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.
What an UPREIT Does
In an UPREIT, a property owner contributes appreciated real estate to a REIT’s operating partnership in exchange for operating partnership units, often called OP units. That contribution is generally structured as a Section 721 exchange, which can defer recognition of gain at the time of the transfer.
For many owners, the appeal is practical. You move from direct ownership of a single property into an interest tied to a broader real estate portfolio. You may also reduce day-to-day management responsibilities. But the tradeoff is that you no longer directly control the contributed property, and taxes are typically triggered later if OP units are sold, redeemed for cash, or converted into REIT shares.
What a DOWNREIT Does
A DOWNREIT also allows a property owner to contribute real estate and potentially defer capital gains taxes. The key difference is structure. Instead of contributing property into the REIT’s main operating partnership, the owner and the REIT form a joint venture to acquire or hold the real estate.
That separate venture can give the parties more flexibility in how economics are allocated. In some cases, that can help when the contributed property differs from the rest of the REIT’s holdings. But that flexibility comes with added complexity. DOWNREITs are often viewed as more complicated arrangements and may receive closer IRS attention.
UPREIT vs. DOWNREIT: The Main Differences
• UPREIT: The property owner contributes real estate to the REIT’s operating partnership and receives OP units tied to the broader REIT structure.
• DOWNREIT: The property owner and REIT place the property into a separate joint venture rather than the main operating partnership.
• Complexity: UPREITs are typically more standardized, while DOWNREITs are often more customized and more complicated.
• Tax deferral: Both structures may defer capital gains taxes, but the specific tax outcome depends on deal terms and later triggering events.
• Control and economics: A DOWNREIT may allow more tailored economic arrangements for a specific property, while an UPREIT is usually more directly aligned with the REIT’s overall portfolio.
What Property Owners Should Focus On
If you are comparing these two paths, focus on a short list of practical questions:
• Does the REIT want your property directly in its operating partnership or in a separate venture?
• Are you comfortable giving up direct ownership in exchange for OP units or a partnership interest?
• How important are simplicity, future liquidity, and portfolio diversification?
• What events could trigger taxes later?
• How will debt, valuation, distributions, and conversion rights be handled?
For many owners, the better choice is not the one with the most features. It is the one that best matches your tax planning, income needs, control preferences, and estate goals. These transactions can be highly technical, so legal and tax review is usually essential before moving forward.
Frequently Asked Questions
Is an UPREIT usually simpler than a DOWNREIT?
Yes, in many cases an UPREIT is viewed as the simpler structure because the property is contributed to the REIT’s operating partnership rather than placed into a separate joint venture. A DOWNREIT may offer more flexibility, but that often comes with added structural and tax complexity that requires careful review.
Can both an UPREIT and a DOWNREIT defer capital gains taxes?
Both structures may allow a property owner to defer capital gains taxes when appreciated real estate is contributed to the REIT-related entity. However, tax deferral is not permanent, and later events such as selling units, converting interests, or other triggering transactions may cause gain recognition. Investors should consult qualified tax professionals.
Why would a property owner choose a DOWNREIT instead of an UPREIT?
A property owner may choose a DOWNREIT when a separate joint venture better fits the economics of the contributed property or the goals of the REIT and the owner. That added flexibility can be useful, but it usually comes with more complexity, so the structure should be evaluated carefully with professional guidance.
