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.
The biggest difference is what you own.
With a REIT, you are typically a shareholder. You buy shares in a real estate investment trust, and your return depends on the trust’s portfolio, operating results, and distribution policy.
With an UPREIT, you contribute property to a REIT’s operating partnership in exchange for operating partnership, or OP, units. That makes you a partner in the operating partnership rather than a direct owner of the contributed property.
For property owners, that distinction matters because an UPREIT is often an exit from active ownership. Once the property is contributed, the REIT takes over management, financing, and sale decisions.
Tax treatment is often the main reason a property owner considers an UPREIT.
A direct REIT investment does not by itself defer capital gains taxes from selling appreciated real estate. If you sell a property, taxes generally must be addressed at the sale unless another tax-deferral strategy.
An UPREIT transaction, often described as a Section 721 exchange, may defer capital gains taxes when you contribute property instead of selling it outright. That deferral generally lasts until a later taxable event, such as:
• Converting OP units into REIT shares
• Redeeming OP units for cash
• A sale of the contributed property in certain circumstances
That said, an UPREIT is generally a one-time deferral path. Unlike a 1031 exchange, you typically cannot continue exchanging back into other real estate indefinitely.
REITs are usually more liquid than direct property ownership because shares can generally be bought and sold more easily than a building or a tenancy-in-common interest.
UPREITs can improve liquidity compared with owning property outright, but liquidity is not immediate. OP units often come with lock-up or lock-out periods, and conversion rights may be limited by the partnership agreement. After conversion, REIT shares may be easier to sell, but that step can create a taxable event.
In short:
• REIT shares: typically more liquid
• OP units: potentially more liquid than real estate, but often restricted
• Direct property: usually the least liquid of the three
If control matters, the difference is straightforward.
A REIT shareholder has limited influence over day-to-day property decisions. An UPREIT investor usually gives up even more direct control over the contributed asset because the REIT and its operating partnership make management and disposition decisions.
That loss of control can be a benefit for owners who want relief from active management. It can be a drawback for owners who want to decide when to refinance, renovate, lease, or sell.
For many property owners, the decision comes down to priorities:
• Choose a REIT approach if you want a more traditional securities investment and simpler access to liquidity.
• Consider an UPREIT if you own appreciated property, want to defer taxes, and are comfortable exchanging direct ownership for a more passive role.
Either way, the structure, tax triggers, and conversion terms deserve careful review with tax and financial professionals.
Not necessarily. An UPREIT may appeal to a property owner who wants to contribute appreciated real estate and defer capital gains taxes. A REIT may appeal more to someone who wants a simpler, more liquid investment. The better fit depends on tax position, income needs, and comfort with giving up control.
Generally, contributing property to an UPREIT may defer capital gains taxes at the time of contribution. However, taxes can be triggered later if you convert OP units into REIT shares, redeem them for cash, or if other taxable events occur under the agreement. Investors should review those triggers carefully before proceeding.
Usually, no. In an UPREIT, you generally exchange direct ownership for OP units, and the REIT assumes control over management, financing, and eventual sale decisions. That can reduce landlord responsibilities, but it also means you may no longer control how the contributed property is operated or when it is sold.