DSTs & 1031 Exchanges: What You Can and Can’t Do
A Straightforward Guide to Operating Restrictions, Property Management, and Investor Success
If you’re exploring Delaware Statutory Trusts (DSTs) for a 1031 exchange, here’s the reality: the difference between a successful DST investment and one that underperforms often comes down to understanding the rules—and sticking to them.
DSTs are powerful, tax-deferred tools, but they’re designed to be passive investments. Missteps in operations or oversight can put your 1031 exchange at risk. So let’s break down what’s allowed, what’s restricted, and how the right team makes all the difference.
DSTs & the IRS: Why Rules Matter
DSTs qualify for 1031 exchanges thanks to Revenue Ruling 2004-86, which “created the structure and restrictions that allowed the trusts to become eligible for tax-deferral benefits” (Tax Notes, 2025). This ruling set the framework that allows investors to defer capital gains taxes—but it comes with strict boundaries:
Investors cannot renegotiate leases, refinance debt, raise additional capital, or engage in active management once the offering closes.
Sponsors cannot cross the line into “material participation,” which would jeopardize 1031 eligibility.
In short: DSTs are hands-off by design, and compliance isn’t optional—it’s the foundation of the investment.
Sponsors: High-Level Oversight Only
During the offering period, DST sponsors are the architects: acquiring assets, structuring the trust, and marketing the opportunity. Once the offering closes, their role is about governance, not operations.
According to Investopedia, sponsors are limited to:
Approving major capital improvements
Reviewing financial reporting
Managing investor communications
Ensuring IRS compliance
Everything else—like daily operations or lease negotiations—is off-limits. Sponsors rely on property managers to keep the trust compliant and cash flowing.
Property Managers: The Unsung Heroes of DSTs
Property managers act as the buffer between sponsors and tenants, handling the operational heavy lifting while keeping the investment IRS-compliant. Rent.com defines their role as managing everything from “repairs and maintenance to subleasing and financial reporting for the property owner.”
Key responsibilities:
Property Operations & Maintenance: Repairs, routine upkeep, security, and vendor management
Tenant Relations: Lease renewals, move-ins/outs, subleasing, and rent collection
Financial Oversight: Expense management, cash reserves, and reporting to sponsors
A DST is only as strong as its property management. Poor management can erode cash flow, frustrate tenants, and threaten compliance—even if the property itself is high-quality.
Investor Considerations: What to Look For
Even though your role is passive, you still need to vet the team. Here’s what I look for:
Experience: How many DSTs has the property manager successfully operated?
Performance: Results in similar markets and property types
Fees & Structure: Transparent costs that match expected distributions
Market Knowledge: Local expertise to maximize occupancy and rental income
All of this should be disclosed in the DST’s offering memorandum, giving you the transparency needed to make an informed decision.
The Bottom Line
DSTs are powerful, hands-off vehicles for building tax-deferred wealth, but only if you:
Understand the IRS rules and operating restrictions
Choose sponsors who stay compliant
Partner with property managers who excel at operations and tenant management
When these pieces align, a DST can deliver consistent cash flow, preservation of your 1031 exchange, and long-term growth—without the headaches of direct property ownership. Let’s chat: https://www.johnnylynum.com/call
