The Overlooked Tax-Equivalent Yield Benefit of DST Investments
Delaware statutory trust (DST) investments offer several tax advantages for investors looking for a passive income strategy that delivers portfolio diversification and the potential for steady cash flow throughout various market cycles.
One often overlooked benefit of DST investments that investors should understand is tax equivalent yield (TEY). TEY is a powerful tool that allows for a direct comparison of after-tax DST returns with fully taxable investments. By deferring capital gains taxes and benefiting from depreciation recapture, DST investments may produce higher after-tax returns. Depreciation recapture is a tax provision for the IRS to collect taxes on a profitable sale of an asset that the taxpayer had used to offset taxable income and in 2025 is capped at 25 percent.
By computing TEY, DST investors can get a clear view of the true after-tax return potential and assess whether the DST is offering competitive returns compared to other investment vehicles. TEY highlights the benefit of the tax deferral and depreciation shield of a DST investment, allowing for investors to make more informed, strategic decisions. Each investor’s tax circumstances are unique, and this information does not constitute tax advice. Investors must consult with their tax advisor.
What is Tax Equivalent Yield?
Tax equivalent yield is a calculation that estimates the pre-tax return an investor would need from a fully taxable investment to match the after-tax return provided by the tax-advantaged DST investment.
Hypothetical Illustration of DST Distributions and TEY
Below is an example comparing a $100,000 DST investment with an anticipated cash-on-cash distribution of four percent to a second fully taxable $100,000 investment using the TEY calculation. Because the investor also receives a share of the depreciation of the property, less of the distribution is subject to tax increasing the amount of income sheltered.
By calculating tax equivalent yield, investors can make an “apples-to-apples” comparison between DSTs and other income-generating, fully taxable investments, ensuring that they make informed decisions based on specific tax situations. Understanding TEY is particularly beneficial for investors seeking an attractive long-term investment strategy.
Content courtesy of Inland.
