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.
The three parts of the structure
An UPREIT has three core components:
• Property: The investment real estate you contribute.
• Operating partnership: The partnership that holds the real estate assets and issues OP units.
• REIT: The real estate investment trust that typically owns and controls the operating partnership.
This structure matters because you usually don't transfer property directly for REIT stock. Instead, you contribute the property to the operating partnership under Section 721 and receive OP units tied to the value of the broader real estate portfolio.
How the structure works
For a property owner, the process generally looks like this:
1. You contribute eligible investment property to the operating partnership.
2. The operating partnership, which is controlled by the REIT, accepts the asset into its portfolio.
3. You receive OP units rather than sale proceeds.
4. You may receive distributions tied to the partnership’s performance.
5. Later, subject to the agreement, you may convert OP units into REIT shares or redeem them for cash.
That final conversion is important because it generally triggers recognition of deferred gain. In other words, the UPREIT can defer tax, but it does not eliminate it.
Why owners use an UPREIT
For many owners, the appeal is straightforward. An UPREIT can provide a way to exit active property management without an outright taxable sale. It may also offer broader portfolio exposure and a path to future liquidity if OP units can later be converted into REIT shares or cash.
It can also turn a concentrated holding in one property into an interest in a larger, professionally managed portfolio. For owners tired of day-to-day management, that shift from direct ownership to passive ownership can be a meaningful benefit.
What changes when you contribute property
The tradeoff is control. Once the property is contributed, the operating partnership and REIT make decisions about management, financing, and disposition. OP unit holders generally do not have the same rights as REIT shareholders, including voting rights at the REIT level.
There may also be holding-period or lock-up restrictions before conversion is allowed. And depending on where the operating partnership does business, OP unit holders may face multistate tax filing requirements.
Key considerations before moving forward
An UPREIT is not simply a tax strategy. It also changes ownership structure, liquidity profile, and control.
Before proceeding, consider:
• Whether the REIT actually wants your property
• How the property will be valued
• Whether debt on the property affects the transaction
• How long your OP units must be held before conversion
• What tax consequences apply when units are converted or redeemed
• Whether passive ownership fits your income and estate planning goals
Frequently Asked Questions
Am I selling my property in an UPREIT transaction?
Not in the traditional sense. In an UPREIT, you generally contribute property to an operating partnership in exchange for OP units rather than cash. That structure may defer capital gains recognition at the time of contribution, but later converting those units into shares or cash is typically a taxable event.
What is the difference between OP units and REIT shares?
OP units represent an ownership interest in the operating partnership, while REIT shares represent ownership in the REIT itself. OP units may often be converted into REIT shares after a required holding period, but that conversion can trigger taxes and may come with restrictions under the partnership agreement.
Is an UPREIT a good fit for every investment property owner?
No. An UPREIT may work for owners seeking tax deferral, less management responsibility, and broader diversification, but it also means giving up direct control of the property. Suitability depends on your tax position, liquidity needs, estate planning goals, and the terms offered by the REIT and operating partnership.
