UPREIT

AAA

DEFINITION of 'UPREIT'

Short for "umbrella partnership real estate investment trust," an UPREIT is an alternative to a section 1031 like-kind exchange as a way to defer or completely avoid capital gains tax liability when an individual or company wants to sell appreciated real estate. Instead of selling the property, the owner contributes it to an UPREIT in exchange for securities called "operating partnership units" or "limited partnership units." The partnership units are worth the same amount as the contributed property. Unlike selling the property, this transaction doesn't create a taxable event. UPREITs became popular in the 1990s. Most large REITs are UPREITs.

INVESTOPEDIA EXPLAINS 'UPREIT'


Upon contributing real estate to the UPREIT, the property owner also receives a put option that allows him or her to convert his or her partnership units into REIT shares or cash after a minimum of one year. Such conversion by the contributor is uncommon because it would create a taxable event. However, the owner's heirs, including a spouse, may wish to use the put option after the owner's death. Because the partnership units' basis is stepped up to current market value when the owner dies, the owner's heirs can convert the partnership units to REIT shares or cash without triggering capital gains tax. UPREITs thus allow owners to transfer appreciated property to heirs tax-free, making UPREITs a valuable tool for estate planning. UPREIT partnership units are also a more liquid source of capital than real estate to pay estate taxes upon the owner’s death.

UPREITs do have a couple of caveats:

1. If the UPREIT liquidates during the contributor’s lifetime, this event would be taxable. A standstill or lockup agreement can eliminate or minimize this risk.

2. The number of partnership units the contributor receives depends on the current market value of those units. Contributing property to an UPREIT at a time when its shares are overpriced can be a bad deal if those shares later decline in value. Contributing when shares are underpriced, however, can make the transaction even more valuable in the long run as the partnership units gain value.
RELATED TERMS
  1. Cascade Tax

    A tax that is levied on a good at each stage of the production ...
  2. Tax Fraud

    Tax fraud occurs when an individual or business entity willfully ...
  3. Capital Tax

    A tax on a corporation's taxable capital, comprising capital ...
  4. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
  5. Real Estate Investment Trust - ...

    A security that sells like a stock on the major exchanges and ...
  6. Dividend

    A distribution of a portion of a company's earnings, decided ...
RELATED FAQS
  1. How much of the global economy is comprised of the real estate sector?

    The commercial and residential real estate industry generated an estimated $3 trillion in 2014, with some 35% of sector revenue ... Read Full Answer >>
  2. How can the price of a stock change on the ex-dividend date?

    An investor looking for a dividend-paying stock has two important dates to consider when investing in a company. The first ... Read Full Answer >>
  3. How can I invest in tax liens?

    An individual can invest in tax liens by identifying available liens and then participating in auctions where property tax ... Read Full Answer >>
  4. What kinds of real estate transactions use triple net (NNN) leases?

    A net-net-net lease, also known as a triple net or NNN lease, is a type of real estate lease that requires the tenant to ... Read Full Answer >>
  5. What are the drawbacks of a small investor buying blue-chip stocks?

    Blue-chip stocks are generally safer for investors. However, their drawbacks for small investors include moderate growth ... Read Full Answer >>
  6. What is the average annual dividend yield of companies in the automotive sector?

    As of May 2015, using trailing 12-month data, the annual dividend yields of industries in the automotive sector are 1.01% ... Read Full Answer >>
Related Articles
  1. Retirement

    Top 7 Estate Planning Mistakes

    Many people try to avoid this process altogether, making things difficult for heirs.
  2. Retirement

    Estate Planning: 16 Things To Do Before You Die

    Find out what you need to prepare to avoid serious estate planning mistakes.
  3. Retirement

    In-Depth Guide To Estate Planning

    The process of planning your estate takes careful consideration. Skip any of these important steps, and your estate could be mishandled.
  4. Retirement

    Estate Planning Basics

    Deciding what will happen to your assets when you pass away is a must - no matter how wealthy you are.
  5. Stock Analysis

    Top Investment Ideas for Malls of the Future

    How investors should be thinking about the mall of tomorrow.
  6. Investing Basics

    How Does a Dividend Reinvestment Plan Work?

    A dividend reinvestment plan allows investors to use their dividends to purchase more shares of the corporation’s stock, rather than receiving payment.
  7. Taxes

    What is an Ad Valorem Tax?

    An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.
  8. Personal Finance

    5 Assets Only The Ultra Rich Can Afford

    Yacht? Private jet? Not that unusual. If you’re rolling in the big bucks, you can buy something much more interesting.
  9. Professionals

    Why Advisors Should Seek Out Wealthy Workers

    The majority of "high-net-workers" thinks an advisor would add value, but few use them. Financial advisors should see this as an opportunity.
  10. Investing

    Why Higher Rates Could Be Good News For Consumers

    While rates remain extraordinarily low by historical standards, in the last few months we have witnessed a modest change in the environment.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!