Umbrella Partnership Real Estate Investment Trusts (UPREIT) allows property owners to exchange their property for share ownership in an UPREIT, usually are subject to Internal Revenue Code (IRC) Section 721 exchanges and are deemed a REIT under standard accounting and tax practices. If you opt in to an UPREIT property, you will be able to defer taxes on the sale of a property in exchange for UPREIT units. This is done via capital gains taxes on UPREIT units and are subject to standard REIT taxation.
UPREITs hold appeal to for individual property owners and commercial property owners alike. Your property contributions in exchange for share ownership in an UPREIT does not create a taxable event because the share units generally have the same value as the contributed property. UPREITs may dictate special provisions such as property sellers being allowed to immediately convert units to REIT shares. Other options might include holding shares for a minimum of one year and then receiving cash.
If you choose to sell your property to an UPREIT, the UPREIT will own the property and its administration will be more complex than a standard REIT. This is due to the Section 721 exchange option and provisions for the owner of the unit. It is incumbent upon UPREIT managers to manage the REIT portfolio to generate returns. Anyone interested in this powerful tax saving tool is strongly advised to seek advice and preparation from their tax specialist.