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.

BREAKING DOWN '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. Profit Margin

    A category of ratios measuring profitability calculated as net ...
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. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  6. Investing Basics

    Find Income-Generating Properties Online

    Discover the best websites for finding valuable properties that can earn you income.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Global ex-US Real Estate

    Take an in-depth look at the Vanguard Global ex-U.S. Real Estate ETF, an international property fund tilted toward Asian markets.
  9. Economics

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  10. Home & Auto

    Après Ski to Profit: Investing in a Swiss Chalet

    Evolving Swiss property laws mean that Swiss ski chalets have become precious commodities – and excellent investments, even if you're not British royalty.
RELATED FAQS
  1. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  2. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  3. What kind of companies in the utilities sector offer the most stable dividends for ...

    Among the companies that offer the most stable dividends for risk-averse investors are large, solidly established U.S.-based ... Read Full Answer >>
  4. What are examples of typical leasehold improvements?

    Typical leasehold improvements include partitioning a large, open space into smaller, more structured areas such as dressing ... Read Full Answer >>
  5. What are the most popular mutual funds that give exposure to the utilities sector?

    Some of the most popular mutual funds that provide exposure to the utilities sector include American Century Utilities, Prudential ... Read Full Answer >>
  6. What dividend yield is typical for the airline sector?

    A dividend yield of 1% is typical for the airline sector. However, many airlines do not pay any dividends at all unlike other ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  2. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  3. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  4. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  5. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
  6. Marlboro Friday

    A reference to Friday, April 2, 1993, when Philip Morris, the maker of Marlboro cigarettes, announced that it would be cutting ...
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!