UPREIT 721 Exchange

A 1031 exchange permits an investor to defer taxes on the sale of investment property by purchasing another property of equal or greater value.

This type of exchange does indeed defer taxes.  But the investor must once again actively manage a considerable investment in a single, undiversified asset.

An UPREIT 721 exchange allows the individual investor to exchange full or fractional property ownership in a single property for partnership units in a large portfolio of investment-grade properties. These REIT operating partnership units can later be converted into REIT common stock.

Exchange Criteria

• No prior sale or exchange funds: relinquished property is exchanged directly for partnership units.
• Marketable investment property.
• Minimum property value $ 1 million
• Accredited investor

How an UPREIT Exchange Works

• Investor directly exchanges property for operating partnership units in REIT.
• Relinquished property appraised by both REIT and investor.
• Investor exchanges property for equivalent value of operating partnership units.
• Investor receives initial 7% (sheltered) cash flow from diversified REIT portfolio.
• Investor can convert operating partnership units into REIT common stock at later date (a taxable event).
• REIT common stock can then be sold as publicly traded shares.

Or

• Investor owns partnership units until death.
• Heirs receive step-up in basis, pay no capital gains tax.

Benefits of UPREIT exchange

• Circumvents problem of selling property and then finding a replacement with IRS time limits
• Maximum real estate diversification within tax-deferred options
• Defer all tax liabilities
• Relief from property management
• Simplify estate
• Maximize cash-flow

However…

• UPREIT is an exit strategy. Investor cannot later exchange operating partnership units back into ownership of single property. Units can only be converted into REIT shares.
• Portfolio performance dependent on REIT investment managers.