A 1031 UPREIT (Umbrella Partnership Real Estate Investment Trust) transaction allows real estate investors to exchange property on a tax-deferred basis under IRS Section 1031 while gaining diversification and liquidity by ultimately converting real estate into shares of publicly traded REIT (Real Estate Investment Trust). This strategy is particularly attractive to property owners who wish to exit direct ownership but still benefit from real estate investment returns and the tax savings of a traditional 1031 exchange.
How It Works
Instead of selling investment property outright (which would trigger capital gains taxes), an investor contributes their proceeds from a sale to an UPREIT in exchange for a shared interest in property owned by the UPREIT. That shared interest can then later be converted into publicly traded REIT shares, providing diversification and the ability to gift or grant such shares as part of the investor’s estate planning strategy.
Benefits of a 1031 UPREIT
The financial benefit of a 1031 UPREIT is tax deferment. Because the exchange occurs under 1031 like-kind exchange rules, capital gains taxes are deferred until the shares in the REIT are sold for cash. This structure also provides diversification, instead of owning a single property, investors gain exposure to a diversified real estate portfolio managed by professionals. REITs typically hold various asset types (e.g., office buildings, apartments, industrial properties), reducing individual property risk. Upon death, heirs or charitable organizations would inherit the REIT shares at a stepped-up cost basis, eliminating the deferred capital gains tax burden.
Considerations
The benefits of a 1031 UPREIT should also be considered against some other unique factors. For instance, once exchanged, the shares of a REIT cannot be exchanged into another 1031 property. Also, after the initial sale of investment property, there is a waiting period of two years before the shared interest in real estate can be converted into shared of a REIT. Additionally, publicly traded REIT shares are subject to market fluctuations.
A 1031 UPREIT transaction offers investors diversification, passive income, tax deferment, and flexibility in estate planning, making it a powerful wealth preservation tool. It is ideal for those looking to transition from active property management to a hands-free, diversified real estate investment without an immediate tax liability.
