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

Part 6 — Under­stand­ing Your DST Tax Pack­age

DST.EDU Spe­cial Series

Octo­ber 21, 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 the DST owns one build­ing, why does my depre­ci­a­tion sched­ule show sev­er­al dif­fer­ent recov­ery peri­ods?”

The answer is cost seg­re­ga­tion.

A com­mer­cial prop­er­ty may look like one build­ing when you dri­ve past it, but for tax pur­pos­es it can con­tain many dif­fer­ent types of assets. Some may be part of the build­ing itself, while oth­ers may qual­i­fy for short­er depre­ci­a­tion peri­ods.

Here’s the impor­tant part: cost seg­re­ga­tion gen­er­al­ly does not cre­ate addi­tion­al prop­er­ty val­ue. It changes when cer­tain depre­ci­a­tion deduc­tions may be tak­en.

Start With the Build­ing

With­out get­ting too tech­ni­cal, res­i­den­tial rental real estate is gen­er­al­ly depre­ci­at­ed over 27.5 years, while non­res­i­den­tial real prop­er­ty gen­er­al­ly uses a 39-year recov­ery peri­od under the gen­er­al MACRS rules. Land itself is not depre­cia­ble.

But not every­thing asso­ci­at­ed with a prop­er­ty nec­es­sar­i­ly has to be depre­ci­at­ed over 27.5 or 39 years. A cost-seg­re­ga­tion study looks more close­ly at the indi­vid­ual com­po­nents of the prop­er­ty and deter­mines whether some assets qual­i­fy for short­er recov­ery peri­ods. Depend­ing on the prop­er­ty and the facts, items may be clas­si­fied as 5‑, 7‑, or 15-year prop­er­ty rather than as part of the longer-lived build­ing.

Exam­ples can include cer­tain fur­ni­ture, fix­tures, equip­ment, appli­ances, dec­o­ra­tive com­po­nents, and land improve­ments such as park­ing areas, side­walks, fenc­ing, and land­scap­ing. The clas­si­fi­ca­tion is not sim­ply based on what an item is called. The actu­al tax treat­ment depends on the nature and use of the asset and the applic­a­ble depre­ci­a­tion rules.

Why Does the Recov­ery Peri­od Mat­ter?

Let’s use a sim­ple exam­ple.

Sup­pose a DST owns a mul­ti­fam­i­ly prop­er­ty. Most of the build­ing may fall into the 27.5‑year res­i­den­tial rental cat­e­go­ry.

A cost-seg­re­ga­tion study, how­ev­er, may iden­ti­fy cer­tain qual­i­fy­ing com­po­nents that can be depre­ci­at­ed over 5, 7, or 15 years.

Why does that mat­ter?

Because a short­er recov­ery peri­od gen­er­al­ly means the depre­ci­a­tion deduc­tions occur soon­er. Instead of recov­er­ing the cost of every depre­cia­ble com­po­nent over near­ly three decades, some qual­i­fy­ing assets may gen­er­ate larg­er deduc­tions dur­ing the ear­li­er years of own­er­ship.

That is why I think of cost seg­re­ga­tion pri­mar­i­ly as a tim­ing strat­e­gy. It does not mean the prop­er­ty sud­den­ly became worth more. It gen­er­al­ly means some of the depre­ci­a­tion deduc­tions have been moved for­ward.

What About 100% Bonus Depre­ci­a­tion?

This has become par­tic­u­lar­ly impor­tant under cur­rent fed­er­al tax law.

For cer­tain qual­i­fied prop­er­ty acquired and placed in ser­vice after Jan­u­ary 19, 2025, the IRS states that a 100% spe­cial depre­ci­a­tion allowance applies unless the tax­pay­er makes an applic­a­ble elec­tion. Qual­i­fied prop­er­ty gen­er­al­ly includes tan­gi­ble MACRS prop­er­ty with a recov­ery peri­od of 20 years or less, sub­ject to the spe­cif­ic require­ments of the law.

That means qual­i­fy­ing prop­er­ty iden­ti­fied through a cost-seg­re­ga­tion study—such as cer­tain 5‑, 7‑, and 15-year assets—may poten­tial­ly qual­i­fy for this accel­er­at­ed depre­ci­a­tion treat­ment.

The build­ing itself gen­er­al­ly does not fall into that cat­e­go­ry because res­i­den­tial rental prop­er­ty uses a 27.5‑year recov­ery peri­od and non­res­i­den­tial real prop­er­ty gen­er­al­ly uses 39 years, both longer than the 20-year thresh­old.

This is one area where I would strong­ly encour­age investors to let their CPA review the actu­al depre­ci­a­tion sched­ules rather than mak­ing assump­tions based on a spon­sor pre­sen­ta­tion.

Not Every DST Investor Gets the Same Result

This is prob­a­bly one of the most impor­tant points in this arti­cle. Two investors can invest the same amount of mon­ey in the same DST and still have dif­fer­ent depre­ci­a­tion results.

Con­sid­er two investors who each acquire a $500,000 inter­est.

The first investor pur­chas­es the DST with cash.

The sec­ond investor acquires the same $500,000 DST inter­est as replace­ment prop­er­ty in a §1031 exchange.

Those investors may have the same dol­lar amount invest­ed, but they do not nec­es­sar­i­ly have the same tax basis.

A §1031 investor may bring for­ward basis and depre­ci­a­tion his­to­ry from the relin­quished prop­er­ty. That can affect the amount of depre­ci­a­tion avail­able on the replace­ment prop­er­ty.

So, when a spon­sor shows an illus­tra­tion of pro­ject­ed depre­ci­a­tion or poten­tial tax ben­e­fits, I would not auto­mat­i­cal­ly assume:

“That is the deduc­tion I will receive.”

It is an illus­tra­tion of the prop­er­ty or invest­ment. Your per­son­al tax result depends on your own basis and tax his­to­ry.

What Should You Look for in the Tax Pack­age?

If the DST prop­er­ty has under­gone a cost-seg­re­ga­tion study, your annu­al tax pack­age may con­tain a sep­a­rate depre­ci­a­tion or cost-seg­re­ga­tion sched­ule.

That sched­ule may divide depre­cia­ble basis among cat­e­gories such as:

• 5‑year prop­er­ty;
• 7‑year prop­er­ty;
• 15-year prop­er­ty;
• 27.5‑year res­i­den­tial rental prop­er­ty; or
• 39-year non­res­i­den­tial real prop­er­ty.

Those recov­ery peri­ods are part of the MACRS frame­work described by the IRS.  I would send the com­plete sched­ule to your CPA rather than just the sum­ma­ry page from the DST tax pack­age. The sup­port­ing detail can be impor­tant in deter­min­ing how depre­ci­a­tion applies to your par­tic­u­lar invest­ment.

Depre­ci­a­tion Is a Tax Deduc­tion, Not Cash Flow

This con­nects direct­ly with what we dis­cussed in Part 4.

Depre­ci­a­tion is a non­cash deduc­tion. The prop­er­ty does not write a check for depre­ci­a­tion. Yet the deduc­tion may reduce tax­able rental income.

That is one rea­son a DST investor may receive a cash dis­tri­b­u­tion that is high­er than the tax­able rental income report­ed for the year. But there is anoth­er side to the sto­ry.

Depre­ci­a­tion gen­er­al­ly reduces adjust­ed tax basis. That reduced basis can become impor­tant lat­er when the prop­er­ty is sold or oth­er­wise dis­posed of in a tax­able trans­ac­tion.

So, I would nev­er look at accel­er­at­ed depre­ci­a­tion only through the lens of:

“How much can I deduct this year?”

The bet­ter ques­tion is:

“How does this depre­ci­a­tion fit into my over­all tax his­to­ry and long-term invest­ment plan?”

Pas­sive-Activ­i­ty Rules Still Mat­ter

Even when a DST gen­er­ates sub­stan­tial depre­ci­a­tion deduc­tions, that does not auto­mat­i­cal­ly mean every investor can use those deduc­tions imme­di­ate­ly. Rental real estate activ­i­ty is gen­er­al­ly sub­ject to pas­sive-activ­i­ty rules unless an excep­tion applies. An investor’s abil­i­ty to use a loss may also depend on basis, at-risk lim­i­ta­tions, oth­er pas­sive income, and indi­vid­ual tax cir­cum­stances.

That is anoth­er rea­son two investors in the same DST can have dif­fer­ent tax out­comes. The cost-seg­re­ga­tion study may be per­formed at the prop­er­ty lev­el, but the ulti­mate tax ben­e­fit is deter­mined at the indi­vid­ual investor lev­el.

A Good Ques­tion to Ask Your CPA

When you receive a DST depre­ci­a­tion sched­ule, I think a very use­ful ques­tion is:

“How much of this depre­ci­a­tion actu­al­ly applies to my tax basis, and how much can I use this year?”

For a §1031 investor, I would add:

“How did my car­ry­over basis and pri­or depre­ci­a­tion affect these num­bers?”

Those ques­tions get direct­ly to the dif­fer­ence between the spon­sor’s prop­er­ty-lev­el infor­ma­tion and the investor’s per­son­al tax result.

The Bot­tom Line

Cost seg­re­ga­tion can be a valu­able part of real estate tax plan­ning because it may move qual­i­fy­ing prop­er­ty into short­er depre­ci­a­tion peri­ods and accel­er­ate deduc­tions. But the head­line num­ber is not the whole sto­ry.

A DST investor’s actu­al ben­e­fit can depend on the cost-seg­re­ga­tion study, prop­er­ty clas­si­fi­ca­tion, tax basis, pri­or §1031 exchanges, depre­ci­a­tion his­to­ry, pas­sive-activ­i­ty lim­i­ta­tions, and oth­er indi­vid­ual cir­cum­stances.

The prop­er­ty may have one cost-seg­re­ga­tion study, but every investor does not nec­es­sar­i­ly have the same depre­ci­a­tion result.

Investor/CPA Take­away

Cost seg­re­ga­tion may accel­er­ate depre­ci­a­tion by iden­ti­fy­ing qual­i­fy­ing assets with short­er recov­ery peri­ods. The actu­al investor ben­e­fit, how­ev­er, depends on the investor’s basis, pri­or exchanges, depre­ci­a­tion his­to­ry, applic­a­ble tax rules, and indi­vid­ual cir­cum­stances. Use the DST’s depre­ci­a­tion sched­ules as a start­ing point and let the investor’s tax pro­fes­sion­al deter­mine the per­son­al tax result.

In Part 7 of our DST.EDU series, we will look at:

Sam­ple Form 1098: Under­stand­ing Mort­gage Inter­est Report­ing in a DST.

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 can vary by invest­ment, spon­sor, prop­er­ty, report­ing method, and investor 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.