Do I need to be an accredited investor to do a 1031 exchange?

Section 1031 tests the property and the calendar, never the taxpayer's balance sheet

Section 1031(a)(1) provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if it is exchanged solely for real property of like kind to be held the same way. Paragraph (a)(2) excludes property held primarily for sale. Paragraph (a)(3) adds the 45-day identification and 180-day receipt limits. That is the whole eligibility test.

The regulation fills in the mechanics: the identification must be in a signed writing delivered before the 45 days end, the description must be unambiguous, three properties of any value or more within 200 percent of what you sold may be named, and a qualified intermediary is anyone other than you or a disqualified person who enters into a written exchange agreement to acquire and transfer the properties.

None of those tests asks how much you earn or own. An exchange of a $180,000 condo is governed by the same words as an exchange of an $18 million warehouse.

Accreditation enters the moment the replacement is sold as a security

A DST interest answers two questions at once. For tax, Rev. Rul. 2004-86 treats the holder of a beneficial interest in a properly restricted trust as owning an undivided interest in its real estate, so the interest is like-kind replacement property. For securities law, the same interest is sold to you in a private placement, which is why a DST is a security and only a registered firm may sell one.

Private placements are made under Regulation D. Rule 506(c) allows the sponsor to market the offering only if all purchasers are accredited investors and it takes reasonable steps to verify that; Rule 506(b) permits up to 35 non-accredited but sophisticated purchasers in any 90 days, an allowance sponsors rarely use because of the disclosure it triggers. So the wealth test comes from the offering document you sign, not from the Code.

The same logic applies to opportunity zone and bonus depreciation funds, which are also private offerings with their own investor gates. A DST or fund interest is illiquid, has no public market, sells when the sponsor decides and can lose principal; accreditation is the regulator's proxy for the ability to carry that.

The three individual routes in one paragraph

Rule 501(a) accredits a natural person with net worth over $1,000,000, alone or with a spouse or spousal equivalent, with the primary residence and its mortgage left out; or with income over $200,000 individually or $300,000 jointly in each of the two most recent years and expected again this year; or holding a Series 7, 65 or 82 licence in good standing. Each route has its own page: what counts toward the net worth test, what counts as income, and whether passing the Series 65 is enough.

For most rental sellers the net worth route decides it, because the equity in the building being sold counts in full and only the home is excluded. A seller with $600,000 of rental equity and $450,000 in retirement accounts is over the line before the sale closes, whatever their salary.

An entity that sold the property is tested on its own: an LLC not formed to make the purchase qualifies with more than $5,000,000 of assets, and any entity qualifies when every equity owner is accredited. A trust has its own $5,000,000 route in Rule 501(a)(7), with the purchase directed by a sophisticated person.

A self-test to run before you list, so the identification list is made of things you can buy

Run the three routes with your CPA before the property goes on the market, not after the 45-day clock starts. The answer decides whether a DST belongs on the identification list at all, and a name you cannot close on wastes one of three slots under the three-property rule, as how many properties you can identify explains.

• Net worth: list every asset except the home, subtract every debt except the home's mortgage up to its value, and treat any new home borrowing from the last 60 days as a debt.
• Income: check each of the two most recent years separately, alone against $200,000 or jointly against $300,000, and ask whether this year will match.
• Licence: a Series 7, 65 or 82 held in good standing; a passed Series 65 without a state registration does not count.
• If none applies, plan the exchange around real estate you buy directly, or ask whether a direct title security's offering admits you, from the start.

What changes if you are, and are not, accredited

If you qualify, the exchange and the DST market are both open, and the questions become size and fit, which DSTs for exchanges under $250,000 covers for small exchanges.

If you do not, the exchange is still yours to make. Replacement options when you are not accredited lists what can be bought directly, and selling a rental when you are not an accredited investor walks through the full path, including the direct title security, which is sold through offering documents and should be asked about before it is identified.