What is 'UPREIT'

UPREIT is 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. DownREIT

    A joint venture between a real estate owner and a real estate ...
  2. Publicly Traded Partnership - PTP

    A business organization owned by two or more co-owners, that ...
  3. Partnership

    A business organization in which two or more individuals manage ...
  4. IRS Publication 541

    A document published by the Internal Revenue Service (IRS) that ...
  5. Real Estate Limited Partnership ...

    A limited partnership entity organized to invest in real estate. ...
  6. Limited Partnership Unit

    An ownership unit in a publicly traded limited partnership, or ...
Related Articles
  1. Small Business

    What is a Partnership?

    A partnership is an organization where two or more owners operate a business.
  2. Investing

    Add Some Real Estate To Your Portfolio

    From REITs to owning your own home, find out how diversify your portfolio with real estate assets.
  3. Investing

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  4. Investing

    Simple Ways to Invest in Real Estate

    Owning property isn't always easy, but there are plenty of perks. Here are some ways to invest in real estate.
  5. Taxes

    Avoid Capital Gains Tax On Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  6. Financial Advisor

    How to Invest in Real Estate Without Buying Property

    Investing in real estate can require more capital than most investors have available, but there are options to invest in real estate for less.
  7. Investing

    How You Make Money In Real Estate

    If you're interested in the real estate game, make sure you know what factors will affect whether you make money or not.
  8. Taxes

    Trade Properties To Keep The Taxman At Bay

    Like-kind exchanges can mean a much lower tax bill on real estate for savvy investors.
  9. Investing

    At Look at REITS vs. Real Estate Mutual Funds (ESRT, TRREX)

    REITs and real estate mutual funds have their differences, but they both offer liquidity and easy access to diversified real estate assets.
  10. Investing

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
RELATED FAQS
  1. What's the difference between general, limited and joined venture partnerships?

    Read about some of the important differences between general partnerships, limited partnerships and joint venture arrangements ... Read Answer >>
  2. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  3. How can I make equity investments in real estate?

    Invest in real estate equity through buying and selling real property or through other more liquid investments like real ... Read Answer >>
  4. What financial metrics are best for evaluating companies in the real estate sector?

    Learn about some of the most important financial metrics and other analytic tools before investing in a real estate company ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center