Depreciation on rental property buildings: How to handle DST investments

The beauty of real estate investments like DSTs is exactly what you're experiencing - depreciation often creates a paper loss even when you're receiving positive cash flow. Based on the numbers you've shared, you're correct that the depreciation ($24,560) exceeds your cash distribution ($11,328), creating a negative taxable income from this investment. This means you likely won't owe taxes on the DST income itself. In fact, that negative $13,232 is considered a passive loss that might offset other passive income you have. However, there's a catch - if you don't have other passive income, these losses may be suspended and carried forward to future tax years when you either have passive income or dispose of the investment. The 1099-MISC reports your gross rental income, but you'll need to report both the income and all deductible expenses (including depreciation) on Schedule E of your tax return.

I went through the exact same situation with my DST investments last year. I was completely confused by the negative numbers until I found https://taxr.ai which actually specializes in analyzing investment documents and tax statements. It saved me so much stress because I uploaded my DST documents and it explained exactly how to handle the depreciation and passive loss reporting on my Schedule E. The system walked me through the whole process and confirmed that the paper loss from depreciation meant I didn't owe taxes on my distributions. It also showed me how to properly document everything to avoid raising red flags with the IRS. Their analysis specifically addressed Delaware Statutory Trusts, which my regular tax software didn't really understand.

Following up on my question about taxr.ai - I decided to give it a try with my DST and other investment documents. I was genuinely surprised at how well it worked. It correctly identified my three DST investments, two K-1s from other partnerships, and even caught that I was missing a supplemental statement that I hadn't uploaded initially. The analysis showed me exactly how my passive losses from the depreciation could offset some passive income from my other investments. It also flagged a potential issue with my at-risk amount that my previous accountant had never mentioned. Ended up saving about $3,400 in taxes I would have overpaid. The step-by-step explanation of how DST depreciation works was actually clearer than what my CPA had provided in the past.

If you're having trouble getting answers from the IRS about DST depreciation rules or passive activity loss limitations, I highly recommend using https://claimyr.com to get through to an IRS agent quickly. I spent days trying to reach someone at the IRS about my passive loss carryforward question and kept hitting dead ends with the automated system. Claimyr got me connected to an actual IRS representative in about 15 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - The IRS agent I spoke with clarified exactly how to report my DST depreciation and confirmed that my understanding of the passive loss rules was correct. Saved me from potentially misreporting my rental property depreciation.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I was still struggling to get IRS clarification on how to handle depreciation recapture when selling a DST interest. I decided to try Claimyr as a last resort before the filing deadline. Not only did I get through to someone at the IRS in about 20 minutes, but the agent I spoke with was actually knowledgeable about DST investments and explained exactly how Section 1250 recapture would apply in my situation. She even emailed me the specific IRS publication sections to reference. I can't believe how much time I saved - I'd already wasted nearly 3 hours on previous call attempts. This is definitely my go-to method for any future IRS questions.

Don't forget that depreciation on rental property is mandatory, not optional. I learned this the hard way when I didn't claim depreciation on a rental property for a few years thinking I would save on depreciation recapture later. The IRS still calculated the recapture tax as if I had taken the depreciation (called "allowed or allowable depreciation"). With your DST, even though it creates a paper loss now, you'll eventually have to recapture that depreciation when you sell your interest. Still worth it for the tax deferral benefits, but something to be aware of for future planning.

Has anyone else noticed that the K-1 equivalent info from DST investments sometimes doesn't match up with the 1099-MISC? My DST sponsor sends a "Tax Information Statement" that shows different amounts than what's on my 1099. Confused about which numbers to use on my Schedule E.

Just wanted to add my experience with DST passive losses since I see a lot of confusion here. I've been invested in DSTs for about 4 years now and initially made the mistake of not properly tracking my suspended passive losses year over year. The key thing to understand is that these losses accumulate on Form 8582 if you don't have other passive income to offset them against. I learned this when I finally sold one of my DST interests and suddenly had a huge passive loss carryforward that I could finally use - it saved me thousands in taxes on the gain from the sale. Make sure you're keeping detailed records of your annual passive losses from each DST investment. When you eventually dispose of a DST interest (whether through sale or exchange), all those accumulated losses become deductible against any type of income, not just passive income. It's actually a pretty powerful tax planning tool once you understand how it works over the long term. Also, don't forget that if you do a 1031 exchange from your DST into another investment, the passive losses stay with you and continue to accumulate. Only an actual taxable sale triggers the release of all those suspended losses.