What counts toward the $1 million accredited investor net worth test?

Net worth is assets minus liabilities, measured on the day the DST interest is sold to you

Neither the Securities Act nor Regulation D defines net worth. The SEC's 2011 Release 33-9287 applies the commonly understood meaning, assets less liabilities, and the SEC's investor bulletin says the same in plainer words.

Values are estimates of fair market value; the release says the rules require no third-party opinion on valuation for the residence or any other asset or liability. You still sign for the figures, and a Rule 506(c) sponsor will want statements behind them, as accredited investor rules for DST investments describes.

Rule 501(a) measures every category at the time of the sale of securities. For an exchanger the relevant date is when the trust takes your money, not the day your rental closes or the day you sign the identification letter.

What counts: the rental's equity, the money with your intermediary, retirement accounts and the rest

Because the rule names one exclusion, the asset side is broad. The SEC's bulletin lists bank accounts, 401(k) and IRA accounts, other investments and a car as included assets, and student loans, car loans and other debts as liabilities. Staff interpretation 255.14 adds vested employee stock options, and 255.49 counts an account or property held with a non-spouse to the extent of your percentage.

Investment real estate counts at estimated value less its loan. After your sale closes, that equity becomes exchange proceeds your intermediary holds for you; on the plain reading they are still yours, but no SEC guidance names exchange accounts, so if your total turns on that balance, have the sponsor's counsel confirm it.

Joint net worth may include a spouse's or spousal equivalent's assets. Under staff interpretation 255.11 nothing has to be in both names and the subscription can be yours alone; whether a spouse's income counts toward accreditation sets out the joint routes.

• Rental or commercial property you still own: estimated value minus its mortgage.
• IRAs, 401(k)s and pension balances, at their statement value.
• Brokerage, bank, money market and certificate of deposit balances.
• Vested stock options and your share of accounts held with others.
• Vehicles and other personal property at an honest estimate.

What is left out: the home, and its mortgage up to the home's value

Rule 501(a)(5)(i) treats your primary residence three ways. The home is not an asset. Debt secured by it is not a liability, up to the home's estimated fair market value at the time of sale. Debt above that value is a liability.

The 2011 release gives the arithmetic. An investor with $2,000,000 of net worth on a conventional count, including a $1,200,000 home with an $800,000 mortgage, has $1,600,000 for the test: the $400,000 of home equity drops out. Reverse it with a $1,400,000 mortgage on the same home and the $200,000 excess is a liability, though the home itself is ignored.

Only the primary residence is carved out; a second home, a vacation rental or land counts at its equity. Assuming all real estate is excluded undercounts you, and counting the home overcounts.

The 60-day rule: a home equity draw taken to enlarge a DST subscription counts against you

The same paragraph adds a look-back. If home-secured debt at the time of sale exceeds the amount outstanding 60 days earlier, the increase is a liability, unless it came from buying the home. The release explains why: otherwise an owner could turn excluded home equity into included cash by borrowing shortly before subscribing.

The SEC's bulletin shows the effect: $1,220,000 of included assets and $200,000 of other liabilities would pass, but a $100,000 home equity balance under 60 days old drops net worth to $920,000. The borrowing is a liability, and per the release its proceeds are not an asset once spent or parked outside the calculation.

For an exchanger topping up a subscription with borrowed money, sequence is everything: draw more than 60 days before the DST closing and the ordinary rules apply; draw the week before and the draw counts against you. Adding your own cash to an exchange covers the tax side.

Worked example: a small landlord who lands at $955,000

Hypothetical, round numbers. Your home is worth $650,000 with a $300,000 mortgage. You sold a rental, repaid its loan, and $350,000 sits with your intermediary. Your IRA holds $450,000, a brokerage account $150,000, and your car is worth $25,000. You owe $15,000 on the car and $5,000 on cards.

The home and its mortgage drop out. Included assets total $975,000 and included liabilities $20,000, so net worth for the test is $955,000: not accredited on this route. A $500,000 IRA instead would put you at $1,005,000, over the line.

Now suppose you draw $50,000 on a home equity line three weeks before the DST closing. The draw is a liability under the 60-day rule and the cash is an asset, so at best they cancel; once the cash has gone to the trust it counts on neither side and you are $50,000 worse off. Take your balance sheet to your CPA before day 45, because every name on the identification list should be one you can close on.

If the figure comes in under $1 million, the exchange still works; the DST may not

The income route in Rule 501(a)(6) and the licence route in Rule 501(a)(10) come next; what counts as income for the accredited investor test and whether a Series 65 makes you accredited cover them. Fail all three and most DSTs are closed, because a Rule 506(c) trust sells only to verified accredited investors.

Your net worth changes who may buy, not what you are buying: a DST interest has no public market, the sponsor picks the sale date, distributions may shrink or stop, and invested capital can be lost. Section 1031 has no wealth test, so real estate you buy directly stays open, as replacement options for non-accredited investors explains.