1031 UPREIT Overview
A 1031 UPREIT Program combines the concepts of a 1031 Exchange, a DST, a 721 Exchange and an UPREIT into one cohesive product.
How a 1031 UPREIT Program Works
In a 1031 UPREIT program, an investor first exchanges an appreciated investment property (the relinquished property) for an interest in a DST that owns real estate through a 1031 exchange, moving the investor from an active real estate investment to a passive one.
If the REIT elects to exercise its fair market value purchase option, the investor contributes their DST interest to the REIT’s operating partnership in exchange for interests in the operating partnership known as OP Units. This is known as a 721 exchange and provides the investor exposure to the operating partnership’s portfolio of high-quality, institutionally managed real estate properties.
Since both the 1031 exchange and the 721 exchange are tax-deferred transactions, this allows the investor to maintain a passive investment in real estate without incurring taxes.
Benefits of a 1031 UPREIT Program1
1031 Investor Benefits
- Provides a passive solution to complete a 1031 exchange and defer capital gains with potential access to a large, diversified portfolio of real estate
- Provides significant estate planning benefits including easy divisibility of the estate among heirs and the ability for heirs to enjoy a step-up in basis
- Provides access to liquidity, in part or in whole, through the REIT Operating Partnership’s redemption program
- No need to continually 1031 exchange to maintain tax deferral
- Protection from potential future elimination of Section 1031 by the U.S. government
REIT Benefits
- Provides access to equity capital to grow the REIT’s portfolio and AUM
- Tax sensitive investors tend to be long-term investors
- Highly valued by distribution partners, leading to new and better relationships and paving the way for REIT common stock selling agreements
Distribution Partner Benefits
- Provides advisors with a sophisticated solution that adds significant tangible value to their clients’ portfolios
- Allows advisors to grow their billable AUM by converting private real estate holdings into securities (i.e., OP Units)
