--- title: "Multi-State DSTs: Withholding, Nonresident Returns, and Common Pitfalls" description: "Learn more about multi-state DSTs: withholding, nonresident returns, and common pitfalls." image: https://www.realized1031.com/hubfs/iStock-2207002297-modified-e91cf9db-a92a-454a-82f7-6a1355b8a39b.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Multi-State DSTs: Withholding, Nonresident Returns, and Common Pitfalls Posted Dec 22, 2025 ![iS-2207002297](https://www.realized1031.com/hs-fs/hubfs/iStock-2207002297-modified-e91cf9db-a92a-454a-82f7-6a1355b8a39b.jpg?width=2120&height=1192&name=iStock-2207002297-modified-e91cf9db-a92a-454a-82f7-6a1355b8a39b.jpg) As you enter a Delaware Statutory Trust (DST), you begin earning money from the income-generating activities of the underlying properties. However, there is a chance that your DST holds assets across multiple states. This reality presents a few complexities, such as how state income tax is filed and paid. Since you’re “sourcing” income as a nonresident for an asset outside of your own state, you are required to pay income tax. How do you go about this scenario? What are the steps the DST sponsor takes to prevent bureaucratic complexity? Realized 1031 shares the process below, as well as tips to avoid common pitfalls. Let’s take a closer look! ### Is State Income Tax Withheld by the DST Sponsor? To answer this question, we must first clarify how the IRS recognizes DSTs. This investment vehicle is [separate from the investors](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf) and is not a taxpayer entity since income passes through. This allows the trust to avoid entity-level federal income tax. However, the tax treatment is different for investors. Each investor is treated as a disregarded owner of their pro-rata share of the underlying property. The DST entity is “disregarded” in favor of treating the investor as if they owned a piece of the building directly. In a multiple-state DST, the structure allows each investor to be treated as a direct owner of the underlying assets. You pay the state-level taxes, and the sponsor’s role is to simply report the financials through the [grantor letter](https://accountinginsights.org/dst-tax-reporting-for-real-estate-investors/). In other words, the sponsor doesn’t withhold tax. This is true in most states. There are exceptions, of course. In California, the Franchise Tax Board requires the DST sponsor (or trustee) to [withhold a percentage of the income allocable](https://www.ftb.ca.gov/forms/2025/2025-588-instructions.html#:~:text=California%20Revenue%20and%20Taxation%20Code,from%20California%20sources%20unless%20an) to nonresident investors. This ensures the state receives its share of taxes upfront. ### Filing and Paying Nonresident Income Tax Returns Each nonresident beneficial interest holder must file and pay income tax for each state where a DST property belongs. The rules for each state are different, with some not requiring income tax at all. Others, like California, [charge up to 13.3%](https://taxfoundation.org/data/all/state/state-income-tax-rates/) for those who belong to the highest tax brackets. The more states the DST has properties in, the more complex income tax payments can become. Thankfully, some DSTs do offer composite returns, especially if they have properties in several states. This additional service allows the DST to file one single return for the investors, offering convenience by trading off tax benefits and deductions. ### Common DST Pitfalls to Avoid for Multi-State DSTs Given the complexity of income tax for multi-state DSTs, it is easy to get trapped in pitfalls that could lead to tax complications. Here are the steps to take to avoid these issues. - **Double Taxation: **Failing to claim “Credit for Taxes Paid to Other States” on your resident state tax return can result in double taxation. This issue is only applicable if the composite returns are not used. - **Missing Filings: **Don’t assume sponsor withholding or composite returns satisfy all your tax obligations. You must confirm your non-resident filing status in every state where the DST operates, or face penalties for unfiled returns. - **Ignoring Minimum Fees: **There are some states that impose flat-rate entity taxes or fees regardless of gains or losses. Checking the DST’s disclosure documents can help you keep track of these fixed costs. ### Wrapping Up: The Basics of Income Tax for Multi-State DSTs Multi-state DSTs add complexity to your investment, especially if you’re earning income from a state where you’re not a resident. Some states have withholding requirements; others do not. Some do not have income tax at all. Solutions like a composite return help streamline the filing process as opposed to doing it state by state, although there are certain trade-offs. Whatever the case, working with your CPA and sponsor is critical to navigating this requirement, ensuring that you’re filing correctly, avoiding tax penalties, and protecting your investment. **Sources:** [https://taxfoundation.org/data/all/state/state-income-tax-rates/](https://taxfoundation.org/data/all/state/state-income-tax-rates/) [https://accountinginsights.org/dst-tax-reporting-for-real-estate-investors/](https://accountinginsights.org/dst-tax-reporting-for-real-estate-investors/) [https://www.irs.gov/pub/irs-drop/rr-04-86.pdf](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf) [https://www.ftb.ca.gov/forms/2025/2025-588-instructions.html](https://www.ftb.ca.gov/forms/2025/2025-588-instructions.html#:~:text=California%20Revenue%20and%20Taxation%20Code,from%20California%20sources%20unless%20an) Download The Guide To DSTs [![The Investor's Guidebook To DSTs](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/DST-eBook-250.png?width=250&height=250&name=DST-eBook-250.png "See if Delaware Statutory ...") ](https://www.realized1031.com/blog/multi-state-dsts-withholding-nonresident-returns-and-common-pitfalls#blogform) Download eBook ---   --- ### The Investor's Guidebook To DSTs ![Download The Guide To DSTs](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/DST-eBook-550.jpg?width=550&height=650&name=DST-eBook-550.jpg) See if Delaware Statutory Trusts are right for you. 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For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "As you enter a Delaware Statutory Trust (DST), you begin earning money from the income-generating activities of the underlying properties. However, there is a chance that your DST holds assets across multiple states. This reality presents a few complexities, such as how state income tax is filed and paid. Since you’re “sourcing” income as a nonresident for an asset outside of your own state, you are required to pay income tax. How do you go about this scenario? What are the steps the DST sponsor takes to prevent bureaucratic complexity? Realized 1031 shares the process below, as well as tips to avoid common pitfalls. Let’s take a closer look! Is State Income Tax Withheld by the DST Sponsor? To answer this question, we must first clarify how the IRS recognizes DSTs. This investment vehicle is separate from the investors and is not a taxpayer entity since income passes through. This allows the trust to avoid entity-level federal income tax. However, the tax treatment is different for investors. Each investor is treated as a disregarded owner of their pro-rata share of the underlying property. The DST entity is “disregarded” in favor of treating the investor as if they owned a piece of the building directly. In a multiple-state DST, the structure allows each investor to be treated as a direct owner of the underlying assets. You pay the state-level taxes, and the sponsor’s role is to simply report the financials through the grantor letter. In other words, the sponsor doesn’t withhold tax. This is true in most states. There are exceptions, of course. In California, the Franchise Tax Board requires the DST sponsor (or trustee) to withhold a percentage of the income allocable to nonresident investors. This ensures the state receives its share of taxes upfront. Filing and Paying Nonresident Income Tax Returns Each nonresident beneficial interest holder must file and pay income tax for each state where a DST property belongs. The rules for each state are different, with some not requiring income tax at all. Others, like California, charge up to 13.3% for those who belong to the highest tax brackets. The more states the DST has properties in, the more complex income tax payments can become. Thankfully, some DSTs do offer composite returns, especially if they have properties in several states. This additional service allows the DST to file one single return for the investors, offering convenience by trading off tax benefits and deductions. Common DST Pitfalls to Avoid for Multi-State DSTs Given the complexity of income tax for multi-state DSTs, it is easy to get trapped in pitfalls that could lead to tax complications. Here are the steps to take to avoid these issues. Double Taxation: Failing to claim “Credit for Taxes Paid to Other States” on your resident state tax return can result in double taxation. This issue is only applicable if the composite returns are not used. Missing Filings: Don’t assume sponsor withholding or composite returns satisfy all your tax obligations. You must confirm your non-resident filing status in every state where the DST operates, or face penalties for unfiled returns. Ignoring Minimum Fees: There are some states that impose flat-rate entity taxes or fees regardless of gains or losses. Checking the DST’s disclosure documents can help you keep track of these fixed costs. Wrapping Up: The Basics of Income Tax for Multi-State DSTs Multi-state DSTs add complexity to your investment, especially if you’re earning income from a state where you’re not a resident. Some states have withholding requirements; others do not. Some do not have income tax at all. Solutions like a composite return help streamline the filing process as opposed to doing it state by state, although there are certain trade-offs. Whatever the case, working with your CPA and sponsor is critical to navigating this requirement, ensuring that you’re filing correctly, avoiding tax penalties, and protecting your investment. Sources: https://taxfoundation.org/data/all/state/state-income-tax-rates/ https://accountinginsights.org/dst-tax-reporting-for-real-estate-investors/ https://www.irs.gov/pub/irs-drop/rr-04-86.pdf https://www.ftb.ca.gov/forms/2025/2025-588-instructions.html", "articleSection" : [ "Delaware Statutory Trusts (DST)" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2025-12-22T15:00:03+0000", "datePublished" : "2025-12-22T15:00:03+0000", "description" : "Learn more about multi-state DSTs: withholding, nonresident returns, and common pitfalls.", "headline" : "Multi-State DSTs: Withholding, Nonresident Returns, and Common Pitfalls", "image" : { "@type" : "ImageObject", "height" : 1192, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2207002297-modified-e91cf9db-a92a-454a-82f7-6a1355b8a39b.jpg", "width" : 2120 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/multi-state-dsts-withholding-nonresident-returns-and-common-pitfalls", "name" : "Multi-State DSTs: Withholding, Nonresident Returns, and Common Pitfalls", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2207002297-modified-e91cf9db-a92a-454a-82f7-6a1355b8a39b.jpg" } ```