UPREIT, 721

UPREIT stands for “Umbrella Partnership Real Estate Investment Trust,” IRC section 721. It is a tax-advantaged structure that allows property owners to contribute their real estate assets to a partnership with a REIT in exchange for operating partnership units (OP units) in the REIT. This enables property owners to defer capital gains taxes on the sale of their property and diversify their holdings without incurring immediate tax liabilities.

The UPREIT structure was introduced in the 1990s as a way for real estate owners to take advantage of the REIT structure’s benefits, including liquidity, diversification, and tax efficiency. The structure can be particularly attractive for owners of highly appreciated real estate assets looking to monetize their holdings while minimizing their tax exposure.

To understand how a UPREIT works, let’s take an example. Suppose a commercial property worth $5 million had been purchased for $2 million a few years ago. If the property were now sold outright, the seller would likely incur a capital gains tax of 20% on the $3 million gain, resulting in a tax liability of $600,000. However, if the property was contributed to a UPREIT, the taxpayer could defer the capital gains tax and receive OP units in the REIT. The REIT can then sell the property and reinvest the proceeds in other real estate assets, generating rental income and capital appreciation for its investors.

As a holder of OP units, the investor would receive a share of the REIT’s income and appreciation, similar to owning shares in a publicly traded REIT. The advantage of holding OP units is that the investor can defer its tax liability until selling the “units.” At this point, the investor would pay capital gains tax on the appreciation of the units. This can be a significant tax advantage for investors looking to monetize their real estate holdings without incurring immediate tax liabilities.

Another benefit of an UPREIT is that it provides investors with greater diversification. By contributing a single property to a UPREIT, investors gain exposure to a portfolio of real estate assets the REIT holds. This can help reduce risk and volatility in an investor’s portfolio and provide access to a range of real estate sectors and geographic regions.

In conclusion, UPREITs can be an effective way for real estate owners to monetize their holdings while deferring capital gains taxes and gaining exposure to a diversified portfolio of real estate assets. However, it’s important to note that UPREITs are not without risks, including market volatility, interest rate changes, and tax laws. As with any investment, it’s essential to do your due diligence and consult a financial advisor (SREI Group) or tax professional before making investment decisions.