The Realized Team’s Picks
UPREIT Disadvantages: Tax, Liquidity, Control, and Concentration Risks
An UPREIT can defer taxes and simplify ownership, but it also comes with meaningful trade-offs. The main disadvantages are that taxes are deferred, not eliminated; liquidity may be delayed or limited; you give up direct control of the property; and your risk can become tied to one REIT, management team, or property focus.
UPREIT Companies: How to Compare Programs Before Contributing Property
The best way to compare UPREIT programs is to focus on what you actually receive in exchange for your property: OP unit value, sponsor quality, liquidity terms, portfolio fit, fees, and tax consequences. A strong program should align with your income needs, risk tolerance, and long-term exit plan.
UPREIT vs. DOWNREIT: What Property Owners Need to Know
An UPREIT and a DOWNREIT can both help property owners contribute appreciated real estate to a REIT structure and defer capital gains taxes, but they work differently. An UPREIT generally uses the REIT’s operating partnership, while a DOWNREIT typically uses a separate joint venture with the REIT, which can make the DOWNREIT more complex.
UPREIT vs. REIT: Ownership, Tax Deferral, Liquidity, and Control
An UPREIT and a REIT can both move a property owner away from direct real estate management, but they are not the same investment. A REIT generally means buying shares with after-tax dollars, while an UPREIT usually means contributing appreciated property for OP units, which may defer taxes but also reduces direct control.
Can You Complete a 1031 Exchange Directly Into an UPREIT?
No. A 1031 exchange generally cannot go directly into an UPREIT because a 1031 exchange requires replacement real property, while UPREIT interests are typically operating partnership units tied to a REIT structure rather than direct real estate ownership. In many cases, investors reach an UPREIT through a two-step path that starts with a 1031-eligible Delaware Statutory Trust.
From 1031 Replacement Property to UPREIT: How a Two-Step Strategy Works
A two-step strategy moves an investor from a 1031 exchange into replacement real estate first, then later into an UPREIT under Section 721 if the sponsor and transaction structure allow it. The appeal is straightforward: continue tax deferral, reduce direct management, and eventually gain access to OP units that may offer more flexibility than owning property outright.
UPREIT Structure Explained: Property, Operating Partnership, and REIT
An UPREIT structure lets a property owner contribute appreciated real estate to a REIT’s operating partnership in exchange for OP units instead of cash. In practical terms, your property moves into the partnership, the REIT controls that partnership, and you receive an ownership interest that may defer capital gains tax until a later taxable event.
An UPREIT Transaction Step by Step: From Property Contribution to OP Units
An UPREIT transaction generally works by contributing appreciated investment real estate to a REIT’s operating partnership under Section 721 in exchange for OP units rather than cash. That structure can defer capital gains recognition at contribution while shifting the owner from direct property ownership to partnership interests tied to the REIT.
What Is an UPREIT?
An UPREIT, or umbrella partnership real estate investment trust, is a structure that lets a property owner contribute appreciated real estate to a REIT’s operating partnership in exchange for operating partnership units instead of selling for cash. This can defer capital gains taxes until a later taxable event, such as converting units to REIT shares, selling the units, or the operating partnership selling the contributed property.
How Does an UPREIT Work?
An UPREIT lets an investment property owner contribute appreciated real estate to a REIT’s operating partnership in exchange for operating partnership, or OP, units instead of cash. Because the transaction is generally structured as a contribution rather than a sale, capital gains taxes may be deferred until a later taxable event.
