Strategies / 721 UPREIT

721 UPREIT

Contribute appreciated real estate to a REIT operating partnership in exchange for OP Units, deferring capital gains while gaining diversified portfolio exposure.

What is a 721 UPREIT contribution?

Section 721 of the Internal Revenue Code allows investors to contribute real estate to the operating partnership of a real estate investment trust (REIT) in exchange for operating partnership units, deferring the recognition of capital gains taxes on the contributed property.

Section 721 of the Internal Revenue Code allows investors to contribute real estate to the operating partnership of a real estate investment trust (REIT) in exchange for operating partnership units, deferring the recognition of capital gains taxes on the contributed property.

A Section 721 contribution is also referred to as an UPREIT transaction, short for Umbrella Partnership Real Estate Investment Trust. It enables investors to convert direct real estate ownership into ownership of a diversified, professionally managed real estate portfolio while preserving the value that would otherwise be lost to taxes at the time of sale.

A Section 721 contribution is also referred to as an UPREIT transaction, short for Umbrella Partnership Real Estate Investment Trust. It enables investors to convert direct real estate ownership into ownership of a diversified, professionally managed real estate portfolio while preserving the value that would otherwise be lost to taxes at the time of sale.

§ 721
Internal Revenue Code
2+years
typical minimum DST ownership period before a potential 721 contribution
OPUnits
received in exchange for contributed property under IRC § 721

The 1031-to-721 pathway

Many high-net-worth investors hold appreciated investment real estate that does not match a REIT's direct acquisition profile. The 1031-to-721 pathway potentially provides sequential access to UPREIT diversification and liquidity.

IRC § 1031

1031 exchange into a DST

The investor sells investment real estate and reinvests proceeds into a Delaware Statutory Trust through a 1031 exchange. When executed correctly, this is a complete tax-deferred transaction in itself, with capital gains deferred under IRC Section 1031.

Holding period

DST ownership period

The investor owns a beneficial interest in the DST, typically for no less than two years, while the trust operates the underlying institutional-quality real estate. The 1031 deferral is fully established and the investor holds the economic attributes of real estate ownership independent of any subsequent action.

IRC § 721

Potential 721 contribution

Subject to program terms, the REIT may acquire the property held by the DST, or the DST interests themselves, in exchange for OP Units under IRC Section 721. This contribution is a separate, non-guaranteed transaction.

A properly executed 1031 exchange into a DST is a fully tax-deferred transaction under IRC Section 1031 that stands on its own. The investor owns DST interests through a multi-year ownership period during which the underlying real estate is professionally managed. Subject to program terms, the REIT may acquire the property held by the DST, or the DST interests themselves, in exchange for OP Units under IRC Section 721. The REIT may also offer investors the choice between OP Units, cash, or a combination of both. This contribution is a separate transaction with its own tax treatment and is not guaranteed to occur.

If the contribution does occur, investors gain ownership in a diversified REIT portfolio through the UPREIT mechanism, even when their relinquished property would not have been a direct acquisition target for the REIT.

How a 721 UPREIT contribution works

In a 721 UPREIT contribution, an investor contributes investment real estate to the operating partnership of a REIT. In return, the investor receives operating partnership units, commonly referred to as OP Units, which represent a partnership interest in the REIT's diversified portfolio.

In a 721 UPREIT contribution, an investor contributes investment real estate to the operating partnership of a REIT. In return, the investor receives operating partnership units, commonly referred to as OP Units, which represent a partnership interest in the REIT's diversified portfolio.

OP Units can typically be converted to REIT common stock on a one-for-one basis, offering potential liquidity at the investor's discretion, subject to any liquidity restrictions imposed by the REIT. The conversion of OP Units into REIT shares triggers a taxable event at the time of conversion, which is usually the intention of the investor. Until conversion, the investor holds OP Units providing diversified exposure to the REIT's underlying real estate portfolio.

OP Units can typically be converted to REIT common stock on a one-for-one basis, offering potential liquidity at the investor's discretion, subject to any liquidity restrictions imposed by the REIT. The conversion of OP Units into REIT shares triggers a taxable event at the time of conversion, which is usually the intention of the investor. Until conversion, the investor holds OP Units providing diversified exposure to the REIT's underlying real estate portfolio.

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Why investors consider the 721 UPREIT

Tax deferral. Contribution of real estate for OP Units defers the recognition of capital gains taxes that would otherwise be triggered by a direct sale.

Portfolio diversification. OP Units often represent an interest in a diversified REIT portfolio rather than a single asset, reducing concentration risk.

Professional management. REIT-owned properties are typically professionally managed, removing the operational obligations of direct ownership.

Path to liquidity. OP Units can typically be converted to REIT shares, providing a path to partial or full liquidity over time.

Estate planning. OP Units may receive a step-up in basis at death, potentially eliminating capital gains tax liability for heirs.

Sightbridge's Approach

DST Programs with Potential 721 Contribution

Sightbridge is preparing institutional-quality DST programs and Opportunity Zone strategies for the private wealth channel. Select DST programs may contemplate an optional Section 721 contribution feature. Each program is structured to meet the standards of underwriting, transparency, and service that institutional investors expect.

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