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.
