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.
Why a direct exchange usually does not work
A 1031 exchange is limited to like-kind real property held for investment or business use. An UPREIT transaction, by contrast, typically involves receiving OP units in an operating partnership affiliated with a REIT. That means the end asset is not the same as taking direct title to replacement real estate.
For that reason, many investors do not move straight from a sold property into an UPREIT. Instead, the more common structure is:
1. Sell the relinquished property as part of a 1031 exchange.
2. Acquire an interest in a Delaware Statutory Trust that qualifies as replacement property.
3. Later, if the sponsor and REIT structure allow it, convert that DST interest into OP units through a Section 721 transaction.
The common path: 1031 first, 721 second
This two-step approach matters because it separates two different tax-deferral strategies.
• 1031 exchange: Defers gain by exchanging into like-kind real property.
• 721 exchange: May defer gain when property is contributed to an UPREIT operating partnership in exchange for OP units.
In practice, a DST can serve as the 1031 replacement property, and only afterward might there be an opportunity to move into an UPREIT. That option is not automatic. It depends on the sponsor, the REIT’s willingness to accept the asset, and the terms of the offering.
What changes once you enter the UPREIT
Moving from direct ownership or a DST into an UPREIT can change both control and flexibility.
You are generally trading hands-on real estate ownership for passive ownership through OP units. That may appeal to owners who want less day-to-day involvement, but it also means less direct control over the underlying property.
More importantly, once you receive OP units, you are no longer holding replacement real estate for another 1031 exchange. If those OP units are later sold or converted in a taxable manner, you may recognize deferred gain and depreciation recapture at that time.
Practical considerations for property owners
Before pursuing this strategy, investors should weigh a few issues:
• Availability can be limited. Not every REIT wants every property.
• The UPREIT step is often discretionary, not guaranteed.
• Liquidity may improve later, but tax consequences can follow a sale or conversion.
• You may lose the ability to keep using future 1031 exchanges once you hold OP units.
For many owners, the key question is not just whether an UPREIT is possible, but whether giving up direct real estate ownership fits their income needs, tax planning, estate goals, and tolerance for reduced control.
Frequently Asked Questions
Can I sell my rental property and buy REIT shares in a 1031 exchange?
No. REIT shares are generally treated as securities, not like-kind real property, so they do not qualify as replacement property for a 1031 exchange. If your goal is to move toward a REIT-related structure, the path often involves a 1031 into a DST first, followed by a possible Section 721 transaction.
Is a DST required before moving into an UPREIT?
Not in every situation, but it is a common path for 1031 investors. A DST can qualify as replacement property for the 1031 exchange, helping preserve tax deferral. Later, if the structure allows, the DST interest may be converted into OP units through a separate UPREIT transaction.
Can I do another 1031 exchange after I receive OP units?
Generally, no. Once you receive OP units, you are no longer holding direct real estate that qualifies as replacement property for a future 1031 exchange. A later disposition of those units may be taxable, so investors should review the structure carefully with their tax and legal advisors before proceeding.
