As you’re likely aware, a Delaware Statutory Trust (DST) is a passive investment that provides passive income from the underlying real estate assets. When tax season comes, investors can expect forms like the K-1 or 1099—often thick and filled with numbers, codes, and footnotes.
Parsing the complex details can be time-consuming, so many investors focus on the headline figures like total income or capital gains. However, it’s also important to look at the fine print to gain real insights. Having a clear idea of the data helps you assess the health of your investments and make more informed decisions.
In this blog post, Realized 1031 shares some of the critical pieces of information from these forms so you know what to look for.
Why Do You Get the DST K-1 and DST 1099 Documents?
The K-1 (Form 1065) and 1099 forms are not actually provided to beneficiaries. It’s the DST version that you’ll receive, given how this investment vehicle is treated as a grantor trust. As such, you get a substitute 1099 form or the grantor letter. This document is often compared to the Form 1065 Schedule K-1, since there are many similarities.
In essence, the grantor letter is provided so you can access the information needed for tax reporting. The substitute 1099 provides details such as taxable income details and deductions that may apply—information that you’ll then use for filling out Schedule E (Form 1040).
Critical Details to Check in Substitute 1099 Form
It’s easy to simply look at the summaries, especially since your CPA will do the filing for you. However, checking the footnotes and specifics can help you assess the operational health of the DST. Here are some aspects that matter.
- Income vs. Distributions: Scrutinizing the difference between the net income (from the activities of the underlying assets) against the cash distribution (what you eventually receive) provides lots of insights. Particularly, high income and low distribution could mean increased operational costs or debt service. If such is the case, then the DST may be experiencing financial stress during that year.
- Expense Line Items: We also recommend looking beyond the summarized “Total Expenses.” Details like repairs vs. capital expenditures and the allocation for reserves are important. High reserve contributions can reduce your cash flow, while excessive repair or maintenance costs may suggest an aging property or poor management.
- Interest Expense and State Filings: The grantor letter will also detail your portion of the mortgage interest, which is considered a deductible. Plus, you’ll find details for state property tax filings. If the DST follows a composite return strategy, then you may not need to file for every state.
How These Details Influence Returns
Looking at the fine print of the grantor letter helps you assess the current health of the DST and plan ahead. For example, a low difference between the income and cash distribution can suggest a healthy investment. If the reverse is true, it’s just as important to know about. Moreover, footnotes detailing a temporary increase in reserves or significant debt service explain why your current cash distribution may be lower than the property’s gross income. These non-cash allocations can be a sign of robust financial health or, conversely, operational stress.
With these details in mind, you can plan for future tax liability and gain a clearer picture of the DST’s long-term performance.
Wrapping Up: The Details That Matter in DST K-1 or 1099 Form
DSTs distribute the substitute 1099 form for investors each year to report income and other important financial information concerning the investment. A savvy investor must look at the fine details of the package to understand how the DST is performing and what the future looks like. These details tell a story that allows you to make smarter decisions in your DST portfolio.
Sources:
https://www.irs.gov/forms-pubs/about-schedule-e-form-1040
https://accountinginsights.org/dst-tax-reporting-for-real-estate-investors/
https://www.delawareinc.com/blog/what-is-a-delaware-statutory-trust/
