What counts as income for the accredited investor income test?

The rule sets a number and stops: there is no definition of income to apply

Rule 501(a)(6) accredits a natural person with individual income over $200,000 in each of the two most recent years, or joint income with a spouse or spousal equivalent over $300,000 in each of those years, who reasonably expects the same level this year. The word income is left undefined, and the SEC's summary of the definition repeats the figures without adding one.

When the SEC rewrote the companion net worth test in 2011, its release noted that neither the Securities Act nor its rules define net worth and applied the commonly understood meaning. No similar statement about income was found, so the ordinary meaning, measured year by year, is the working rule, with staff interpretations settling the edges.

Whose income is added together is a separate question. Whether a spouse's income counts toward accreditation covers the joint route and the spousal equivalent; this page is about what goes into the figure.

What SEC staff have said counts, and what does not

Three interpretations in the Division of Corporation Finance's Securities Act Rules interpretations touch the content of income. Interpretation 255.16 counts amounts contributed on the participant's behalf to a profit-sharing or pension plan, to the extent the rights are vested, so a vested employer match counts though it never reached your pay.

Interpretation 255.17 goes the other way: a purchaser generally may not include unrealized capital appreciation, so the rise in value of your rental, your index fund or your home is not income until realised. Interpretation 255.48 lets the issuer convert income not reported in U.S. dollars at the last-day-of-year rate or the year's average.

Interpretation 255.15 governs consistency, not content: you meet the individual test in all three years or the joint test in all three, unless your marital status changed along the way.

• Counts: salary, bonus, self-employment profit, net rental income, pension and retirement distributions, realised gains, vested employer plan contributions.
• Does not count: unrealised appreciation in property or securities, per interpretation 255.17.
• Not addressed by any interpretation: whether rental income is measured gross or after depreciation; the returns a sponsor reads show it net.

Why the gain on your rental sale rarely gets you there

A sale of a rental produces a realised gain, and nothing in the rule or the interpretations excludes it. But it lands in one year. If your salary was $150,000 in each of the two prior years, a $300,000 gain this year gives you one qualifying year and two failing ones, and interpretation 255.15 does not let the current year stand in for the past.

Where the gain helps is the forward-looking limb. A seller who cleared $210,000 in each prior year from salary and rent, and whose rent has now stopped, can point to the sale-year gain as the reason this year will still clear $200,000. The gain closes the gap ahead, not the gap behind.

What a sponsor actually reads: the IRS forms, not your spreadsheet

Rule 506(c)(2)(ii)(A) deems a sponsor to have verified income if it reviews any IRS form reporting your income for the two most recent years, naming Form W-2, Form 1099, Schedule K-1 to Form 1065 and Form 1040, and takes your written statement that you expect to qualify this year.

For a landlord the 1040 is the document, and Schedule E reaches it after depreciation and expenses. The safe harbour names forms, not a line on them, so whether a questionnaire asks for total income, adjusted gross income or something else is the sponsor's choice; ask before you assume. The verification routes and their timing are set out in whether accreditation has to be verified for a 1031 DST.

A Rule 506(b) trust has no verification requirement and relies on the sponsor's reasonable belief, which usually rests on your questionnaire. The two exemptions are compared at Rule 506(b) versus Rule 506(c).

Worked example: $170,000 of salary and $40,000 of net rent, then the sale

Hypothetical, round numbers. You are single, earned $170,000 of salary in each of the two most recent years, and your rental netted $40,000 a year, so each 1040 showed about $210,000. You sold the rental in June. This year brings $170,000 of salary, $20,000 of rent and a $250,000 gain. Both prior years and this year clear $200,000: you are accredited on income.

Lower the salary to $150,000. Both prior years show $190,000 and fail, and this year's gain changes nothing about them. The income route is closed, so you turn to net worth, where the released equity and your retirement accounts count; what counts toward the net worth test runs that list.

Passing either test does not shrink the risk on the other side. A DST interest trades on no exchange, is sold when the sponsor decides, can reduce or stop its distributions, and can lose the money you put in. Take both tests to your CPA with the filed returns before you identify a DST, because the day-45 list cannot be amended afterwards.

If you retired this year, the forward-looking limb is the one that fails

The third limb looks forward. A seller who earned $220,000 in each of the two prior years but retired in January, and now expects $90,000 of pension and Social Security, cannot reasonably expect to reach the same level this year, so the income route fails even though both past years pass. Pension and IRA distributions reported on 1099 forms are not excluded, so a retiree whose distributions clear the threshold still qualifies. For most new retirees, though, net worth is the test to run, and DSTs for small exchanges covers what follows once the gate is passed.