UPREITs facilitate a tax-deferred real estate asset exchange

The complications of real estate property management, the desire for diversification, and the nature and process of estate planning are all common reasons for real estate investors to want to exit their real estate investments. Unfortunately, sales of properties for cash are typically taxable events, which means that the investor becomes liable for taxes on the difference between the sales price and the investor’s adjusted tax basis in the property. If the investor has held the property for a long time and substantially depreciated the asset and/or the property has appreciated in value, the tax burden may be significant. Certain tax-deferred transaction structures allow property owners to divest their low-basis multifamily real estate without triggering capital gains.

An UPREIT transaction (where “UPREIT” stands for umbrella partnership real estate investment trust) is a mechanism allowing for a tax-deferred contribution of property to a partnership under Section 721 of the Internal Revenue Code. In this transaction, a property owner contributes property to a real estate investment trust’s (REIT’s) subsidiary operating partnership or company in exchange for partnership or membership interests in the operating entity (as the image to the left depicts). An UPREIT transaction can allow an investor to essentially trade one property (or a portfolio) for an equity interest in a larger, diversified portfolio that is managed by the REIT and its advisors. The transaction may offer the investor enhanced liquidity options as well.

Through an UPREIT transaction property owners may be able to achieve one or more of the following objectives: (a) defer capital gains tax when appreciated real estate is sold; (b) eliminate management hassles of owning real estate; (c) diversify through ownership of a portfolio of properties; (d) upgrade to institutional quality real estate; (e) receive consistent quarterly income.

Good candidates for an UPREIT transaction may include:

  • Family-owned properties with unresolved succession issues
  • Properties with third-party tenants
  • Partnerships that need to be dissolved
  • Long-term assets with very low basis
  • Surplus property generated by consolidations
  • Property owners concerned they have too much of their net worth tied up in real estate

Intrigued? We invite you to explore the nuances, features, and benefits of UPREIT transactions by downloading our whitepaper below.

Download our whitepaper to learn more!

UPREIT stands for umbrella partnership real estate investment trust. BSP’s Multifamily UPREIT Program offers owners of multifamily apartment communities a way to contribute their properties to BSPMT on a tax-deferred basis in exchange for an equity interest in BSPMT’s operating company. Tax laws are subject to change. You should obtain investment, financial, legal, and tax advice and conduct a diligent investigation of information material to you before making any decisions regarding a potential UPREIT transaction.