Do You Have to Be Accredited to Invest in a DST?

In most cases, yes. Delaware Statutory Trust interests are almost always sold as private placements under Regulation D, and those offerings are generally limited to accredited investors. For an individual, that usually means income above 200,000 dollars, or 300,000 dollars with a spouse or spousal equivalent, in each of the last two years, or a net worth over 1,000,000 dollars not counting your primary residence. Holding certain securities licenses can also qualify you. Meeting the test is a starting point, not a recommendation, and a licensed broker dealer still has to decide whether an offering is suitable for you.

Why are DSTs limited to accredited investors?

A DST interest is a security. Sponsors could register each offering with the Securities and Exchange Commission, but that is expensive and slow, so most rely on the private placement exemptions in Regulation D. Those exemptions generally restrict sales to accredited investors, on the theory that people with more income, assets or financial training can better evaluate and absorb the risks of an unregistered, illiquid investment.

That is also why you buy a DST interest through a licensed broker dealer and receive a private placement memorandum rather than a public prospectus. The accredited investor rule is part of the same framework.

What is the income test?

For an individual, the income test is met if you earned more than 200,000 dollars in each of the two most recent years and reasonably expect to reach the same level in the current year. Joint income with a spouse or spousal equivalent must exceed 300,000 dollars in each of those years, with the same expectation for the current year.

Two points trip people up. First, the test looks at two full years, not one good year. Second, the gain from a single property sale is generally a one time event, so a large capital gain in the year you sell does not by itself establish a pattern of income. The broker dealer will look at the full picture.

What is the net worth test?

The net worth test is met if your net worth, alone or together with a spouse or spousal equivalent, is more than 1,000,000 dollars. The key rules are about your home.

• ›The value of your primary residence is excluded. Home equity does not count toward the 1,000,000 dollars.
• ›The mortgage on your home is generally excluded too, up to the home's fair market value.
• ›Debt above the home's value counts as a liability. If you owe more than the house is worth, the excess reduces your net worth.
• ›Recent borrowing against the home can count. If the mortgage balance increased in the 60 days before you invest, other than to buy the home, that increase is generally treated as a liability.

Everything else, including investment real estate, retirement accounts, brokerage accounts and cash, generally counts as an asset, and other debts count as liabilities.

How does that work with real numbers?

Illustrative example only. These figures are invented to show how the test is applied and do not describe any real investor or outcome.

Suppose a married couple owns a home worth 900,000 dollars with a 400,000 dollar mortgage, a rental property with 750,000 dollars of equity, retirement accounts of 350,000 dollars, and a 50,000 dollar car loan.

• ›Home equity of 500,000 dollars: excluded
• ›Rental equity: 750,000 dollars
• ›Retirement accounts: 350,000 dollars
• ›Car loan: minus 50,000 dollars
• ›Net worth for the test: 750,000 plus 350,000 less 50,000, which is 1,050,000 dollars

That is more than 1,000,000 dollars, so the couple would generally meet the net worth test. Now suppose they had taken a 100,000 dollar home equity line 30 days earlier to pay for a renovation. That new borrowing would generally count as a liability, net worth for the test would fall to 950,000 dollars, and they would no longer meet it on net worth alone.

The threshold is also "more than" 1,000,000 dollars. A figure of exactly 1,000,000 dollars does not meet it.

Can a professional license qualify you?

Yes. Since 2020, individuals who hold certain professional certifications in good standing qualify as accredited investors regardless of income or net worth. The SEC currently recognizes the General Securities Representative license (Series 7), the Investment Adviser Representative license (Series 65), and the Private Securities Offerings Representative license (Series 82). The license must be active, not lapsed.

What about trusts, LLCs and other entities?

Many owners hold investment property in an LLC, partnership or trust, and that entity may be the one doing the exchange. Entities have their own tests. Broadly, an entity can qualify if it has more than 5,000,000 dollars in assets and was not formed specifically to make the investment, or if every one of its equity owners is an accredited investor. A trust can generally qualify with more than 5,000,000 dollars in assets if it was not formed to make the investment and is directed by someone with the knowledge and experience to evaluate it. A revocable trust is often looked through to the person who created it.

Because a 1031 exchange requires the same taxpayer on both sides, the entity that sells must generally be the one that buys. That makes it important to confirm early whether the selling entity itself meets the test, not just its owners.

How is accredited status verified?

It depends on which exemption the offering uses.

• ›Rule 506(b) offerings generally allow the investor to represent their status, usually through a detailed questionnaire, with the broker dealer reviewing it as part of its suitability process.
• ›Rule 506(c) offerings, which are allowed to advertise publicly, require the issuer to take reasonable steps to verify status. That often means tax returns or W 2 forms for the income test, account statements and a credit report for the net worth test, or a written confirmation from a CPA, attorney, registered investment adviser or broker dealer.

Plan for this inside your exchange timeline. Paperwork that takes a week to assemble is a week of your 45 day identification period.

Is meeting the test enough?

No. Accredited status only means you are allowed to be offered the investment. A broker dealer also has to evaluate whether a specific offering suits your goals, liquidity needs, time horizon and existing holdings. DST interests are generally illiquid, the sponsor controls the property, distributions are not guaranteed, and you can lose some or all of your principal. Sponsors may also set minimum investments above the regulatory floor.

What if you are not accredited?

Then most DST offerings are not available to you, but a 1031 exchange still is. Owners who do not meet the test generally exchange into directly owned replacement property, such as another rental, a commercial building or a net leased property. Your CPA and Qualified Intermediary can help you weigh those options against your timeline.

If a DST is on your list, confirm your status before your sale closes, not after. Knowing whether you qualify, and how you will document it, keeps one more surprise out of a schedule that already has very little room in it.