DST Estate Planning: Step-Up in Basis and How Your Heirs Inherit

The estate piece is where DSTs do their quietest work. Most landowner families come to us thinking about tax deferral on the sale. By the end of the first conversation, they’re often more interested in the inheritance side than the sale itself.

Here’s why.

The step-up in basis, plainly

When you pass, the IRS resets the cost basis on most assets you own to their fair market value on the date of death. Your heirs inherit at that new, stepped-up basis. Any capital gains or depreciation recapture you’d been carrying forward effectively disappears.

If you bought a ranch decades ago for $400,000 and it’s worth $4 million when you die, your heirs inherit it at $4 million basis. They could sell it the next day for $4 million and owe no capital gains tax.

DSTs work the same way. You hold a fractional interest in the actual underlying real estate, treated as direct ownership for tax purposes. When you pass, your heirs inherit the DST interest at its fair market value on the date of death. The deferred capital gains, depreciation recapture, and state taxes you’d been carrying forward are gone for your heirs.

That’s the quiet wealth transfer most landowners never plan for explicitly.

Why this changes the math on holding to death

A common pattern we see: a landowner wants to sell because the work has gotten too heavy, the kids aren’t coming back, and they want to enjoy the next decade. But they hesitate because the tax bill on the sale is brutal.

A 1031 exchange into a DST defers that tax. They sell. They roll the proceeds. They start receiving potential mailbox money. Twenty years later, when they pass, their heirs inherit the DST interest at a stepped-up basis. The deferred tax effectively disappears.

The combination of 1031 deferral plus step-up at death is what some advisors call “swap till you drop.” It’s not a trick. It’s the way the tax code is written for direct real estate ownership.

The “three heirs, one ranch” problem

This is where the inheritance side really matters.

Most landowner families we work with have multiple heirs. One wants to keep the place running. One moved away decades ago and wants cash. One is somewhere in between. Leaving the ranch to all three forces a fight: sell or hold? Manage together or buy each other out? Hire a manager? Lease to a neighbor?

A DST avoids that.

When you put the proceeds of the sale into a DST and pass it to three heirs, each heir gets a clean, separate, undivided interest in the same DST. They don’t co-own a piece of land. They each own their own DST units. One can hold. One can sell out at the next exit. One can roll their share into another DST. No one needs anyone else’s permission.

The Thanksgiving table stays quiet for the right reasons.

How the math illustrates the impact

A simplified example. Numbers are illustrative, not a forecast.

A landowner sells a $5 million ranch with a $1 million original basis. They roll the proceeds into a DST and continue deferring. They live another 15 years, receiving distributions through the hold period, then rolling into successive DSTs as each property cycles.

When they pass, their heirs inherit a DST interest worth, say, $5 million in then-current value. The basis resets to $5 million.

Without the step-up, the heirs (or the original landowner if they had taken cash) would have owed capital gains and depreciation recapture on the original $4 million of gain plus any subsequent appreciation. State taxes on top. Potentially 30 to 40 percent of the gain.

With the step-up, that liability disappears for the heirs.

That’s why we tell families that the strongest case for a DST is rarely the sale itself. It’s what happens when the strategy meets a generational handoff.

What heirs actually inherit

Practical mechanics. Your heirs don’t inherit a piece of paper they have to figure out.

• They receive a fractional interest in the same DST you held
• They receive their share of any distributions through the remainder of the hold period
• They receive their share of the sale proceeds when the sponsor sells the underlying property
• At that exit, each heir individually decides whether to roll into another DST, take cash, or convert to a public REIT through a 721 UPREIT exchange
• The basis is reset at the date of death, so the deferred tax is effectively eliminated

Each heir handles their own piece. No shared decision-making required.

What to coordinate with your estate planning attorney

A DST is a financial asset, not a substitute for an estate plan. We work alongside your estate planning attorney to make sure:

• The DST interest is titled correctly (revocable trust, joint tenancy, individual ownership)
• The beneficiary designations on retirement accounts and life insurance are aligned with the DST inheritance
• The estate’s overall tax exposure (federal estate tax, generation-skipping tax if applicable) is accounted for
• Successor trustees and executors understand how the DST will distribute to heirs

The DST itself is straightforward at death. The estate plan around it is where the family-specific work happens.

What this does not change

A few important things.

The deferred tax is still there during your lifetime. If you take cash from a DST at any point during your life, the deferred tax becomes payable in the year you take the cash. The step-up only applies at death.

Estate tax may still apply. The step-up is for income tax. Federal estate tax has a different threshold (currently in the millions, but subject to change). For very large estates, additional planning is required.

No guarantees. Income through the hold depends on property performance. Principal can be lost. We do extensive independent third-party due diligence on every sponsor and offering, but no one can promise a return.

The big picture

For families where the kids aren’t coming back to run the land, a DST gives you three things at once: relief from the work, deferral on the tax, and an inheritance structure that doesn’t tear the family apart.

That’s the long game. The visit is how we figure out whether it fits yours.