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A little clarity for your next decision.
A little clarity for your next decision.
By Jerry Baker
An accredited investor is a person or entity that meets a legal test for buying certain private investments. The most common tests for individuals use income or net worth, but other paths exist. Meeting a test opens a door; it does not show that the investment behind it is right for you. [1]
If you are selling a rental property and looking at Delaware statutory trust investments, or DSTs, you may be asked about your finances before you can invest. That question serves a different purpose from the questions about your exchange.
Your exchange review asks whether the deal meets the tax rules. Your investor review asks whether you can buy the offering. Then there is the question I care about just as much: does this investment make sense for your needs?
Section 1031 itself does not impose an accredited-investor income or wealth test on a direct purchase of qualifying real estate. It applies to eligible real property held for business or investment. A DST interest may qualify as replacement property under a specific structure, while its sale also has to follow securities rules. These are separate tests, even when they apply to the same purchase. [2] [3]
A large exchange balance does not answer every question. It does not tell me what money you need outside the exchange, whether you can wait years for a sale, or how you would cope with lower income. I want those answers before a portfolio starts to look finished.
You may qualify through one applicable path; you do not have to meet both the income and net-worth tests. The following table gives the common starting points. The full rules and offering documents still control. [4]
| Path | Basic threshold | What to check |
|---|---|---|
| Individual income | More than $200,000 in each of the last two years | A reasonable expectation of the same level this year |
| Joint income | More than $300,000 with a spouse or spousal equivalent in each of those years | The current-year expectation also applies |
| Net worth | More than $1 million, alone or jointly with a spouse or spousal equivalent | Special rules exclude your main home and address its debt |
| Certain licenses | Series 7, 65, or 82 held in good standing | Passing a test alone is not the full good-standing check |
The SEC also lists roles tied to a particular issuer or private fund, and paths for certain family clients. Those categories have limits. A job title at one company does not grant access to every private offering. [1]
The words “more than” matter. Exactly $1 million does not exceed $1 million. When your figures are close to a threshold, have the calculation reviewed instead of rounding them upward. Small debts and changes in asset values may decide which side of the line you are on.
Status is assessed at the time the securities are sold. It is not a lifetime label earned when you first cross a threshold. [4] Keep a dated record of the figures you use. If the purchase takes longer than expected, ask whether documents need updating. A past approval is useful background, but it should not take the place of current facts.
Look at each prior year separately. For an individual using the income path, one very strong year cannot make up for another year below the threshold. You also need a sound basis for what you expect to earn this year. [4]
Consider a hypothetical investor with individual income of $225,000 and $240,000 in the two prior years. The investor expects $230,000 this year from a continuing job. Those figures support the basic income test. The review still needs to confirm what counts as income and why that forecast makes sense.
Now change the earlier year to $175,000 and the later year to $310,000. Their average is above $200,000. The earlier year still misses the individual test. The investor may qualify through net worth or another path, but averaging does not fix this one.
A property sale can make the question less obvious. Gross sale price, cash left after paying off a loan, taxable gain, and annual income are different figures. A closing statement alone does not establish which income number belongs in a securities questionnaire.
Ask your CPA to help when the record includes a business sale, unusual gains, partnership income, or a recent move from work into retirement. Explain which test the issuer is checking. That makes the question far more useful than asking, “Am I wealthy enough?”
I also want to know what changed. A high prior salary may show that you meet part of a legal test. It does not show that you can afford the same risks after the salary stops.
A useful worksheet has four columns: the asset or debt, your share, its current value, and the record supporting that value. List bank and brokerage accounts, other investments, real estate other than your main home, and debts. Use current, supportable figures. Then apply the special home rules. [5]
Here is a simplified hypothetical example. It assumes sole ownership, no unusual debt, and no recent borrowing against the home.
| Item | Amount counted |
|---|---|
| Bank and brokerage assets | $650,000 |
| Investment property value | $700,000 |
| Total counted assets | $1,350,000 |
| Loan on investment property and other counted debts | −$250,000 |
| Illustrative net worth | $1,100,000 |
The arithmetic is $1,350,000 minus $250,000. Do not put only the property's equity on the asset side and then subtract its loan again. That counts the same debt twice.
Suppose the investor also owns a primary home worth $1 million with a stable $600,000 mortgage. Under the usual home exclusion, neither the home's value nor that portion of its mortgage enters this example. The $400,000 of home equity does not increase the result. [5]
Valuation deserves care. An old purchase price is not automatically today's value. A private business stake may take more work to value than a bank account. If a number cannot be supported, flag it. A precise spreadsheet built on a hopeful estimate is still a hopeful estimate.
Keep the worksheet separate from your spending plan. Net worth can include assets that are hard to sell. Passing this test does not mean the same amount of cash is available for living costs or emergencies.
First, home-secured debt above the home's estimated market value counts as a liability. Second, a rise in home-secured debt during the 60 days before the securities sale generally counts too, except when it results from buying the primary home. These rules prevent the home exclusion from hiding certain debt. [4]
For a simple underwater-home example, assume a home is worth $900,000 and its mortgage is $1 million. The excess is $100,000. If the investor otherwise has $1.05 million of counted net worth, subtracting that excess brings the figure to $950,000. The net-worth path would not work on those facts.
For a separate example, assume an investor borrows another $150,000 against an existing home 30 days before investing. The mortgage remains below the home's value. Keeping that new cash in a bank account does not simply create $150,000 of qualifying net worth: the recent increase must also be addressed as a liability.
Real cases may involve a refinance, a line of credit, a home purchase, and overlapping rules. Have the reviewer work through them together. Do not combine examples mechanically or subtract the same amount twice.
The point is to start early. If you are gathering paperwork for an investment and also changing a home loan, tell the person reviewing your status. They need the sequence and balances, not just the latest monthly statement.
Joint net worth can include assets owned separately by either spouse or spousal equivalent. Using that test does not force the securities purchase to be joint. A spousal equivalent is a cohabitant in a relationship generally like that of a spouse; the category is not a way to combine finances with any roommate or business partner. [5]
Decide who will actually buy the investment before assembling documents. The individual, joint owners, trust, or LLC on the subscription papers must be reviewed under the proper path. Changing the buyer late in the process can raise new questions.
The SEC currently recognizes Series 7, 65, and 82 licenses held in good standing as a professional path. A real estate license, an MBA, or years of rental ownership alone are not substitutes for those credentials. Check the current license rules. Passing an exam years ago does not mean you still qualify. [12]
Also separate a proposed policy change from an effective rule. A news story about expanding access, or a course called “accredited investor training,” does not establish a new legal route. Ask for the current rule and the exact category being used.
An entity needs its own analysis. Some corporations, partnerships, and LLCs qualify with assets above $5 million and a condition that they were not formed just to buy the offered securities. A trust's $5 million path also requires a sophisticated person to direct the purchase. Another category covers entities whose equity owners are all accredited. [4]
Other entity and family-office paths have different terms. Some use investments rather than total assets; some focus on assets under management. These measures are not the same. Ask the offering's reviewer to identify the exact rule paragraph, then gather evidence for that paragraph. [1]
Imagine a family LLC with four owners. Three say they meet an individual test. The fourth does not. A majority vote cannot make the all-owners path true. The reviewer must consider another valid route, if one exists, rather than assuming the three qualified owners carry the fourth.
A trust calls for similar care. The trustee's personal wealth alone does not settle every trust's status. Provide the relevant trust and ownership records through the agreed secure process. Have counsel address questions about who owns the interest and who has power to act.
For a 1031 exchange, do not change ownership just to make a questionnaire easier. Ask the tax and legal team how the proposed buyer fits the exchange before forming or moving assets into an entity. A securities answer can create a separate tax question.
Two common private-offering rules are Rule 506(b) and Rule 506(c). They use the accredited-investor definition, but their marketing and verification requirements differ. The issuer is the entity selling the securities.
| Question | Rule 506(b) | Rule 506(c) |
|---|---|---|
| Can the offering use general public advertising? | No | Yes, subject to the rule's conditions |
| Must every purchaser be accredited? | Not always; limited non-accredited participation has added conditions | Yes |
| How is accredited status assessed? | The issuer needs a reasonable belief | The issuer must take reasonable steps to verify |
Under 506(b), the limit is 35 non-accredited purchasers in any 90-calendar-day period, with purchaser-counting rules. Those purchasers must have the required financial knowledge alone or with a purchaser representative, and added disclosure rules apply. That legal option does not mean a particular sponsor accepts non-accredited investors. [6]
Rule 506(c) permits broader advertising while requiring accredited purchasers and verification. Seeing an offering publicly does not make it open to everyone, and an advertisement does not establish regulatory approval. [7]
The SEC says checking a box alone, without other knowledge of the investor, is insufficient for either assessment standard. A reasonable-belief process can consider the relationship and known facts. A verification process must take the steps the rule requires. [8]
This explains why “another sponsor accepted my form” may not settle the next offering's review. Ask which exemption applies and what evidence is needed. Do that before the exchange clock turns a paperwork question into a rush.
Rule 506(c) provides several nonexclusive methods. An income review can use IRS forms for the prior two years plus a written current-year expectation. A net-worth review can use certain recent asset and debt records. It also needs written confirmation that all debts were disclosed. The rule's detailed conditions matter. [9]
Another method uses written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA. The professional must confirm the required review and conclusion within the prior three months. This can reduce the financial records sent directly to an issuer, but ask whether that issuer accepts the proposed documentation. [9]
For someone the same issuer previously verified, a conditional method permits a current written representation for five years after that verification, absent information to the contrary. It is not a five-year government credential or automatic acceptance by every sponsor. [8]
Plan the document handoff. Ask who will receive the files, which records are needed, how to transmit them, and whether a professional's confirmation will work. Do not send a tax return in an ordinary email merely because someone asks urgently. Confirm the recipient through a channel you already trust.
Keep your answers honest and current. If assets fall, debts rise, or expected income changes, tell the reviewer. A document from last year should not be used to conceal a change that matters today.
An approved email address can let you into the Baker 1031 investor portal. That access check is not a review of your income, assets, or debt. It does not certify accredited status, reserve an allocation, or approve you for a specific offering.
Likewise, saving an opportunity or building a draft portfolio is a planning step. The figures can help frame a discussion, but the sponsor's subscription process and the firm's required review still follow.
Keep three questions separate:
A minimum investment is separate too. An offering might require a particular dollar amount, but having that amount does not automatically establish accredited status. Nor does meeting a legal threshold force the sponsor to accept a purchase.
FINRA explains that a broker's recommendation of a private placement to a retail customer is subject to Regulation Best Interest. Its suitability rule applies where appropriate outside that retail standard. Wealth alone does not remove the need to assess the customer, investment, costs, conflicts, and reasonably available alternatives. [10]
Here is how I would think through three hypothetical situations:
I would rather discuss those tradeoffs before an investment is selected. We can compare the planned hold, loans, tenant risks, fees, and sources of cash flow. We can also test what happens if the expected exit arrives later or at a lower price.
Private placements can be difficult to resell, may provide less information than registered offerings, and can lose substantial value, including the full investment. A Form D filing is a notice, not SEC approval. Read the risk disclosures even when the brochure looks familiar. [11]
Start by naming the buyer and the qualification path you expect to use. Then gather the records that support it. Ask what the review needs while there is time to fill any gaps. Do not let a deadline drive the decision.
Next, set aside the legal test and write down what you need from the investment. Include income, available cash, time, and the amount of loss you could withstand. Bring both sets of answers to the discussion.
If the documents reveal a problem, there is no benefit to hiding it. Another qualification path may apply. Another type of investment may fit better. Or the right answer may be to stop. Eligibility should make the conversation possible, not make the decision for you.
No. These are separate qualification paths. You need to meet an applicable category, including all its conditions. The individual income path also looks at both prior years and the current-year expectation. [1]
Generally, no. The home is excluded. Home-secured debt has special treatment, including rules for debt above home value and certain increases during the prior 60 days. Review recent borrowing rather than simply excluding every mortgage balance. [5]
Yes, through an applicable path such as net worth. Retirement itself does not disqualify someone. Still, the need for cash and stable income should be reviewed separately from legal eligibility.
There is no universal government certificate that approves you for all private investments. Issuers assess your status under the applicable rules. A verification letter is evidence for a review, not a guarantee of acceptance or investment quality. [8]
Some exemptions permit it under specific conditions. Rule 506(b) has a limited route with experience and disclosure requirements, while Rule 506(c) requires accredited purchasers. An offering can set narrower admission terms, so ask about that offering rather than assuming access. [6] [7]
No. Portal access lets you use the website. It is separate from accredited-status review, any other offering requirements, and acceptance of subscription documents. A saved portfolio remains a draft until the required investment process is completed.
No. The exchange amount may be relevant to your finances, but it is not a substitute for an applicable qualification test. Debts, ownership, other assets, and the identity of the buyer still matter. A property sale price alone is not net worth.
No. It does not protect principal or guarantee distributions, tax results, or an exit date. Review the investment and your ability to bear its risks, even after you meet the eligibility requirements. [11]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.