UPREIT

What Is an UPREIT?

UPREIT means umbrella partnership real estate investment trust. An UPREIT is a unique REIT structure that permits property owners to exchange their property for share ownership in the UPREIT. Be that as it may, UPREITs are generally subject to Internal Revenue Code (IRC) Section 721 exchanges.

Figuring out UPREITs

Real estate investment trusts (REITs) were presented by Dwight D. Eisenhower as a type of alternative real estate mutual fund. REITs are made as a type of real estate portfolio that incorporates real estate properties and real estate financing capital. REITs are an entity that permits investors to make investment contributions for equity units or shares of the business.

As REITs have advanced in the market, a few alternative structures have been developed to accommodate various types of investors. The UPREIT is one such structure, basically known for its allowance of property contributions in exchange for share ownership. The DownREIT and a few different alternatives have likewise been made as branch-offs.

In their formation, REITs can decide to take on a business structure. Publicly traded REITs will be structured as corporations. Private REITs will generally decide to be structured as a trust or association however they may likewise pick other situations with. Like most non-corporations, private substances additionally have the option to be taxed as a corporation.

What is basically important for any REIT is that they meet the requirements of IRC Title 26, Sections 856-859. While meeting these requirements, a REIT can pass through its income to its all shareholders. In that capacity, the pass-through income is viewed as a deduction and the REIT pays next to no in taxes. The fundamental requirement is that greater than 90% of the business relates to real estate assets.

Special Considerations

Rather than selling property, an owner can contribute it to an UPREIT in exchange for units. The share units generally have a similar value as the contributed property. Since the property sold to the REIT is covered under IRC Section 721, the transaction doesn't make a taxable event.

In property-to-share conversion, UPREITs might direct special provisions. Frequently, the exchange furnishes the seller with special units that permit the property seller to pick how they might want to vest in the REIT. Property sellers might be permitted to promptly change units over completely to REIT shares. Different options may likewise be accessible, for example, holding shares for at least one year and afterward getting cash.

When an investor sells their property to an UPREIT, the UPREIT possesses the property and all administration engaged with it. UPREIT management can be to some degree more complex than fundamental REITs in light of the Section 721 exchange option and every one of the provisions that accompany it for the new unitholder. UPREIT managers are responsible for dealing with their REIT portfolio to produce returns.

Shares of the UPREIT can vary in light of the activities of management, valuation of the real estate properties, financing bargains, and whatever other transactions that happen. This can make volatility for shareholders. UPREIT shareholders will commonly have flexible liquidity which permits them to effectively change their shares over completely to cash at whatever point they pick.

Benefits of UPREITs

UPREITs can be a reasonable option for any property owner seeking to sell their property. In that capacity, it can appeal to both individual property owners and commercial property owners. Any property owner who decides to create a Section 721 exchange into an UPREIT can receive the value of the property as UPREIT units.

Section 721 exchanges into an UPREIT don't make a taxable event. In any case, unitholders are taxed in light of general REIT taxation standards. Some property owners might decide to involve this type of investment for estate planning since it might perhaps bypass taxes out and out.

Requirements for UPREITs

An UPREIT is a REIT under all standard accounting and tax rules. UPREITs were made to consider the contribution of property into the REIT in exchange for ownership shares. This organizing is accordingly directed by the standards of IRC Section 721 which talks about tax safeguards for property to share exchanges. As a general rule, any REIT which takes into consideration Section 721 exchanges inside the REIT can be viewed as an UPREIT.

Most REITs will zero in on a specific segment of the real estate market, however the directing standards just direct that real estate property and associated financing must make up greater than 90% of the business. UPREITs will commonly follow a similar investing strategy, zeroing in on a targeted real estate niche.

Section 721 gives directing standards to the release of shareholder units in exchange for property. Section 721 can be an alternative to IRC Section 1031 exchanges. Section 1031 exchanges permit a property owner to sell their property and invest the proceeds in a like-kind exchange to keep away from taxes.

Section 1031 exchanges are not permitted in UPREITs anyway on the grounds that they require like-kind exchanges and don't permit a property to share ownership exchanges. In this manner, the Section 721 exchange into an UPREIT can be alluring. Both 721 and 1031 exchanges permit the property owner to concede taxes.

UPREIT versus DownREIT

UPREITs, DownREITs, and any remaining special REIT elements are just REITs at their core with special provisions that permit them some additional flexibility. The DownREIT permits a property investor to go into a joint venture with a REIT. In a DownREIT, the unit exchange depends fundamentally on the value of the property in the joint venture which can make better returns for the joint venture unitholder.

Features

• UPREIT property benefactors can concede taxes on the sale of property in exchange for UPREIT units however capital gains taxes on UPREIT units are subject to standard REIT taxation.
• Property-for-share exchanges in an UPREIT are generally permitted under Section 721 of the Title 26 Internal Revenue Code.
• An UPREIT is a unique REIT structure that permits property owners to exchange their property for share ownership in the UPREIT.