The Differences Between an UpREIT and a DownREIT

Real estate investment trusts, or REITs, allow investors to invest in large-scale real estate. But what are the differences between an UpREIT and a DownREIT?
Written By
Carl E. Sera, CMT
Published On
May 4, 2023

Traditional methods of REIT formation involve real estate transfers to a REIT in exchange for REIT stocks. But unfortunately, it creates a taxable instance if property interests become diversified. So, what are the differences investors should know between UpREITs and DownREITs?

What Is an UpREIT?

An UpREIT is a collaboration between a REIT where property investors transfer real estate assets for operating partnership units and the owners of real estate appreciation. It’s a 721 exchange with tax-deferring benefits that share similar advantages to 1031 exchanges.

Operating partnership units become converted to REIT shares or sell the contributing property. Furthermore, UpREITs work as wealth management tools for tax management purposes by private real estate owners.

What Is a DownREIT?

A DownREIT consists of a joint partnership between a REIT and a real estate owner for acquiring and operating real estate properties. A property becomes transferred into joint ventures, allowing investors to defer capital gains taxes.

Investors often prefer DownREITs in cases of deferring capital gains taxes on an appreciated property sale if they believe the property value exceeds a property owned by a REIT. Furthermore, DownREITs are for investors who don’t intend to operate under umbrella partnerships and opt for limited partnerships with REITs.

Comparing UpREITs and DownREITs

So, what are the differences between UpREITs and DownREITs? Firstly, because DownREITs focus on a joint venture, property assets become held at the partnership level, as partnership performance remains separate from a REIT’s portfolio.

Furthermore, UpREITs have been more commonly used for tax benefits and simplistic approaches, which allow investors to defer capital gains taxes in transferring appreciated real estate properties. However, DownREITs have a more complex process and receive more criticism from the IRS, which causes investors to favor UpREITs instead.

We at Sera Capital offer our real estate investment services to those who need financial advice, management, and opportunities. We specialize as a fee-only fiduciary that provides 721 and 1031 exchanges, along with Delaware Statutory trust services and other real estate investment practices. Our professional IRC 721 advisors help eager investors receive tax benefits and increase investment portfolio diversification and liquidity. If you have any questions about our investment services, schedule a free 30-minute call today.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 16 years of experience in the financial services industry with a focus on investment management.

Secure Your Free 30-min
Consultation Today

Schedule Consultation