Zero-coupon DSTs are typically associated with 1031 exchange debt replacement, but savvy accredited investors increasingly use them for broader tax, estate, and financial planning strategies — even outside of 1031 exchanges. With the integration of accelerated depreciation, cost segregation, and bonus depreciation, the benefits for direct cash investors are even more compelling.

1. Depreciation Shield (Especially for High-Income Investors)

Zero-coupon DSTs still provide depreciation deductions, even without income distributions. These non-cash deductions help offset other passive income, including K-1 income, effectively reducing taxable income. Investors benefit even without receiving current cash flow — which is ideal for high earners looking for paper losses.

Bonus Depreciation & Cost Segregation Advantage: Many zero-coupon DST sponsors employ cost segregation studies to reclassify a portion of the building into short-lived personal property (5-, 7-, and 15-year assets). These assets qualify for bonus depreciation, which was set at 100% for property placed in service before 2023 and 80% in 2023. This means investors can often deduct a significant portion of their investment in the first year — potentially exceeding 30–50% of their capital invested, depending on asset mix and timing.

2. Estate Planning and Wealth Transfer

Zero-coupon DSTs generate no current income, which means they don’t increase the estate's size due to annual DST cash flow. All appreciation occurs passively and tax- deferred. If held until death, the asset receives a step-up in basis, eliminating both capital gains and depreciation recapture for heirs — a powerful multi-generational wealth tool.

3. Tax Deferral Without 1031 (Via Trusts or Strategic Structures)

Zero-coupon DSTs can be held in charitable remainder trusts (CRTs), deferred sales trusts (DSTs), or Opportunity Zone wrappers, allowing investors to defer gains while controlling the timing and manner of liquidation — all without a traditional 1031 exchange. The tax- deferred appreciation still benefits from cost segregation and depreciation strategies.

4. Avoiding Current Tax Drag (NIIT, IRMAA, State Taxes)

By generating no income, zero-coupon DSTs help investors stay under critical income thresholds:

• Net Investment Income Tax (NIIT)
• Medicare IRMAA surcharges
• State income tax exposure

This helps affluent investors manage tax brackets and avoid triggering surtaxes.

5. Preserving Future 1031 Eligibility

Even when purchased with cash, zero-coupon DSTs qualify as 1031-eligible real property. Investors can roll forward their proceeds tax-deferred via:

• Another DST upon maturity
• A 721 UPREIT strategy into REIT shares

This gives cash investors future optionality while benefiting from real estate tax advantages in the present.

6. Matching Long-Term Wealth Planning Goals

Zero-coupon DSTs function like real estate-backed zero-coupon bonds. Investors use them to potentially:

• Defer income until a known liquidity event (e.g., retirement)
• Reduce current tax obligations
• Accumulate future equity for planned needs (e.g., charitable giving, tuition)

Summary: Powerful Depreciation Without Cash Flow

Depreciation, especially when accelerated through cost segregation and bonus depreciation, potentially allows zero-coupon DST investors to:

• Reduce passive income taxes
• Offset gain recognition
• Shelter Section 1031 boot
• Increase after-tax internal rate of return (IRR)

Even in a non-1031 setting, these DSTs unlock the full tax power of real estate — without the headaches of direct property management or current income reporting.

For more information, feel free to contact the team at Fortitude today. You can check out all of our valuable resources here.