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What are the “seven deadly sins” of DST investing?

Delaware Statutory Trusts (DSTs) must adhere to strict IRS regulations to qualify for 1031 exchange tax deferral benefits. These rules, often called the “seven deadly sins” of DST investing, are designed to maintain the DST’s passive structure and preserve its like-kind exchange eligibility. While investors receive an ownership interest in the trust, they relinquish voting rights and management control. Here are the seven deadly sins of DST investing: 

1. No additional equity contributions: Investors make a single equity contribution upon formation. DSTs cannot issue capital calls, so all future expenses must be planned and funded upfront. 
2. No refinancing of debt: Any mortgage placed on the property at the time of acquisition cannot be refinanced during the DST’s ownership. 
3. No reinvestment of sale proceeds: When a DST property is sold, proceeds must be distributed to investors and cannot be reinvested into another asset. 
4. Limits on capital expenditures: Only normal repairs and maintenance are permitted. To prevent speculative investing, any major improvements, upgrades or development projects are prohibited. 
5. Limits on cash investments: Any excess cash held by the DST must be invested conservatively in short-term debt or similar low-risk vehicles—no speculative investments are allowed. 
6. Mandatory cash distributions: The DST must distribute earnings and proceeds to investors on a predetermined schedule, ensuring passive income but limiting reinvestment flexibility. 
7. No new leases or lease renegotiations: The DST itself cannot negotiate new leases or modify existing ones. Instead, a master lease structure is typically used, allowing a third-party master tenant to handle lease agreements. 

By following these rules, DSTs maintain 1031 exchange eligibility, ensuring investors can continue deferring taxes while enjoying a passive real estate investment.