Why Your DST Sponsor Can’t Just “Fix” Things: The Seven Restrictions Behind Every DST

If you place clients in Delaware Statutory Trusts, you should understand the trade at the heart of the structure. The IRS treats a DST as direct real estate ownership for 1031 purposes under Revenue Ruling 2004-86. That ruling is what makes the tax deferral work.

The price of that treatment is control. Once the offering closes, the trustee's powers are strictly limited. The industry calls these the seven restrictions, and they shape everything about how a DST behaves for its entire life.

1. No new capital. Once the offering closes, the DST cannot accept additional investor money. If the property needs cash the trust doesn't have, the trustee cannot go back to investors or bring in new ones.

2. No new or renegotiated debt. The trustee cannot refinance, restructure existing loans, or take on new borrowing. The financing you see at closing is the financing for the life of the deal.

3. No lease renegotiation. The trustee cannot renegotiate existing leases or sign new ones, with a narrow exception if a tenant goes bankrupt or becomes insolvent. The lease terms at closing are locked in.

4. No major improvements. Only ordinary repairs and maintenance are permitted. The trustee cannot reposition, expand, or materially alter the property.

5. No reinvestment of sale proceeds. If the property is sold, the DST distributes the proceeds. It cannot roll them into a new property.

6. Cash sits in short-term holdings only. Money held between distribution dates can only go into short-term government obligations, not anything designed to chase yield.

7. Cash gets distributed, not stockpiled. All cash must be paid out to investors currently, except for reasonable reserves for expenses.

Why this matters for your client conversations: these restrictions are not flaws in a particular sponsor's offering. They apply to every DST. They are also the reason sponsor selection matters so much. A DST cannot adapt its way out of a bad property, a weak lease, or a broken capital structure. The underwriting has to be right on day one, because there is no day two fix.

That is the right lens for due diligence. You are not evaluating a manager who can pivot. You are evaluating a fixed set of assets, leases, and financing that will run untouched for years. Ask about the tenant, the lease term, the debt structure, and the reserves. Those are the variables that decide the outcome, because the trustee cannot change any of them later.

This is educational information, not tax or legal advice. Every investor should consult their own tax advisor before acting.