facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Military Finances 401: UPREITs Thumbnail

Military Finances 401: UPREITs

Investment Taxes

Wait! It's a new acronym. UPREIT's (Umbrella Partnership Real Estate Investment Trust) are a specific tool to help solve a specific problem. That problem is highly appreciated real estate. UPREIT's (also called 721 exchanges) allow a real estate investor to get a piece of real estate out of his or her portfolio and replace it with a diversified real estate portfolio with a $0.00 tax bill when executed.

How Does an UPREIT Work?

Much like exchange funds (see article below) UPREIT's operate as a partnership, often operated under a normal REIT. Like any other partnership, a real estate investor can contribute property to the partnership in exchange for an interest in that partnership. And as mentioned above, this exchange is not a taxable event.

If other properties have been contributed to the UPREIT (which is the normal case), the investor now owns a diversified real estate portfolio. The managers of the UPREIT will manage the portfolio of properties including arranging for repairs and finding tenants. The manager of the UPREIT will distribute the partnership income to the partners and that income will be taxable (after accounting for expenses). The income is eligible for the Qualified Business Income (QBI) deduction. The QBI deduction is 20% or said another way, you'll only pay income tax on 80% of the income. This deduction is not subject to income limits, which isn't always the case with the QBI deduction.

One final nuance in a UPREIT. You may be able to exchange all or a portion of your UPREIT position for shares in the parent REIT. Again, this exchange is tax free.

Why Are the Differences Between UPREITs and 1031 Exchanges?

There are important differences between UPREITs and 1031 exchanges. Here are some of the more important ways.

  • UPREITs help diversify a real estate portfolio. On the other hand, most 1031 exchange are one for one and the portfolio doesn't get diversified.
  • UPREITs do not have the same rules on identifying replacement property that 1031 exchanges have (identify and replace property with 45/180 days of closing on the sale)
  • UPREITs may allow even further diversification through shares of the parent REIT
  • UPREITs are one and done. Once you've exchanged your property for a portion of the UPREIT, you can't exchange for another UPREIT or do a 1031 exchange. When you dispose of the UPREIT, you will be taxed. You can do an unlimited number of 1031 exchanges
  • With an UPREIT you give up management and decisions about the property. With a 1031 exchange you maintain control

Should You Use an UPREIT?

Like most financial decisions, whether or not to use an UPREIT depends on the situation. If getting out of managing your property and diversifying your real estate portfolio are goals, then an UPREIT could be a good option. If on the other hand, your goal is to build a real estate portfolio for your heirs, then a 1031 exchange might work better, and you swap til you drop.

Military Finances are Different

Moving every few years as a member of the military can result in a bit of a real estate empire. That is one way that military finances differ from those of a civilian. That's one of the reasons we think that Active and Retired Senior Military Officers and NCOs should work with a financial advisor that deals with people just like you every day. If you'd like to find out how we do that, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 401: Exchange Funds


Retired Military Finances 201: 1031 Exchanges


Military Finances 401: Delaware Statutory Trusts. Another Choice for Rental Property Sales.



Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.