Who Can Invest in a DST? | Accredited Investor Rules for 1031 Exchanges (Episode 1)

Hello and welcome to Exchange Insights, your resource for 1031 market intelligence and education. My name is Tom Wall, partner here at Anchor1031. This is episode one of our DST Structure series. Today's video discusses who can and cannot invest in a DST.

I often take this for granted as a 1031 advisor, but before you even think about the kind of deals you should invest in, investors need to understand if they're even eligible to participate in DST offerings at all. So the question is who can invest in a DST?

DSTs are private placements, so investors need to be accredited in order to participate. The SEC has specific guidelines for determining accredited status, and it's going to be your advisor's and broker dealer's responsibility to help make sure that you qualify for these investments. If you don't meet the accreditation standards, you won't be able to participate in a DST, which could leave you stuck with paying a big tax bill. There are too many investors that assume they're accredited without fully understanding the rules, and there are a few nuances and gray areas that can affect DST investors specifically.

So let's talk about who can be an accredited investor. The SEC has established two primary methods for individuals to qualify: either via income or via net worth.

For income, an individual must have earned over $200,000 in each of the past two years with a reasonable expectation of the same income in the current year. If filing jointly with a spouse, that threshold increases to $300,000.

For net worth, an individual or joint spouse can qualify if their combined net worth exceeds $1,000,000, excluding their primary residence.

There's also a third path. Certain professionals, such as licensed investment advisors or those holding Series 7, Series 65, or Series 82 credentials, can qualify as accredited investors through their professional status.

So to recap, to be an accredited investor, an individual needs to have earned $200,000 or more for two consecutive years. If married, the threshold is $300,000 combined. An individual can qualify if they have a net worth of $1,000,000 or more excluding their primary residence, or if you're a licensed financial professional.

There are also pathways for LLCs, corporations, and other entities to be accredited investors, which is important because many real estate investors own property in an entity. So to cover entities, LLCs, partnerships, and corporations can qualify for accreditation if all beneficial owners are accredited as individuals, or if the entity itself has more than $5,000,000 in assets. This applies to traditional legal entities as well as revocable trusts and family trusts used for estate planning purposes.

So I know we mentioned net worth, but this is a good time to go over what counts towards your assets to qualify for accreditation. When calculating net worth, you can include investment accounts, real estate holdings, retirement accounts, business ownership, and personal property. Your primary residence is excluded unless you're in a unique situation where you have a mortgage that exceeds the value of your home. In that case, the negative equity would actually count against your net worth. A quick note here: it might be tempting to consider all of your personal assets in this calculation, but personal assets like cars, jewelry, and collectibles are generally difficult to value and verify, so we try to stick to investments, real estate, and retirement accounts.

As I mentioned before, trusts and entities used for estate planning purposes can participate in DSTs, but there are some nuances to keep in mind. Trusts can own DST investments, but the trust structure needs to be carefully reviewed to ensure proper titling and tax treatment for 1031 exchange purposes.

Now, this is a really important topic for investors who have sold their investment property in an entity. If you sold in an entity, you need to buy back in the same entity. I won't go too deep, but a common complication with 1031 investors looking to buy into a DST is when a trust already holds the relinquished property. Certain trusts, like irrevocable trusts or trusts with multiple beneficiaries, may create complications. So, before initiating a 1031 exchange, review your trust structure with your estate attorney and CPA and make sure everything is set up correctly. If your trust structure complicates your 1031 exchange, they may be able to help you restructure the trust or use an alternative approach to maintain your eligibility.

So the takeaway here is if your property is already in a trust, consult with your advisors before initiating a 1031 exchange.

Also, one of the most common questions we receive is, "Can I exchange into multiple DSTs with the same proceeds?" The answer is yes. Exchangers who want to achieve diversification across asset classes and sponsors can absolutely spread their investment across multiple DSTs. Investors don't need to allocate 100% of their exchange capital to a single DST. In fact, doing so rarely makes sense. Many 1031 investors use their exchange as an opportunity to spread their investment across different sponsors, property types, and geographies to achieve more balance in their real estate portfolios. DST minimums typically range between $100,000 and $250,000, so depending on the size of your exchange, diversification may be more or less feasible.

So to wrap up, being an accredited investor is a key first step before planning your 1031 exchange into a DST. Verify your status by reviewing the income and net worth requirements set by the SEC. If your property is in an entity, trust, or other legal structure, review it with your advisors before starting the exchange process. And remember, you don't have to go into one single DST. Diversification is possible and often recommended.

Thanks for watching. If you'd like to learn more about DSTs, please visit our website at anchor1031.com.