The SEC's $1 million net worth test: the house comes out, the mortgage usually does too, and a HELOC drawn in the last 60 days is added back

The rule in one line

“The primary residence is not counted as an asset in the net worth calculation.”
— and, in general, neither is the debt secured by it.

The $1 million accredited-investor threshold is quoted constantly. How it is counted is quoted much less, and that is where the answers go wrong.

Start inclusive, then take two things out

The SEC begins from everything: “Except for the special provisions described below, individuals should include all of their assets and all of their liabilities in calculating net worth.”

Then the home leaves the asset side — Dodd-Frank section 413(a) “requires that the value of a person’s primary residence be excluded”. And here is the step people miss: the mortgage generally leaves the liability side with it. “In general, debt secured by the primary residence (such as a mortgage or home equity line of credit) is not counted as a liability in the net worth calculation if the estimated fair market value of the residence is greater than the amount of debt secured by it.”

Excluding the house but keeping its mortgage is the common error. It can turn a qualifying investor into a non-qualifying one on paper.

The 60-day clause

“if the amount of debt secured by the residence has increased in the 60 days preceding the sale of securities to the investor (other than in connection with the acquisition of the primary residence), then the amount of that increase is included as a liability” — even where the house is worth more than the debt.

The SEC states the reason plainly: “to deter individuals from incurring debt secured by their primary residence for the purpose of inflating their net worth”.

Read the scope carefully. It covers an increase in debt secured by the residence — not any borrowing — and it excepts debt taken to buy the home.

What the worked example does and does not show

The SEC’s own figures: base case “Individual’s net worth: $850,000 - $20,000 = $830,000”; then “because of a $10,000 drawdown under the HELOC” inside the window, “Total liabilities: $30,000”.

Other assets stay at $850,000 in both columns. That is a controlled comparison, not a claim that borrowing always lowers net worth — the page does not address what happens if the borrowed cash is still sitting there, and neither do we.

Two more that get dropped

Underwater mortgages. The excess of debt over value counts as a liability “even if the borrower may not be personally liable for the excess amount by reason of … state anti-deficiency statutes or similar laws.”

No appraisal requirement. “There is no requirement to obtain a third party estimate of the fair market value of the residence.” An estimate is still used — it just need not come from outside.

And “primary residence” is not defined in SEC rules at all; the SEC says it is “commonly understood to mean the home where a person lives the most of the time.”

Both sources here are the SEC. Two pages from one regulator are not two independent witnesses, and we say so on the page. This is not legal or investment advice.

How the SEC counts the $1 million accredited-investor net worth — glowwiki

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