Glossary

Approximately 75% of DST (Delaware Statutory Trust) offerings conduct cost segregation studies.

DSTs are structured as pass-through entities for tax purposes, meaning rental income, expenses, and depreciation deductions flow directly to investors (typically reported via a grantor trust letter rather than a K-1). This allows investors to claim their pro rata share of depreciation on their personal tax returns, enhancing tax efficiency—especially when paired with strategies such as 1031 exchanges for capital gains deferral.

Cost segregation is a common enhancement in this setup. It involves a study (usually performed or commissioned by the DST sponsor) that reclassifies portions of the property’s basis into shorter recovery periods—such as 5-year personal property (e.g., carpets, fixtures) or 15-year land improvements (e.g., landscaping, parking)—instead of the standard 27.5-year (residential) or 39-year (commercial) straight-line depreciation. This accelerates deductions in the early years of ownership, reducing taxable income and improving cash flow without changing the total depreciation over the asset’s life.

Not every DST sponsor provides or incorporates a cost segregation study (some offerings rely on simpler allocations), but industry sources indicate it has become best practice for the majority of DSTs across multifamily, industrial, retail, and similar property types. Investors in these offerings benefit from the sponsor-supplied breakdown for tax reporting purposes. In rarer cases where a study isn’t provided upfront, an investor might pursue one independently (subject to the DST structure and sponsor approval), but sponsor-led studies are the norm for those that “allow” or facilitate it.

Keep in mind that tax outcomes depend on individual circumstances, property type, and current IRS rules (e.g., bonus depreciation eligibility). Always consult a tax advisor or CPA familiar with DSTs for your specific situation, as the exact benefits vary by offering.