--- title: How Do UPREITs Provide Tax Deferral Benefits to Property Owners? description: Learn more about how UPREITs provide tax-deferral benefits to property owners. image: https://www.realized1031.com/hubfs/iStock-2236272790-modified-54332226-0f5f-4506-a982-df5789c87978.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # How Do UPREITs Provide Tax Deferral Benefits to Property Owners? Posted Oct 19, 2025 ![iS-2236272790](https://www.realized1031.com/hs-fs/hubfs/iStock-2236272790-modified-54332226-0f5f-4506-a982-df5789c87978.jpg?width=1312&height=738&name=iStock-2236272790-modified-54332226-0f5f-4506-a982-df5789c87978.jpg) Many real estate investors understand that with high appreciation comes high taxes, and as such, look for ways to delay tax liability in order to keep more of their equity working for them. One strategy that has become popular in recent years is the umbrella partnership real estate investment trust (UPREIT). Its structure allows property owners to contribute highly appreciated property [without recognizing gain or loss](https://www.law.cornell.edu/uscode/text/26/721). How does that happen? How do UPREITs provide tax deferral benefits to property owners? Realized 1031 shares the answers below to help you better understand this tax management strategy. ### Recap of the UPREIT Investment Structure An UPREIT is a legal structure that works as an operating partnership (OP). The partner with the controlling interest is the REIT. Meanwhile, investors contribute their real estate assets to the UPREIT to receive OP units, turning them into limited partners. These units are the economic equivalent of REIT shares, and investors receive dividends based on the performance of the UPREIT’s portfolio. Over time, the OP units can be converted to REIT shares and sold if you need liquidity. Thanks to this structure, investors not only enjoy tax-deferral benefits but can also take advantage of passive income, professional management, and enhanced diversity. ### UPREIT Tax Deferral: How It Happens The [mechanism that enables tax-deferral for UPREIT contributions](https://www.investopedia.com/terms/u/upreit.asp) is the 721 exchange. Here’s how the process allows you to avoid immediate tax burden. ### 1. Contribution Instead of Sale In a traditional real estate sale, you’re immediately liable for capital gains taxes. The substantial amount can take away a huge chunk of your profits. A [721 exchange](https://www.realized1031.com/blog/what-are-the-pros-and-cons-of-a-721-exchange) allows you to avoid an official sale while still being able to access new investments. That’s because in an UPREIT structure, you contribute property instead of selling it. The IRS doesn’t recognize losses or gains due to the nature of the transaction. ### 2. Receipt of OP Units In return for the asset contribution, you receive OP units. The IRS views this exchange as a continuation of your investment rather than a sale. As long as you hold those OP units, the tax liability is deferred. ### 3. Conversion of OP Units is Optional You can hold your OP units indefinitely, and no one can compel you to convert them. This means that you can continue deferring capital gains taxes for as long as you need, helping immensely with tax planning and management. ### Key Tax Advantages for Tax Management Thanks to the nature of OP units, UPREITs provide more than just tax deferral in the context of tax management. Here are other benefits you can expect. - **Deferral of Depreciation Recapture: **Aside from capital gains taxes, you also defer [depreciation recapture](https://www.realized1031.com/blog/important-information-to-know-about-depreciation-and-real-estate-sales) during a 721 exchange. This amount follows ordinary income rates, so being able to delay payment allows you to preserve more of your wealth. - **Estate Planning Benefits: **OP units can be held until death. Upon your passing, the units undergo a step-up in basis, [resetting their cost basis to the fair market value](https://taxfoundation.org/taxedu/glossary/step-up-in-basis/#:~:text=The%20step%2Dup%20in%20basis,reducing%20the%20heir's%20tax%20liability.). This process effectively eliminates the capital gains and depreciation recapture, giving your heirs immense relief from the tax burden of highly appreciated assets. - **Flexibility and Liquidity: **If you do need to liquidate due to changing lifestyle needs, you’re allowed to convert OP units in increments instead of one event. This feature helps you manage capital gains tax payments, allowing you to pay small amounts instead of one huge lump sum. ### Comparing UPREITs vs. 1031 Exchanges 1031 exchanges and UPREITs are often compared against each other because of their similar tax-deferral benefits. The former involves swapping two like-kind properties, which also avoids the recognition of gains or losses. However, the 1031 exchange allows investors to maintain direct property ownership. Meanwhile, you lose control over [your previous property](https://www.realized1031.com/blog/using-section-721-to-dispose-of-commercial-real-estate) as you contribute it to the UPREIT for OP units. Given these differences, UPREITs are more suitable for investors who want hands-off involvement over their assets. Plus, UPREITs provide immediate diversification that 1031 exchanges can’t provide as easily. If you still want direct control over your properties, then the 1031 exchange may be the ideal option. ### Wrapping Up: Basics of UPREIT Capital Gains Tax Referral UPREITs provide a powerful way for property owners to defer capital gains and depreciation recapture taxes while transitioning from direct property ownership to a diversified, income-producing investment. Plus, benefits like step-up in basis make UPREITs ideal for estate planning and wealth transfer. When you’re wary about the huge tax bill of highly appreciated properties, this strategy might be the best option for you. **Sources:** [https://taxfoundation.org/taxedu/glossary/step-up-in-basis/](https://taxfoundation.org/taxedu/glossary/step-up-in-basis/) [https://www.investopedia.com/terms/u/upreit.asp](https://www.investopedia.com/terms/u/upreit.asp) [https://www.law.cornell.edu/uscode/text/26/721](https://www.law.cornell.edu/uscode/text/26/721) Download The Guide To DSTs [![The Investor's Guidebook To DSTs](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/DST-eBook-250.png?width=250&height=250&name=DST-eBook-250.png "See if Delaware Statutory ...") ](https://www.realized1031.com/blog/how-do-upreits-provide-tax-deferral-benefits-to-property-owners#blogform) Download eBook ---   --- ### The Investor's Guidebook To DSTs ![Download The Guide To DSTs](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/DST-eBook-550.jpg?width=550&height=650&name=DST-eBook-550.jpg) See if Delaware Statutory Trusts are right for you. 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For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Many real estate investors understand that with high appreciation comes high taxes, and as such, look for ways to delay tax liability in order to keep more of their equity working for them. One strategy that has become popular in recent years is the umbrella partnership real estate investment trust (UPREIT). Its structure allows property owners to contribute highly appreciated property without recognizing gain or loss. How does that happen? How do UPREITs provide tax deferral benefits to property owners? Realized 1031 shares the answers below to help you better understand this tax management strategy. Recap of the UPREIT Investment Structure An UPREIT is a legal structure that works as an operating partnership (OP). The partner with the controlling interest is the REIT. Meanwhile, investors contribute their real estate assets to the UPREIT to receive OP units, turning them into limited partners. These units are the economic equivalent of REIT shares, and investors receive dividends based on the performance of the UPREIT’s portfolio. Over time, the OP units can be converted to REIT shares and sold if you need liquidity. Thanks to this structure, investors not only enjoy tax-deferral benefits but can also take advantage of passive income, professional management, and enhanced diversity. UPREIT Tax Deferral: How It Happens The mechanism that enables tax-deferral for UPREIT contributions is the 721 exchange. Here’s how the process allows you to avoid immediate tax burden. 1. Contribution Instead of Sale In a traditional real estate sale, you’re immediately liable for capital gains taxes. The substantial amount can take away a huge chunk of your profits. A 721 exchange allows you to avoid an official sale while still being able to access new investments. That’s because in an UPREIT structure, you contribute property instead of selling it. The IRS doesn’t recognize losses or gains due to the nature of the transaction. 2. Receipt of OP Units In return for the asset contribution, you receive OP units. The IRS views this exchange as a continuation of your investment rather than a sale. As long as you hold those OP units, the tax liability is deferred. 3. Conversion of OP Units is Optional You can hold your OP units indefinitely, and no one can compel you to convert them. This means that you can continue deferring capital gains taxes for as long as you need, helping immensely with tax planning and management. Key Tax Advantages for Tax Management Thanks to the nature of OP units, UPREITs provide more than just tax deferral in the context of tax management. Here are other benefits you can expect. Deferral of Depreciation Recapture: Aside from capital gains taxes, you also defer depreciation recapture during a 721 exchange. This amount follows ordinary income rates, so being able to delay payment allows you to preserve more of your wealth. Estate Planning Benefits: OP units can be held until death. Upon your passing, the units undergo a step-up in basis, resetting their cost basis to the fair market value. This process effectively eliminates the capital gains and depreciation recapture, giving your heirs immense relief from the tax burden of highly appreciated assets. Flexibility and Liquidity: If you do need to liquidate due to changing lifestyle needs, you’re allowed to convert OP units in increments instead of one event. This feature helps you manage capital gains tax payments, allowing you to pay small amounts instead of one huge lump sum. Comparing UPREITs vs. 1031 Exchanges 1031 exchanges and UPREITs are often compared against each other because of their similar tax-deferral benefits. The former involves swapping two like-kind properties, which also avoids the recognition of gains or losses. However, the 1031 exchange allows investors to maintain direct property ownership. Meanwhile, you lose control over your previous property as you contribute it to the UPREIT for OP units. Given these differences, UPREITs are more suitable for investors who want hands-off involvement over their assets. Plus, UPREITs provide immediate diversification that 1031 exchanges can’t provide as easily. If you still want direct control over your properties, then the 1031 exchange may be the ideal option. Wrapping Up: Basics of UPREIT Capital Gains Tax Referral UPREITs provide a powerful way for property owners to defer capital gains and depreciation recapture taxes while transitioning from direct property ownership to a diversified, income-producing investment. Plus, benefits like step-up in basis make UPREITs ideal for estate planning and wealth transfer. When you’re wary about the huge tax bill of highly appreciated properties, this strategy might be the best option for you. Sources: https://taxfoundation.org/taxedu/glossary/step-up-in-basis/ https://www.investopedia.com/terms/u/upreit.asp https://www.law.cornell.edu/uscode/text/26/721", "articleSection" : [ "Delaware Statutory Trusts (DST)" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2025-10-19T14:00:00+0000", "datePublished" : "2025-10-19T14:00:00+0000", "description" : "Learn more about how UPREITs provide tax-deferral benefits to property owners.", "headline" : "How Do UPREITs Provide Tax Deferral Benefits to Property Owners?", "image" : { "@type" : "ImageObject", "height" : 738, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2236272790-modified-54332226-0f5f-4506-a982-df5789c87978.jpg", "width" : 1312 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/how-do-upreits-provide-tax-deferral-benefits-to-property-owners", "name" : "How Do UPREITs Provide Tax Deferral Benefits to Property Owners?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-2236272790-modified-54332226-0f5f-4506-a982-df5789c87978.jpg" } ```