THE OKLAHOMA BAR JOURNAL 26 | MAY 2026 DELAWARE STATUTORY TRUSTS Legal Structure and IRS Acceptance Governed by the Delaware Statutory Trust Act, DSTs are trust entities that allow numerous investors to possess fractional shares in real property through beneficial ownership of the titleholding trust.6 Investors in a DST are not direct owners of the real estate but instead own an undivided interest in the assets held by the trust, while the DST holds title to the property for the benefit of its many investors. In 2004, the IRS recognized DSTs’ beneficial interest as qualified/like-kind replacement property for real property relinquished within §1031 exchanges.7 Via Rev. Rul. 2004-86, the IRS importantly distinguished DSTs from limited partnership (LP) interests for the purpose of §1031 transactions. The IRS further specified that beneficial interests are synonymous with direct ownership interests under §1031, that debt must be allocated pro rata for exchange purposes and that active management must be conducted by the DST and not by its beneficial interest holders.8 Consequently, this revenue ruling effectively made it possible for taxpayers to conduct a qualifying §1031 exchange transaction in a manner that incorporates passive management strategies of the replacement property. In other words, the taxpayer is no longer relegated to being actively involved in the continual management of their replacement property (as was customary practice with most §1031 exchanges), should they instead prefer to take a more passive role while still retaining/enjoying the tax benefits of owning such directly held real estate interests. IRS DST Parameters: ‘Seven Deadly Sins’ While Rev. Rul. 2004-86 effectively opened the §1031 door to DSTs, the IRS tempered its acceptance of using such structured vehicles within the private letter ruling by requiring DSTs to be limited in the actions they may take. As such, DSTs: May not obtain additional capital May not acquire additional debt or refinance current debt May not reinvest any subsequent sale proceeds May not make capital expenditures; it is limited to making normal repair and maintenance expenses May not enter into new leases or *renegotiate existing leases9 May not invest cash between distribution dates to its beneficial owners in anything other than shortterm securities Must distribute all cash (other than necessary reserves) on a current consistent basis To deal with these limitations, DSTs tend to contain provisions for springing into an LLC taxed as a partnership (commonly known as a “Springing LLC”) if action prohibited by the IRS within the DST format is needed. While this action is normally not taxable, it does run the risk of limiting future §1031 exit options. Tenants, Toilets and Trash: DSTs and Passive Management Among seasoned real estate investors, the burdens of active property management are often summarized – somewhat tonguein-cheek – by the well-known phrase “tenants, toilets and trash.” This trinity of persistent frustrations often causes once-eager real estate investors to begin searching for viable exit ramps as they face the day-to-day oversight of active property operations and management. The operational realities of being a landlord often detract Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.
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