How is it different from a traded REIT?
Non-traded UPREITs offer stability without public trading; OP Units may have redemption options.
Why a DST to non-traded UPREIT?
If you are selling highly appreciated real estate a 721 exchange into a non-traded UPREIT offers a powerful next step. Enjoy: Continued Tax Deferral: Postpone capital gains taxes seamlessly. Diversified Portfolio: Shift from a single property to a stable, managed real estate collection. Long-Term Focus: Benefit from steady income without stock market volatility. Estate Planning Edge: Pass on wealth with potential tax advantages for heirs.
Who should consider a DST to 721 UPREIT transaction?
You may want to consider a DST to 721 UPREIT transaction if you fall into one of these categories: Those seeking diversification without triggering taxes. Investors prioritizing passive income and potential liquidity. Individuals planning estate transitions to benefit heirs. Those considering a net lease property but would like a more diversified strategy.
What are the risks involved?
Like all investments, a DST to 721 UPREIT transaction carries certain risks: Market Risk: OP Unit or REIT share values may decline due to real estate fluctuations. Liquidity Limits: Conversion of OP Units may be restricted by timing or UPREIT rules. Loss of Control: Investors relinquish direct influence over the DST property. Tax Law Changes: Future legislation could impact tax deferral benefits
Is it a reasonable expectation that liquidations will occur with UPREIT’s over time and realize capital gains?
After the 721 conversion takes place, investors own OP units which are essentially shares, in the entire REIT, which includes all the properties in the REIT’s portfolio. The REIT intends to 1031 exchange any selling properties so if there is a particular original property that sells it shouldn’t necessarily trigger taxes for you. Of course, there could be the minute risk that the REIT sells your exchanged property (without exchanging) and creates a tax event but I haven’t seen this yet in any of my clients’ REITS over the last 20 years. These are typically perpetual life REITs that grow [...]
Will the REIT continue to buy more properties? Will there be taxable gains as the REIT grows and values go up during my hold?
The REIT fund is professionally managed and usually aims to strategically acquire and disposition properties to benefit the fund. Most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares. With increased basis associated with the non-recourse debt in the DST phase, it is possible to have minimal tax on the income in the OP unit/REIT phase.
What annual tax reporting documents will I receive after the completion of the 721?
DST investors currently receive a substitute Form 1099 each year. After the completion of the 721 exchange Transaction, the Operating Partnership will instead issue annual Schedule K-1 tax statements to the holders of OP Units. What About State Tax Filings? As an investor in the REIT, there may be a requirement to file 2024 state income tax returns in the jurisdiction in which the REIT has earned income or loss. The 721 UPREIT sponsors that we work with offer state composite tax return election usually via a convenient portal designed to make tax reporting easier and more efficient. If the [...]
How long does the process take?
While timelines can differ, most transactions follow a general timeframe: DST Phase: Investors will hold their DST position for a minimum of two years. UPREIT Phase: If the REIT executes the Fair Market Value Call Option, investors will be swapped out of the DST property and into OP Units in the REIT. Holding Time: Typically, after one additional year investors can convert OP Units into REIT shares and sell them via the share repurchase program. (Subject to capacity constraints / sponsor terms.)
What happens if the DST property does not get called into the REIT?
Although unlikely, this can happen. If the DST doesn’t get called into the REIT by the sponsor then it continues as the DST for the remainder of the hold, it could be re-evaluated for the UPREIT at a later time but if the property sells as a DST, investors can cash out or 1031 exchange the proceeds.
What happens to the debt from the DST when it UPREITS (721 exchange)?
The DST interests have been exchanged for OP units ownership in the REIT so it is important to evaluate the debt levels of the REIT when choosing a DST to REIT program. Any non-recourse debt assumed when you purchased the initial DST, is extinguished when you go into the OP units of the REIT phase. Many clients find this feature very attractive as you may have increased your basis and resulting depreciation benefit to the cash flow by acquiring the initial debt in the DST phase but are no longer responsible for any of the debt in the REIT phase.