Who Can Invest in DSTs? Your Guide to Accredited Investor Requirements
Complete Guide to Accredited Investor Requirements for DST Investments
Key Takeaway: DST Accredited Investor Requirements
Only accredited investors and qualifying entities can invest in Delaware Statutory Trusts (DSTs). Individual accreditation requires $200,000+ annual income ($300,000 joint), $1 million+ net worth (excluding primary residence), or qualifying professional licenses. Entities need $5 million+ assets OR all owners must be individually accredited. Understanding these DST accredited investor requirements is crucial for successful 1031 exchange planning.
When planning your 1031 exchange or considering passive real estate investments, understanding the accredited investor DST requirements is fundamental. The SEC establishes strict accreditation guidelines to protect retail investors from potentially unsuitable investments due to factors like low liquidity or complex risk profiles. This comprehensive guide covers individual and entity accreditation requirements, common misconceptions, and critical planning considerations for DST investments.
What is an Accredited Investor?
Only accredited investors and entities that meet specific accreditation criteria are permitted to invest in DSTs. The Securities and Exchange Commission (SEC) establishes these guidelines to protect public retail investors from potentially unsuitable investments due to factors like low liquidity or complex risk profiles. This also applies to investments in Tenants in Common (TICs) or non-traded REITs.
Important Note
This information is not tax advice. Investors must discuss their individual circumstances and suitability for these investments with their CPA and/or tax advisor before entering a 1031 exchange.
Individual Accreditation Requirements
To qualify as an accredited investor, individuals typically need to meet one of three criteria (not all three):
1. Income Requirements
An individual must have an annual income of at least $200,000, or $300,000 when combined with a spouse, in each of the two most recent years. There must also be a reasonable expectation of earning the same or higher income in the current year.
2. Net Worth Requirements
An individual must possess a net worth exceeding $1 million, either individually or jointly with a spouse. Crucially, the value of your primary residence is specifically excluded from this calculation.
3. Professional Credentials
Certain professional licenses can confer accredited investor status, such as holding a Series 7, Series 65, or Series 82 license. Additionally, knowledgeable employees of a private fund, including executive officers, directors, trustees, general partners, advisory board members, or those serving in a similar capacity, may also qualify.
Entity Accreditation Requirements
For investments made through an entity such as a corporation, partnership, limited liability company (LLC), or revocable trust, different requirements apply:
Primary Entity Requirement
Your entity must possess total assets in excess of $5 million, and it must not have been formed specifically to acquire the securities.
Alternative Qualification
If your entity does not meet the $5 million asset threshold, you may still qualify if each of the entity's owners individually qualifies as an accredited investor. It's an "either/or" scenario: either the entity has $5 million in assets, or all its owners are individually accredited.
DST Accredited Investor Verification Process
The verification process for DST accredited investor status involves several key steps:
Documentation Required
Choose one based on how you qualify:
- • Tax returns for the past two years (for income verification), OR
- • CPA letter confirming net worth calculation, OR
- • Bank statements and brokerage account statements (for net worth verification), OR
- • Professional license verification (Series 7, Series 65, Series 82, etc.), OR
- • Entity formation documents (if investing through entity)
Verification Timeline
The DST accredited investor verification typically takes 2-5 business days once all documentation is submitted. Working with experienced advisors can expedite this process and ensure accuracy.
Important Nuances and Common Misconceptions
Understanding the finer points of DST accredited investor definition can prevent potential issues:
Personal vs. Investment Assets for DST Qualification
When calculating individual net worth for qualified investor Delaware Statutory Trust eligibility, personal assets such as your primary residence, vehicles, or vacation homes are generally excluded. Instead, focus on investment real estate, retirement accounts, bank accounts, and brokerage accounts. Always consult with your CPA regarding these distinctions for DST accredited investor definition compliance.
Net Worth vs. Total Assets
For individual accreditation, the $1 million threshold is a net amount (assets minus liabilities, such as mortgages). However, for entity accreditation, the $5 million threshold refers to gross assets; liabilities are not subtracted. For example, a property valued at $5 million with a $2 million loan still meets the total asset requirement.
Entity Ownership Requirements
Critical Point for DST Accredited Investor Requirements: If an LLC or S Corp with less than $5 million in total assets is investing, every single owner, regardless of their stake, must be individually accredited. It is vital for investors to review their organizational documents and ensure all owners are verified as meeting the DST accredited investor definition. Issues can arise when heirs inherit small portions of an entity without meeting the accreditation criteria.
Common Trust Complications
Revocable vs. Irrevocable Trusts
While most entities, including revocable trusts with less than $5 million in assets, can be accredited if all owners/trustors are individually accredited, irrevocable trusts face stricter rules. Irrevocable trusts must have $5 million in total assets without exception; individual accreditation of owners does not apply.
Investors should consult with their estate attorneys and/or CPAs to confirm their trust's qualifications. We have seen cases where trusts mistakenly identified as revocable were, in fact, irrevocable, leading to disqualification.
Automatic Trust Conversion Risk
Critical Planning Consideration
Some revocable trusts are structured to automatically become irrevocable upon the death of one of the trustors. This conversion can inadvertently disqualify an investor from participating in a 1031 exchange into a DST.
For instance, if a couple invests in a DST through a revocable trust and one spouse passes away, the trust's change to irrevocable status could prevent a future 1031 exchange into another DST or direct private placement if the remaining owner(s) do not meet the new, stricter criteria.
It is crucial to discuss these potential scenarios with your trust attorneys to ensure appropriate accommodations are in place.
The 506(b) Securities Exception
There are certain private securities offerings, specifically 506(b)s, that may allow a limited number of non-accredited investors to participate under specific conditions. If this is a relevant consideration, it is advisable to explore these options with your CPA or advisor.
Essential Action Steps
Proactive Planning Recommendations
- • Verify Early: Confirm accreditation status well in advance of time-sensitive 1031 exchanges
- • Entity Review: Examine all organizational documents and entity structures
- • Trust Analysis: Work with estate attorneys to understand trust classifications and potential conversions
- • Professional Consultation: Engage CPAs and tax advisors for accurate net worth calculations
- • Estate Planning: Address potential heir qualification issues in advance
By proactively addressing accreditation requirements and consulting with your CPA or tax advisors well in advance of a time-sensitive 1031 exchange, you can avoid costly errors and ensure a smooth investment process. Do the research on your entities and trusts to confirm your eligibility for direct private placement investments.
Frequently Asked Questions
About Thomas Wall
Thomas Wall has nearly a decade of experience in alternative investments and real estate. He has helped financial advisors at banks and wirehouses navigate a broad spectrum of equity, debt, and retirement investments at AIG which contributed to over $200MM of capital invested. From there, Thomas specialized in helping real estate investors navigate the transition from active management to passive real estate investing. He advises high-net-worth investors on 1031 exchanges, DSTs, private real estate offerings, and REITs. He has helped investors through hundreds of 1031 exchanges, placing over $230MM of equity into real estate. Today, with Anchor1031, he focuses on providing his investors with the tools they need to accurately assess risk and successfully defer taxes when repositioning their real estate portfolio and making the transition from active manager to passive investor.
Continue Learning About DSTs
The Seven Deadly Sins of a DST
Learn about the critical IRS restrictions that govern DST operations and their impact on investment strategy.
DST Fee Structure Analysis
Comprehensive analysis of Delaware Statutory Trust fees, debt risks, and investment considerations.
Ready to Discuss Your 1031 Strategy?
Schedule a call with our 1031 exchange specialists and let us help you navigate the benefits and risks of DSTs and TICs.
Disclosure
Tax Complexity and Investment Risk
Tax laws and regulations, including but not limited to Internal Revenue Code Section 1031, bonus depreciation rules, cost segregation studies, and other tax strategies, contain complex concepts that may vary depending on individual circumstances. Tax consequences related to real estate investments, depreciation benefits, and other tax strategies discussed herein may vary significantly based on each investor's specific situation and current tax legislation. Anchor1031, LLC and Great Point Capital, LLC make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about all tax aspects with respect to your particular circumstances. Please note that Anchor1031 and Great Point Capital, LLC do not provide tax advice.
The information contained in this article is for general educational purposes only and does not constitute legal, tax, investment, or financial advice. This content is not a recommendation or offer to buy or sell securities. The content is provided as general information and should not be relied upon as a substitute for professional consultation with qualified legal, tax, or financial advisors.
Tax laws, regulations, and IRS guidance regarding 1031 exchanges are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is never indicative of future performance. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another.
All real estate investments, including 1031 exchanges, are speculative and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. Before making any investment decisions or implementing any 1031 exchange strategies, readers should consult with their own qualified legal, tax, and financial professionals who can provide advice tailored to their specific circumstances. Prospective investors should not proceed unless they can readily bear the consequences of potential losses.
While the author is a partner at Anchor1031, the views expressed are educational in nature and do not guarantee any particular outcome or create any obligations on behalf of the firm or author. Neither Anchor1031 nor the author assumes any liability for actions taken based on the information provided herein.