Mortgage Interest, Real Estate Taxes and Property Expenses: How Investor Allocations Work

Part 5 — Under­stand­ing Your DST Tax Pack­age

DST.EDU Spe­cial Series

Octo­ber 18, 2026

By Al DiNi­co­la, AIF®
Pri­vate Fund Advi­sor
DST 1031 Spe­cial­ist
Fidu­cia­ry Cap­i­tal Man­age­ment, LLC

What Investors and Their CPAs Need to Know About DST Tax Report­ing

One ques­tion I hear from investors is:

“If I don’t per­son­al­ly make the mort­gage pay­ment or pay the prop­er­ty tax bill, why are mort­gage inter­est and real estate tax­es show­ing up in my DST tax pack­age?”

The answer goes back to how a qual­i­fy­ing DST is struc­tured for fed­er­al tax pur­pos­es.

A DST may own a large com­mer­cial property—a $50 mil­lion apart­ment com­mu­ni­ty, for example—with its own mort­gage, prop­er­ty tax­es, insur­ance, main­te­nance costs, man­age­ment expens­es, and oth­er oper­at­ing costs.

You obvi­ous­ly are not per­son­al­ly pay­ing the entire mort­gage or prop­er­ty tax bill. Instead, your annu­al tax pack­age may pro­vide your applic­a­ble pro­por­tion­ate share of the tax infor­ma­tion asso­ci­at­ed with the prop­er­ty.

Here’s the impor­tant part: the expens­es occur at the prop­er­ty lev­el, but the applic­a­ble tax infor­ma­tion may be allo­cat­ed to the indi­vid­ual DST investor.

Why the Under­ly­ing Prop­er­ty Mat­ters

Rev­enue Rul­ing 2004–86 helps explain this rela­tion­ship.

In the spe­cif­ic DST struc­ture addressed by the IRS, ben­e­fi­cial own­ers were treat­ed for fed­er­al income-tax pur­pos­es as own­ing pro­por­tion­ate inter­ests in the under­ly­ing trust prop­er­ty. That is why your DST tax pack­age may con­tain infor­ma­tion tied to the actu­al oper­a­tion and financ­ing of the real estate, includ­ing mort­gage inter­est, real estate tax­es, oper­at­ing expens­es, and depre­ci­a­tion. Once you begin think­ing of the tax pack­age as infor­ma­tion flow­ing from the under­ly­ing prop­er­ty, the num­bers become eas­i­er to under­stand.

A Sim­ple Exam­ple

Assume an investor’s annu­al DST tax state­ment includes:

• Pas­sive rental real estate income: $4,542
• Mort­gage inter­est: $8,750
• Real estate tax­es: $2,100
• Oth­er prop­er­ty expens­es: $3,250
• Depre­ci­a­tion: Report­ed sep­a­rate­ly

The investor is not receiv­ing the prop­er­ty’s entire mort­gage-inter­est expense or prop­er­ty-tax bill. The tax pack­age is pro­vid­ing the infor­ma­tion applic­a­ble to that investor’s inter­est. Those amounts are then reviewed by the investor’s CPA along with the rest of the tax pack­age.

Mort­gage Inter­est: Prop­er­ty-Lev­el Debt vs. Your Per­son­al Mort­gage

Mort­gage inter­est is one area where the dis­tinc­tion is espe­cial­ly impor­tant. A DST prop­er­ty may have sub­stan­tial financ­ing, but it is not the same as a mort­gage you per­son­al­ly obtained from a bank. You did not nego­ti­ate the prop­er­ty loan direct­ly with the lender, and you are not mak­ing the month­ly mort­gage pay­ments your­self. Yet your annu­al tax pack­age may still include an allo­ca­tion of mort­gage inter­est asso­ci­at­ed with the under­ly­ing prop­er­ty.

Prop­er­ty-lev­el debt is dif­fer­ent from a mort­gage per­son­al­ly orig­i­nat­ed by the investor.

The financ­ing exists at the prop­er­ty lev­el, while the annu­al tax pack­age may reflect your applic­a­ble share of the relat­ed tax infor­ma­tion.

Why This Mat­ters in a §1031 Exchange

This dis­tinc­tion can become par­tic­u­lar­ly impor­tant when the DST was acquired as replace­ment prop­er­ty in a §1031 exchange. A DST may include prop­er­ty-lev­el financ­ing, and that financ­ing can be rel­e­vant when the investor and tax pro­fes­sion­als eval­u­ate replace­ment-prop­er­ty val­ue and debt con­sid­er­a­tions. But I would not look at the mort­gage-inter­est amount on the annu­al tax state­ment and try to recon­struct the §1031 exchange from it.

The exchange cal­cu­la­tion and the annu­al tax-report­ing cal­cu­la­tion serve dif­fer­ent pur­pos­es. The §1031 exchange should be eval­u­at­ed based on the investor’s relin­quished prop­er­ty, replace­ment prop­er­ty, equi­ty, debt, and indi­vid­ual exchange cir­cum­stances.

Real Estate Tax­es and Oper­at­ing Expens­es

The same gen­er­al con­cept applies to real estate tax­es and oth­er prop­er­ty expens­es. A com­mer­cial prop­er­ty may incur sub­stan­tial prop­er­ty tax­es, insur­ance, repairs, main­te­nance, man­age­ment expens­es, util­i­ties, and oth­er costs. Your tax pack­age may show the amounts applic­a­ble to your inter­est.

In our exam­ple:

• Real estate tax­es: $2,100
• Oth­er prop­er­ty expens­es: $3,250

These fig­ures are part of the over­all tax pic­ture and help explain why tax­able rental income may dif­fer from the cash dis­tri­b­u­tions you received.

Don’t Recon­struct the Allo­ca­tion Your­self

One mis­take I cau­tion investors against is tak­ing the prop­er­ty’s finan­cial state­ment and try­ing to cal­cu­late their own tax allo­ca­tion. You may know the prop­er­ty’s total mort­gage inter­est expense and believe you know your per­cent­age own­er­ship. It can seem log­i­cal to mul­ti­ply every expense by that per­cent­age. I would not rec­om­mend doing that.

Tax allo­ca­tions can be affect­ed by the invest­ment amount, own­er­ship peri­od, financ­ing, tax clas­si­fi­ca­tion, depre­ci­a­tion sched­ules, and spon­sor account­ing records.

For exam­ple, an investor who pur­chased a DST inter­est part­way through the year may not have the same report­ing peri­od as an investor who owned the invest­ment for the full year.

Indi­vid­ual tax his­to­ry may also mat­ter, par­tic­u­lar­ly when the DST was acquired through a §1031 exchange.

That is why investors should work from the annu­al tax pack­age pre­pared for their spe­cif­ic invest­ment rather than try­ing to recre­ate the num­bers them­selves.

The Expens­es Help Explain the Tax Result

Mort­gage inter­est, real estate tax­es, and oper­at­ing expens­es are not sim­ply extra num­bers on the state­ment. They help explain the tax result.

As we dis­cussed in Part 4, cash dis­tri­b­u­tions and tax­able rental income may be dif­fer­ent. Prop­er­ty-lev­el expens­es, togeth­er with depre­ci­a­tion and oth­er applic­a­ble tax items, are part of the rea­son. So, when you see sev­er­al expense cat­e­gories on your DST state­ment, think of them as pieces of the over­all tax pic­ture.

The Investor’s Share Is What Mat­ters

A $50 mil­lion prop­er­ty may have mil­lions of dol­lars of annu­al expens­es. The indi­vid­ual DST investor is not report­ing the entire prop­er­ty’s num­bers. The investor is work­ing with the applic­a­ble tax infor­ma­tion pro­vid­ed for his or her DST inter­est.

This is impor­tant because prop­er­ty-lev­el finan­cial state­ments should not sim­ply be car­ried over to an indi­vid­ual investor’s tax return. Your CPA should rely on the investor-spe­cif­ic tax pack­age and sup­port­ing sched­ules.

A Good Ques­tion to Ask Your CPA

A use­ful ques­tion is:

“How are the mort­gage inter­est, real estate tax­es, prop­er­ty expens­es, and depre­ci­a­tion shown in my DST tax pack­age affect­ing the rental income report­ed on my return?”

That gets direct­ly to the issue with­out requir­ing you to cal­cu­late the allo­ca­tions your­self.

The Bot­tom Line

Mort­gage inter­est, real estate tax­es, and oper­at­ing expens­es are incurred at the under­ly­ing prop­er­ty lev­el, but the DST’s annu­al tax report­ing may pro­vide the applic­a­ble infor­ma­tion asso­ci­at­ed with your invest­ment. You are not per­son­al­ly pay­ing the prop­er­ty’s entire mort­gage or tax bill. You are receiv­ing tax infor­ma­tion reflect­ing the por­tion applic­a­ble to your DST inter­est. The key is not to recon­struct the allo­ca­tions your­self from the prop­er­ty’s over­all finan­cial state­ments.

Use the annu­al DST tax pack­age and let your CPA deter­mine how the infor­ma­tion applies to your indi­vid­ual return.

Investor/CPA Take­away

Use the annu­al DST tax pack­age for the investor’s actu­al report­ed allo­ca­tion. The under­ly­ing prop­er­ty may have mil­lions of dol­lars of mort­gage inter­est, real estate tax­es, and oper­at­ing expens­es, but the investor reports the applic­a­ble tax infor­ma­tion for his or her DST interest—not the entire prop­er­ty’s fig­ures.

In Part 6 of our DST.EDU series, we will look at:

Cost Seg­re­ga­tion in a DST: Under­stand­ing 5‑, 7‑, 15‑, 27.5- and 39-Year Prop­er­ty.

Edu­ca­tion­al Note

This arti­cle is intend­ed sole­ly for gen­er­al edu­ca­tion­al and infor­ma­tion­al pur­pos­es. It is not indi­vid­ual tax, legal, secu­ri­ties, or invest­ment advice. DST tax report­ing and investor allo­ca­tions can vary by invest­ment, spon­sor, prop­er­ty, financ­ing, own­er­ship peri­od, report­ing method, tax basis, and indi­vid­ual cir­cum­stances. Investors should pro­vide their com­plete DST tax pack­age to their CPA or oth­er qual­i­fied tax pro­fes­sion­al and obtain advice based on their indi­vid­ual sit­u­a­tion.

Delaware Statu­to­ry Trusts (DSTs) have become a notable part of com­mer­cial real estate invest­ing. As Al DiNi­co­la empha­sizes, a DST is a struc­ture, not an asset class, the focus should remain on the qual­i­ty of the under­ly­ing prop­er­ty and how it fits your goals.  DSTs are for accred­it­ed investors and car­ry risks, i.e. illiq­uid­i­ty, real estate mar­ket fluc­tu­a­tions, and spon­sor deci­sions. Con­sult your advis­er about suit­abil­i­ty, espe­cial­ly for §1031 exchanges. For more details, please con­tact:

• Al DiNi­co­la adnicola@fiduciarycm.com  
• Direct: 239 691 8098
• Sched­ule Appoint­ment

Advi­so­ry ser­vices are offered through Fidu­cia­ry CM, an SEC-reg­is­tered advis­er. Invest­ments involve risk and are not guar­an­teed. Always refer to offer­ing doc­u­ments for full risk dis­clo­sures. Delaware Statu­to­ry Trust (DST) invest­ments involve risks asso­ci­at­ed with com­mer­cial real estate own­er­ship and are not suit­able for all investors. These risks may include, but are not lim­it­ed to, loss of prin­ci­pal, illiq­uid­i­ty, ten­ant vacan­cy, financ­ing risk, inter­est rate fluc­tu­a­tions, prop­er­ty val­ue declines, eco­nom­ic and mar­ket con­di­tions, and risks asso­ci­at­ed with spon­sor and prop­er­ty man­age­ment deci­sions. Please refer to the applic­a­ble Prop­er­ty Pri­vate Place­ment Mem­o­ran­dum (PPM) for a com­plete dis­cus­sion of the risks and con­sid­er­a­tions spe­cif­ic to that offer­ing. Secu­ri­ties-relat­ed activ­i­ties, where applic­a­ble, are con­duct­ed through the author’s then-cur­rent reg­is­tered bro­ker-deal­er, mem­ber FINRA/SIPC. Cur­rent reg­is­tra­tion infor­ma­tion is avail­able through FINRA Bro­kerCheck. Past per­for­mance is not indica­tive of future results. Nei­ther the Reg­is­tered Rep­re­sen­ta­tive nor the Bro­ker-Deal­er can con­trol or guar­an­tee future deci­sions made by the DST spon­sor, asset man­ag­er, prop­er­ty man­ag­er, ten­ants, lenders, or oth­er third par­ties involved in the oper­a­tion of the prop­er­ty. Past per­for­mance is not indica­tive of future results. For edu­ca­tion­al pur­pos­es only; not tax, legal, secu­ri­ties, or invest­ment advice and not an offer or solic­i­ta­tion to buy or sell secu­ri­ties.