The short answer
They are the things a DST trustee is not permitted to do if the trust is to stay a trust for federal tax purposes rather than become a partnership. The phrase is industry shorthand: the IRS never wrote a numbered list, and the restrictions are scattered through the facts of Rev. Rul. 2004-86 with a separate five-item list in its analysis. The consequence of breaking one is the point. A reclassified trust issues partnership interests, and a partnership interest is not real property, so the interest could no longer be acquired or disposed of in a 1031 exchange.
At a glance
| Source | Rev. Rul. 2004-86; the IRS uses no such phrase and gives no numbered list |
|---|---|
| Classification test | No power to vary the investment, Treas. Reg. § 301.7701-4(c)(1) |
| New capital | No additional contributions of assets, including money, after closing |
| Debt | No renegotiation of the loan and no new borrowing |
| Leases | No new or renegotiated leases with anyone other than the existing tenant |
| Capital work | Only minor non-structural modifications, unless required by law |
| Reserves | Short-term obligations maturing before the next distribution, held to maturity |
| Escape hatch | The debt and lease limits lift on the tenant's bankruptcy or insolvency |
The IRS never wrote seven of anything, and no two firms number them the same way
Read Rev. Rul. 2004-86 end to end and the phrase does not appear. What appears is a description of one trust agreement's limits in the statement of facts, and a separate list of five powers in the analysis that would change the answer.
The industry lists are reconstructions, and they differ. 1031 Crowdfunding opens its seven with the bar on accepting contributions after the offering closes and includes "invest any cash to profit from market fluctuations" as its own item; Legal 1031 numbers the same territory differently, treating required distributions and reserve investment restrictions as separate entries.
Neither is wrong. Treat the number seven as a mnemonic and the ruling as the authority, because a dispute would be decided on the ruling's language rather than on anyone's numbering.
The restrictions as the ruling actually words them
These come from the trust agreement described in the ruling's facts. Every one of them is a limit on the trustee, not on you.
The last two are obligations rather than prohibitions, which is why some lists carry six items and others eight. The substance is identical.
- No new money: the trustee may not "accept additional contributions of assets (including money) to DST" once the offering has closed.
- No touching the debt: the trustee "may not renegotiate the terms of the debt used to acquire Blackacre," and may not borrow anew.
- No reinvestment: the trustee "may not exchange Blackacre for other property" or "purchase assets other than the short-term investments described above."
- No leasing activity: the trustee "may not renegotiate the lease with Z or enter into leases with tenants other than Z."
- No real capital work: the trustee "may make only minor non-structural modifications to Blackacre, unless otherwise required by law."
- Reserves parked, not managed: cash must go into short-term obligations "maturing prior to the next distribution date," held until maturity.
- Cash out the door: the trustee "is required to distribute all available cash less reserves" to the beneficial owners in proportion to their interests.
The list that would actually decide a case has five items, and it sits in the analysis
Near the end of the ruling the IRS states what would flip the result, and this is the passage to quote if anyone ever argues about it. A trust whose trustee holds the power to do one or more of five things is a business entity rather than a trust.
Those five are: "(i) dispose of Blackacre and acquire new property; (ii) renegotiate the lease with Z or enter into leases with tenants other than Z; (iii) renegotiate or refinance the obligation used to purchase Blackacre; (iv) invest cash received to profit from market fluctuations; or (v) make more than minor non-structural modifications to Blackacre not required by law."
Note what the test is about: holding the power, not exercising it. A trust agreement that grants the trustee an unused right to refinance has a classification problem on the day it is signed.
Tenant bankruptcy is the one door the ruling deliberately leaves open
The debt and lease restrictions are not absolute. Both carry the same qualifier in the ruling's facts: the trustee may not renegotiate the loan, renegotiate the lease or take a different tenant "except in the case of Z's bankruptcy or insolvency."
That exception is narrow and event-driven. It is not a general power to re-tenant a building whose occupant is merely struggling, or to refinance a loan that has become expensive.
It is also why single-tenant structures make people nervous, since the exception exists precisely because the tenant failing is the scenario the structure cannot otherwise survive. Tenant concentration risk in single-tenant versus portfolio trusts weighs that exposure.
What breaking one would cost: partnership classification, and no way back to section 1031
The ruling spells out the consequence. A trust with those extra powers "will be a business entity which, if it has two or more owners, will be classified as a partnership for federal tax purposes," unless it is treated as a corporation under section 7704 or elects corporate treatment.
It then closes the obvious escape route: because the trust's assets "will not be owned by the beneficiaries as coowners under state law, DST will not be able to elect to be excluded from the application of subchapter K." The section 761(a) election that would have preserved like-kind treatment is unavailable.
Under current law the bar operates through the definition of real property. Treas. Reg. § 1.1031(a)-3 lists co-ownership among the interests that are real property and excludes "interests in a partnership (other than an interest in a partnership that has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K)." The old statutory exclusion for "certificates of trust or beneficial interests" that the ruling cites at § 1031(a)(2)(E) was removed when the 2017 Act narrowed section 1031 to real property, but the outcome for a reclassified trust is the same.
Read the restrictions as a description of the investment, not just a tax footnote
The limits tell you what kind of asset you are buying long before they tell you anything about audit risk. A vehicle that cannot raise capital, cannot refinance, cannot re-lease and cannot renovate is a vehicle designed to hold a stabilised, already-leased, already-financed property and then sell it.
So the trust cannot execute a turnaround, and it cannot call you for money if things go wrong; whether DSTs can do value-add or development and how a DST pays for a new roof follow that through.
Offering documents answer the restrictions with two devices you will meet in the risk factors: a master lease that puts operating decisions with a master tenant, and a springing LLC that converts the trust if the property gets into trouble. DST master leases and what a springing LLC means for your next exchange cover both. Confirm how your own offering handles them with your CPA or attorney.
Related questions
Do the restrictions bind me, or only the trustee?
Only the trustee. You have no management role to restrict, which is the same reason you get no vote; see who controls a DST.
If a springing LLC is triggered, have the restrictions been broken?
The conversion is designed to happen before a prohibited act, so the trust ceases to exist rather than misbehaving. The cost is that what you then hold is an LLC interest, which is why the springing LLC page matters to your next exchange.
Can the trustee sell the property early?
Selling is not among the prohibitions; reinvesting the proceeds is. A sale generally ends the trust and returns your share, which is where your next 1031 out of a DST begins.
Does a fixed-rent escalator count as renegotiating the lease?
No. The ruling's own lease adjusts by "a fixed rate or an objective index, such as an escalator clause based upon the Consumer Price Index," provided the adjustment is outside the parties' control.
Why can't the trust just keep cash for a rainy day?
It can hold a reasonable reserve, but the money must sit in short-term obligations held to maturity and everything above the reserve must be distributed. Managing that cash for return would be a power to vary the investment.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Rev. Rul. 2004-86 (IRS) - the trust agreement restrictions, the five powers that cause business-entity classification, and the unavailability of a section 761(a) election
- Treas. Reg. § 301.7701-4(c)(1) - investment trusts and the power to vary the investment
- Treas. Reg. § 1.1031(a)-3 - real property definition, co-ownership included and partnership interests excluded
- 26 U.S.C. § 1031(a) - like-kind exchanges limited to real property after the 2017 amendment
- 1031 Crowdfunding - What is a Delaware Statutory Trust (one published seven-item list)
- Legal 1031 Exchange Services - What is a Delaware Statutory Trust (a differently ordered seven-item list)