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What is an Accredited Investor?

If you’ve been researching the 1031 exchange as an option for selling investment property, you may have come across some new terminology. For example, many investors are unfamiliar with the term “accredited investor,” and they wonder how it relates to a 1031 exchange transaction. This discussion will explain the important details you need to know.

What is an Accredited Investor?

The Securities and Exchange Commission (SEC) defined the term accredited investor under Rule 501 of Regulation D, which is part of the Securities Act of 1933. It refers to an individual or entity deemed “financially sophisticated” and has a “reduced need for the protection provided by regulatory disclosure filings.”

Due to the advanced financial experience accredited investors likely have, it’s assumed they can understand complex investment vehicles. An investor who qualifies for this designation has access to certain investment opportunities not available to the broad general public.

Accredited Investor Requirements

It’s a common misconception that there’s a process you need to follow to become an accredited investor. However, this is not the case. To qualify, you’ll simply need to meet the following requirements:

  1. Earn an income of over $200,000 in each of the two most recent years (or $300,000 for married couples) and have a reasonable expectation of earning at least this much in the current year.
  2. Have an individual net worth or joint net worth with your spouse of over $1 million at the time of the purchase (excluding your primary residence)

There are also separate accredited investor provisions under Rule 501 for charitable organizations, corporations, partnerships, trusts, financial institutions, equity owners, and company directors.

Irrevocable Trusts

Investment properties that are titled under an Irrevocable Trust have a more stringent set of requirements. In general, Irrevocable Trusts can be an accredited investor if:

  1. The trust has a minimum of $5 million in assets or
  2. The trustee or co-trustee of the trust is a bank, insurance company, registered investment company, business development company, or small business investment company

For investors who wish to invest in options restricted to accredited investors from funds in an Irrevocable Trust having less than $5 million in assets, we recommend that they consider adding a trustee or co-trustee from one of the institutions listed above. 

Do You Need to be an Accredited Investor to Do a 1031 Exchange?

A 1031 exchange is a process that allows real estate investors to defer their capital gains taxes by exchanging a piece of property for one or more “like-kind” properties. Any investor can engage in a 1031 exchange without worrying about qualifying as an accredited investor.

However, if you are planning on exchanging your property and using a Delaware Statutory Trust (DST) for your replacement property (which meets like-kind property requirements of the 1031 exchange), then the accredited investor requirement kicks in. 

The SEC categorizes DSTs as “securitized investments,” triggering the accredited investor requirement. Like other unregistered investments, DSTs can often be complex investments and are considered illiquid, making them inappropriate for inexperienced investors.

The bottom line is that you do not have to be an accredited investor to engage in a 1031 property exchange, but you do if you plan to exchange your property for ownership in a DST.

Learn More About 1031 Exchanges

While it’s not necessarily difficult to engage in a 1031 exchange, there are many moving parts. Therefore, it’s often helpful to consult with a professional before starting, as this may help you avoid costly mistakes.

To learn more about the 1031 exchange process and whether it might be right for you, reach out to our team. We’re happy to discuss your goals and help you explore your options.

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Help Save 1031 Exchanges
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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