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.
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.)
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.
One cannot buy into a REIT for their 1031 exchange as the ownership of the REIT is typically in the form of shares rather than direct ownership of real estate as required by the like-kind exchange tax law. Intermediary/Accommodators will not wire funds into REIT for this reason. If a client desires to be invested in REIT, they first need to invest in a DST - per the IRC Revenue Ruling 2004-86 - where the DST is likely to be acquired by the REIT in the future utilizing section 721 and therefore maintaining full tax deferral as long as all [...]
A DST is a legal entity used in real estate investing, often as a replacement property in a 1031 exchange. It allows multiple investors to own fractional interests in income- producing properties (e.g., apartments, retail centers) managed by a trustee, offering passive income and tax deferral.
An UPREIT (Umbrella Partnership Real Estate Investment Trust) is a structure where a REIT controls an operating partnership. Investors contribute property (or DST interests) to the partnership in a tax-deferred 721 exchange and receive OP Units, which may later be convertible into REIT shares or cash.
