There are a lot of options when it comes to how you choose to invest in the real estate market. Unfortunately, most real estate investors get started with the most challenging option: investing in properties one at a time—and managing them all by hand. This approach also has the unwanted side effect of being a full-time job—and all of the responsibilities that come with it.
What if you could unload the work associated with your portfolio while keeping all of the benefits that make it attractive—and without sustaining the heavy losses associated with a typical sale? Thankfully, this isn't a hypothetical situation: your exit strategy actually exists! If you're an investor who's been thinking of selling your investment property, then you need to hear about what an Umbrella Partnership Real Estate Investment Trust or UPREIT can do for you!
So what exactly is so unique about an UPREIT—and why should you care as an investor?
You may be in a position where you have real estate that has appreciated, so you've been thinking of selling your investment property to get out from under the workload; over time, that added value is something you've wanted to take advantage of. However, when you own the real estate outright, those gains on your rental properties can result in a big hit in terms of taxes. If you've been seeking alternatives to punishing capital gains taxation, a DFW UPREIT is the right move for you!
An Alternative to Selling Your Investment Property
With real estate that has appreciated, there's no reason to take a heavy hit from capital gains taxation. Instead, what you can do is transform those real estate assets into partnership units or operating partnership units within an UPREIT structure. This is an exchange that is deferred from a tax perspective and takes advantage of Internal Revenue Code (IRC) Section 721 to convert your properties into same-value operating units.
One big benefit of this model over simply selling your investment property is that when you go through this type of transfer, you can avoid capital gains taxes until individual operating units are transferred into shares in the DFW UPREIT. This not only turns your illiquid assets liquid, but it also makes managing your cash flow easier when choosing to invest elsewhere or gift your portfolio as an inheritance. Plus, when you work within a DFW UPREIT, you no longer have to manage your units to keep them profitable: the Umbrella Partnership portion of the REIT does all the work for you.
Transferring Real Estate Assets in a Portfolio
To better understand exactly how this type of transaction would work, let's use an example where you have an apartment building with 100 units. You may be in a position where you own that building and all of the units that are inside of it. You get to the point where the building has appreciated, and you want to do something to move it rather than continue to inherit the workload associated with managing 100 homes.
When you take that apartment building and to contribute it to a DFW UPREIT, the capital gains tax that would be applied to the entirety of a traditional sale is deferred. You are also given same-value operating units in exchange for the appreciated value of the apartment units. When selling your investment property the traditional way, you wouldn't be able to liquidate a single unit in the entire building to enhance your cash flow.
With properties converted into operating partnership units—and potentially into shares—you as the former apartment owner are now in a position where you have both the potential gains from both the shares and also from the continued management of the properties you contributed to the DFW UPREIT. As long as you retain your operating units, they remain tax-deferred. Only after you shift operating partnership units into stock is when you would run into capital gains tax.
Primary Benefits of Choosing a DFW UPREIT
Sure, we've discussed that one benefit that comes with choosing a DFW UPREIT structure is that you can avoid the taxation associated with selling your investment property. As the owner, you gain considerable financial freedom in determining how you want to mobilize your real estate assets when you convert them into operating units. Additionally, you offload the responsibilities associated with maintaining your former properties.
However, an added perk that comes with transferring your properties into a DFW UPREIT is that you have tapped into an expansive portfolio collective—and the added diversity this provides. Unlike traditional property management that often works on a small scale, you are now part of a balanced portfolio—and this can be very advantageous for you as an investor.
Let the Professionals Be Your Guide
Now that you know more about how a DFW UPREIT structure can be put to work for you, you may be interested in learning more about various types of REITs and exchanges—and how they compare. This requires more in-depth information than we can offer in a single article. However, when you reach out to The Peak Group, we can walk you through exactly why a DFW UPREIT is so beneficial to investors looking to escape the burdens of an overwhelming portfolio.
Investing in an UPREIT can be a powerful vehicle for returning the reigns of your properties to you! Let us show you how to reach financial freedom when you choose this alternative to selling your investment property outright.
Posted by The Peak Group on April 16, 2020