Why UPREITs are Becoming More Popular with Investors

Posted Aug 3, 2023


A 1031 exchange has tax deferral benefits for those investors who are able to find a suitable replacement property. However, investors need to basically run the gauntlet as restrictions and deadlines must be met for the 1031 exchange to be performed successfully.

Instead of a 1031 exchange, many investors are turning to the 721 UPREIT exchange. An UPREIT (Umbrella Partnership Real Estate Investment Trust) provides tax deferral benefits without the restrictions and deadlines of a 1031 exchange. We’ll review what makes an UPREIT attractive as a capital gain tax deferral option. If you need a primer on UPREIT basics, check here.

UPREIT Vs. 1031 Exchange

Once an investor transfers their property into an UPREIT, selling the OP (operating partnership) units will result in a taxable event. Unlike a 1031 exchange, investors can’t continuously exchange property while retaining their tax deferral.

Does that mean a 1031 Exchange is better? As with most financially-based scenarios, it depends on the investor. There are plenty of reasons, which we’ll get into shortly, that an investor might choose an UPREIT over a 1031 exchange.

While converting OP units into REIT shares is taxable, investors don’t have to convert them all at once. OP units can be converted over time, reducing the investor’s tax bill. 

In the next section, we’ll explore other benefits that UPREITs offer.

UPREIT Benefits

An UPREIT offers a number of advantages over a 1031 exchange. One advantage is that there aren’t any deadlines. UPREIT investors avoid the critical 1031 exchange deadlines. These 1031 exchange deadlines include the 45-day identification window and the 180-day window to complete the exchange. Such deadlines can be difficult to meet depending on the real estate market at the time the exchange is performed.

UPREITs are passive real estate investments. Investors doing a 1031 exchange with real property still have property to manage. There’s no management with an UPREIT as the investor will own OP units of the REIT partnership.

An UPREIT is more liquid because it is not real property. Investors can convert their OP units into REIT shares and trade them on a public exchange like any public stock. Because the REIT is public, investors can determine the REIT’s price at any time and decide if they want to sell or not.

Many UPREITs contain several properties, providing diversification. Investors who exchange their single property for a diversified REIT automatically diversify their real estate holdings. To do the same with real property, an investor would need to own several property categories in different locations, which are a more costly and time-consuming set of transactions.

This diversification also includes access to commercial real estate without needing to meet any other qualifications or minimum investment requirements.

REITs payout 90% of their earnings as dividends. This is no different for UPREITs. Investors wanting to diversify their real estate holdings and earn income can achieve both goals with an UPREIT.


Similar to a 1031 exchange, a 721 UPREIT exchange is an involved process. Working with an experienced realtor can help ensure that the process goes smoothly.


This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Investors who have sold real estate and executed a 1031 Exchange into a DST may execute future 1031 Exchanges and continue to defer taxable gains. Alternatively, a client may enter into a transaction pursuant to IRS Code Section 721 (also known as an UPREIT transaction). In an UPREIT transaction, Clients will receive, at the REIT Sponsor’s option, cash or OP units. OP units are units of an operating partnership that is wholly owned by a REIT. If the client receives OP units, he or she has exchanged into a security and therefore no longer owns real estate and cannot execute another 1031 Exchange out of the OP units and into other real estate. However, pursuant to IRS Code Section 721, the UPREIT transaction into the OP units may qualify as a tax-deferred exchange. The disposition of their interest in OP units will result in a taxable transaction, including the recognition of their deferred capital gain and any depreciation recapture. The client’s gain will only be recognized upon sale or disposition of the OP units.

There is no guarantee that an UPREIT transaction will occur. The option for this transaction is at the discretion of the REIT Sponsor. Some DSTs allow the client to choose whether to take OP Units or cash. Clients should consult the prospectus and their advisor regarding the specifics.

A Guide to UPREIT Transactions

A Guide to UPREIT Transactions
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A Guide to UPREIT Transactions

A Guide to UPREIT Transactions

Learn more about the UPREIT process.

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