--- title: The Risks Associated With UPREIT Investments description: Learn more about the risks associated with UPREIT investments. image: https://www.realized1031.com/hubfs/iStock-1088926156-modified-1cd2da5f-0e92-4fee-b9af-872c5be74e7e.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** # The Risks Associated With UPREIT Investments Posted Oct 21, 2025 ![iS-1088926156](https://www.realized1031.com/hs-fs/hubfs/iStock-1088926156-modified-1cd2da5f-0e92-4fee-b9af-872c5be74e7e.jpg?width=1254&height=705&name=iStock-1088926156-modified-1cd2da5f-0e92-4fee-b9af-872c5be74e7e.jpg) Umbrella partnership real estate investment trusts (UPREITs) offer a multitude of benefits like tax deferral and passive income, making them appealing to modern investors. This is all made possible due to the 721 exchange and the [nature of the UPREIT structure itself](https://www.investopedia.com/terms/u/upreit.asp). However, like any other investment vehicle, UPREITs have their own set of risks that investors must be aware of. Understanding these challenges and pitfalls helps you prepare and minimize their effects. ### 1. Taxes Aren’t Eliminated, Just Deferred The primary benefit of UPREITs is that they help defer capital gains taxes. There is no recognition of gains or losses during the contribution, so capital gains won’t be taxed immediately. However, deferral doesn’t mean elimination. When a taxable event occurs, specifically the conversion of OP units to REIT shares, you will be liable to pay the deferred capital gains taxes and depreciation recapture when applicable. Given this possibility, you’ll need to employ a few strategies to manage tax payments. Some investors choose to stagger conversions so that only a small amount of capital gains is recognized at a time. ### 2. REIT Performance Is Still Tied to Market Conditions REIT dividends are not guaranteed. The UPREIT’s income is still tied to the performance of the underlying assets, meaning your wealth is also tied to the REIT’s performance. Given this fact, it’s important to be aware of the fluctuations in rental rates, inflation, and broader economic conditions. These factors, when favorable, can increase the value of your OP units and your income. The inverse is true when conditions are unfavorable. There are also sector-specific risks to consider. For example, UPREITs that specialize in [office buildings may still not be stable](https://www.commercialcafe.com/blog/national-office-report-july-2025/) compared to rising industries like warehousing or data centers. In other words, if a sector struggles, the value of your investment might decline. ### 3. You Lose Control of Properties Contributing your asset to the UPREIT relieves you of direct ownership and landlord rights. This effect can be a boon for investors who no longer want hands-on involvement over their properties. However, those who still want direct control may find UPREITs too limiting. These investors lose having a say over major capital decisions, tenant selection, and management. ### 4. Tax Complexities Aside from the recognition of deferred capital gains upon the conversion of OP units, there are still a few tax complexities that UPREIT investors might face. First is the complexity of basis tracking. Errors could result in surprise tax bills or IRS disputes, so you must carefully track the adjusted basis of your assets to minimize the chances of these problems. There’s also the [possibility of the REIT](https://www.realized1031.com/blog/what-is-sponsor-risk-in-real-estate) selling the contributed property. Typically, there are provisions that delay this practice to protect you from unexpected tax liability. When the sale eventually happens, you may face a huge tax hit. ### 5. Liquidity Trade-offs While UPREITs themselves are generally more liquid than investments like Delaware Statutory Trusts or direct property ownership, OP units may still be locked during an initial holding period. This typically lasts for a year, preventing you from accessing your capital if the need for cash arises. Even after the holding period, liquidity may not be immediate since you’ll have to assess market conditions to determine if selling at that moment will yield the most profits. ### 6. REIT-Investor Misalignment As an OP unit holder, you have limited say in REIT governance. Decisions are made by the REIT’s management and board, and there’s always the possibility that their decisions may not align with your priorities or goals. For example, some REITs may focus on boosting short-term share price instead of long-term stability. This possibility makes it even more important to not just look at the promised dividends of an UPREIT, but also to [evaluate the REIT](https://www.realized1031.com/blog/what-to-know-before-working-with-a-upreit-sponsor) and its governance. This way, you enter one that aligns with your goals. ### Wrapping Up: UPREIT Investment Risks To Keep in Mind UPREITs offer an attractive set of advantages like tax deferral and passive income, but a strategic investor must also take into account the risks associated with this investment vehicle. Market volatility, tax complexity, loss of control, and potential liquidity challenges can result in unwanted effects, so investors must examine these drawbacks and consider if they are worth the benefits UPREITs provide. Only then can individuals invest with confidence and the right expectations. **Sources:** [https://www.investopedia.com/terms/u/upreit.asp](https://www.investopedia.com/terms/u/upreit.asp) [https://www.commercialcafe.com/blog/national-office-report-july-2025/](https://www.commercialcafe.com/blog/national-office-report-july-2025/) A Guide to UPREIT Transactions [![A Guide to UPREIT Transactions](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/UPREIT-eBook-250b.png?width=250&height=250&name=UPREIT-eBook-250b.png "Learn more about the UPREIT ...") ](https://www.realized1031.com/blog/the-risks-associated-with-upreit-investments#blogform) Download eBook ---   --- ### A Guide to UPREIT Transactions ![A Guide to UPREIT Transactions](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/UPREIT-eBook-550b.jpg?width=550&height=600&name=UPREIT-eBook-550b.jpg) Learn more about the UPREIT process. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. 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" : "Umbrella partnership real estate investment trusts (UPREITs) offer a multitude of benefits like tax deferral and passive income, making them appealing to modern investors. This is all made possible due to the 721 exchange and the nature of the UPREIT structure itself. However, like any other investment vehicle, UPREITs have their own set of risks that investors must be aware of. Understanding these challenges and pitfalls helps you prepare and minimize their effects. 1. Taxes Aren’t Eliminated, Just Deferred The primary benefit of UPREITs is that they help defer capital gains taxes. There is no recognition of gains or losses during the contribution, so capital gains won’t be taxed immediately. However, deferral doesn’t mean elimination. When a taxable event occurs, specifically the conversion of OP units to REIT shares, you will be liable to pay the deferred capital gains taxes and depreciation recapture when applicable. Given this possibility, you’ll need to employ a few strategies to manage tax payments. Some investors choose to stagger conversions so that only a small amount of capital gains is recognized at a time. 2. REIT Performance Is Still Tied to Market Conditions REIT dividends are not guaranteed. The UPREIT’s income is still tied to the performance of the underlying assets, meaning your wealth is also tied to the REIT’s performance. Given this fact, it’s important to be aware of the fluctuations in rental rates, inflation, and broader economic conditions. These factors, when favorable, can increase the value of your OP units and your income. The inverse is true when conditions are unfavorable. There are also sector-specific risks to consider. For example, UPREITs that specialize in office buildings may still not be stable compared to rising industries like warehousing or data centers. In other words, if a sector struggles, the value of your investment might decline. 3. You Lose Control of Properties Contributing your asset to the UPREIT relieves you of direct ownership and landlord rights. This effect can be a boon for investors who no longer want hands-on involvement over their properties. However, those who still want direct control may find UPREITs too limiting. These investors lose having a say over major capital decisions, tenant selection, and management. 4. Tax Complexities Aside from the recognition of deferred capital gains upon the conversion of OP units, there are still a few tax complexities that UPREIT investors might face. First is the complexity of basis tracking. Errors could result in surprise tax bills or IRS disputes, so you must carefully track the adjusted basis of your assets to minimize the chances of these problems. There’s also the possibility of the REIT selling the contributed property. Typically, there are provisions that delay this practice to protect you from unexpected tax liability. When the sale eventually happens, you may face a huge tax hit. 5. Liquidity Trade-offs While UPREITs themselves are generally more liquid than investments like Delaware Statutory Trusts or direct property ownership, OP units may still be locked during an initial holding period. This typically lasts for a year, preventing you from accessing your capital if the need for cash arises. Even after the holding period, liquidity may not be immediate since you’ll have to assess market conditions to determine if selling at that moment will yield the most profits. 6. REIT-Investor Misalignment As an OP unit holder, you have limited say in REIT governance. Decisions are made by the REIT’s management and board, and there’s always the possibility that their decisions may not align with your priorities or goals. For example, some REITs may focus on boosting short-term share price instead of long-term stability. This possibility makes it even more important to not just look at the promised dividends of an UPREIT, but also to evaluate the REIT and its governance. This way, you enter one that aligns with your goals. Wrapping Up: UPREIT Investment Risks To Keep in Mind UPREITs offer an attractive set of advantages like tax deferral and passive income, but a strategic investor must also take into account the risks associated with this investment vehicle. Market volatility, tax complexity, loss of control, and potential liquidity challenges can result in unwanted effects, so investors must examine these drawbacks and consider if they are worth the benefits UPREITs provide. Only then can individuals invest with confidence and the right expectations. Sources: https://www.investopedia.com/terms/u/upreit.asp https://www.commercialcafe.com/blog/national-office-report-july-2025/", "articleSection" : [ "UPREIT" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2025-10-21T14:00:00+0000", "datePublished" : "2025-10-21T14:00:00+0000", "description" : "Learn more about the risks associated with UPREIT investments.", "headline" : "The Risks Associated With UPREIT Investments", "image" : { "@type" : "ImageObject", "height" : 705, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/iStock-1088926156-modified-1cd2da5f-0e92-4fee-b9af-872c5be74e7e.jpg", "width" : 1254 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/the-risks-associated-with-upreit-investments", "name" : "The Risks Associated With UPREIT Investments", "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-1088926156-modified-1cd2da5f-0e92-4fee-b9af-872c5be74e7e.jpg" } ```