What is an UPREIT? Is it a good tool for 1031 Exchanges?

Converting real property in to a REIT is possible using an UPREIT. The potential advantages of using an Umbrella Partnership Real Estate Investment Trust (UPREIT) in conjunction with a Section 1031 Exchange in bullet points:

Deferred Capital Gains Taxes: A primary advantage of using an UPREIT in a 1031 Exchange is the ability to defer capital gains taxes from the sale of a property. By transferring the property into the UPREIT, an investor can avoid immediate capital gains tax that would be due in a traditional sale. The tax is deferred until the investor sells their Operating Partnership (OP) units or the UPREIT sells the property.

• Liquidity: Unlike direct ownership in real estate, UPREIT Operating Partnership units can be more readily converted to cash. Although the conversion of these units into REIT shares may trigger a tax event, the investor has the freedom to decide when to make this conversion and potentially spread the tax liability over a longer period.

• Diversification: By participating in an UPREIT, an investor can diversify their real estate portfolio. UPREITs typically own a variety of properties in different sectors and geographic locations, reducing the risk associated with owning a single property.

• Professional Management: UPREITs are managed by professionals who handle day-to-day operations and decision-making. This allows investors to enjoy the benefits of real estate investment without having to deal with the complexities of property management.
  Estate Planning Benefits: If held until death, the beneficiaries of the investor’s estate will receive a step-up in basis on the OP units, potentially reducing the capital gains tax liability.

• Access to Larger Investments: Through an UPREIT, small investors can gain access to larger, institutional-grade properties that would be out of reach for them individually.

However, it’s important to note that UPREITs also come with risks and complexities, and may not be suitable for all investors. It’s recommended to consult with a tax advisor or real estate investment professional before making any decisions.