In an UPREIT transaction, a property owner looking to defer taxable gain on the sale of a property may transfer the property to the UPREIT in exchange for limited operating partnership units (OP Units). Taxes on the gain are deferred until the seller later redeems the OP Units for shares of the REIT. Although a powerful tax deferral and diversification strategy for real estate owners to consider, 721 exchanges are complex and may not be suitable for all investors.

Potential Benefits of a 721 Exchange/UPREIT Structure

 
Diversification

By transferring a single property to an UPREIT in exchange for OP Units in an operating partnership, the seller of the property may gain access to indirect ownership of a larger portfolio of properties.

 
Liquidity

In an UPREIT structure, owners of OP Units may be able to convert their units for shares of common stock of the REIT, which may provide access to liquidity options. However, the conversion may be a taxable transaction and in such event may cause the holder of the OP Units to recognize tax liability at the time of such conversion.

 
Estate Planning

OP Units can be split equally and either held or liquidated by the holder’s heirs or estate, receiving a step-up in basis, paying no capital gains and depreciation recapture taxes.

 
Hands-Off Investing

By transferring a property to an UPREIT in exchange for OP Units in an operating partnership, the seller of the property no longer will have to worry about property management responsibilities.

Frequently Asked Questions

Can 1031 exchange be performed after a 721 exchange?

REIT shares are not eligible to be used in a 1031 exchange, therefore once a 721 exchange is completed, capital gains taxes can no longer be deferred via a 1031 exchange.

Can DST interests be used in a 721 exchange?

Property owners can contribute DST interests to an UPREIT in exchange for OP Units as part of a 721 transaction. Taxes on this transaction are deferred during the time the OP Units are held, typically between 12 to 24 months. Investors may receive distributions from OP Units*.

How does a 1031 exchange differ from a 721 exchange?

Both transactions allow property owners the ability to defer capital gains tax on the sale of a business or investment real property. However, a 721 exchange transaction allows property owners to contribute real property in exchange for interests in an operating partnership of a REIT that is structured as an UPREIT. With a 1031 exchange, property owners exchange property for other like-kind property.

For More Information

Inland Private Capital investment programs are sold by broker dealers and registered investment advisors authorized to do so.

Contact your financial professional to learn more. Or, for help finding a financial professional:

CONTACT INLAND

Inland Private Capital Investment Programs are sold by broker dealers and registered investment advisors authorized to do so.

Connect with your Inland team to learn more:
Important Disclosures

This page includes a brief and general description of Section 721 of the Internal Revenue Code. All investors should consult their own tax advisors regarding a Section 721 tax strategy.

Important Risk Factors to Consider

Investments in real estate assets are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the financial condition, operating results and value of real estate assets. These factors include, but are not limited to:

  • changes in national, regional and local economic conditions, such as inflation and interest rate fluctuations;
  • local property supply and demand conditions;
  • ability to collect rent from tenants;
  • vacancies or ability to lease on favorable terms;
  • increases in operating costs, including insurance premiums, utilities and real estate taxes;
  • federal, state or local laws and regulations;
  • changing market demographics;
  • changes in availability and costs of financing;
  • acts of nature, such as hurricanes, earthquakes, tornadoes or floods
  • economic risks associated with a fluctuating U.S. and world economy, including those resulting from the novel coronavirus and resulting pandemic.

Connect with Us

This website is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by an offering memorandum and sold only by broker dealers and registered investment advisors authorized to do so. An offering is made only by means of the offering memorandum in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the offering memorandum must be made available to you in connection with any offering.

Investments in offerings sponsored by Inland Private Capital Corporation (IPC) involve certain risks including but not limited to tax risks, general real estate risks, risks relating to the financing on the applicable property, if any, risks relating to the ownership and management of the property, risks relating to private offerings and the lack of liquidity, and risks relating to the DST, QOZ and Qualified Opportunity Fund structures. This website is not intended as tax advice

The Inland name and logo are registered trademarks being used under license. Throughout this web site “Inland” refers to some or all of the entities that are a part of The Inland Real Estate Group of Companies, Inc., which is comprised of a group of independent legal entities, some of which may be affiliates, share some common ownership or have been sponsored and/or managed by such entities or subsidiaries thereof, including Inland Real Estate Investment Corporation. The Inland name and logo are registered trademarks being used under license.  Inland Securities Corporation, member FINRA/SIPC, is dealer manager and placement agent for programs sponsored by Inland Investments and Inland Private Capital, respectively. For more information on Inland Securities Corporation, visit FINRA BrokerCheck.

Copyright © 2024 Inland Private Capital Corporation. All rights reserved.