interest or holding the REIT shares after a 721 exchange, both get a stepped-up basis at death. What matters is that the client was still holding the investment when they died, not which stage of the process they were in.

A DST interest is worth raising as an alternative to a straight 1031 exchange into another single building, specifically because it divides cleanly among multiple heirs without a forced sale.

No. The tax basis reset and probate are two separate issues. The DST interest still needs to be titled correctly, usually inside a revocable trust, for the family to actually avoid probate court.

Loop one in before the deal closes whenever the client has multiple heirs, a large deal size, or an existing trust that needs to be updated to hold the new interest.

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