But there is good news for those hoping to do a 1031 exchange today and own REIT interests in the future—without triggering capital gains taxes. This is known as the “1031/721 combo strategy” or simply the “UPREIT conversion” strategy. Here’s how the 1031/721 Strategy works:
Sell your rental property today
Conduct a 1031 exchange by investing your proceeds into a passive replacement property
Own a fractional interest in an institutional property for 2-3 years The Operating Partnership (“OP”) of an “UPREIT” then acquires the property UPREIT stands for Umbrella Partnership Real Estate Investment Trust Your interests in the property convert to REIT OP units under a tax-deferred transfer per IRC §721 Thereafter, you own REIT OP units, which can be redeemed partially or entirely on a periodic basis beginning 12 months after the conversion REIT investors continue to claim their pro-rata share of depreciation (subject to personal cost basis) and ultimately benefit from a “step up” in cost basis upon death, thereby avoiding the deferred capital gains taxes altogether
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