Most discussions of 721 exchanges focus on UPREITs, but there's a related structure worth understanding: the DownREIT. Both UPREITs and DownREITs are REIT structures that let property owners contribute property tax-deferred (under Section 721) in exchange for partnership units — so both enable the 721 exchange. The difference is structural. An UPREIT (umbrella partnership REIT) holds all its properties in a single operating partnership beneath the REIT. A DownREIT, by contrast, involves the REIT forming a separate partnership at a lower tier for the contributed property, rather than using one umbrella operating partnership for everything. The DownREIT is less common and more complex, used in specific circumstances. Understanding the UPREIT-vs-DownREIT difference helps owners navigate the structure they encounter. This guide explains the structural and tax differences, when each is used, and what it means for property owners.
The UPREIT structure
The UPREIT structure, covered in our UPREIT basics guide, has the REIT owning all its properties through a single operating partnership. The REIT sits at the top (issuing shares, controlling the partnership as general partner), and beneath it is one operating partnership (the 'umbrella') that holds the entire real estate portfolio. Property owners who contribute property receive units in this single operating partnership (OP units).
So in an UPREIT, there's one operating partnership holding all the properties, with the REIT and the contributing owners as partners. All contributed properties go into the same operating partnership, and all contributors hold units in that one partnership. This single-operating-partnership structure is the defining feature of the UPREIT.
The UPREIT structure is the more common and generally simpler of the two — most REITs that accept 721 contributions are UPREITs, using the single operating partnership. The umbrella structure (one OP holding everything) is the standard framework for 721 exchanges. The UPREIT structure — the REIT owning all its properties through a single operating partnership, with contributors receiving units in that one partnership — is the more common, simpler 721-exchange structure. The single operating partnership is its defining feature. Understanding the UPREIT structure (one OP) sets up the contrast with the DownREIT. The UPREIT's single-operating-partnership structure is the standard framework, against which the DownREIT's different structure is understood.
The DownREIT structure
The DownREIT structure differs by using a separate, lower-tier partnership for the contributed property, rather than one umbrella operating partnership for everything. In a DownREIT, when a property owner contributes property, the REIT forms (or uses) a separate partnership at a lower tier — the contributed property goes into this specific partnership, in which the REIT and the contributing owner are partners. So instead of one umbrella operating partnership, a DownREIT may have multiple partnerships at a lower level.
In this structure, the REIT typically owns some properties directly (or through its own entities) and forms separate partnerships with contributing owners for the contributed properties. So the REIT's structure is more layered — it owns properties at multiple levels, with the contributed property in a distinct lower-tier partnership. The contributing owner holds units in that specific partnership (DownREIT units), not in a single umbrella operating partnership.
The DownREIT structure is less common and more complex than the UPREIT — it's used in specific circumstances (discussed below) where the single-operating-partnership UPREIT structure isn't used or available. The multiple-lower-tier-partnership structure is the defining feature of the DownREIT. The DownREIT structure — the REIT using a separate, lower-tier partnership for contributed property (rather than one umbrella operating partnership), with the REIT owning properties at multiple levels — is the less common, more complex 721-exchange structure. The separate lower-tier partnership is its defining feature. Understanding the DownREIT structure (separate partnerships) contrasts it with the UPREIT (one OP). The DownREIT's multiple-partnership structure distinguishes it from the UPREIT's single operating partnership.
An UPREIT holds all properties in one umbrella operating partnership; a DownREIT uses separate lower-tier partnerships for contributed property, making it more layered and complex.
Key structural differences
The key structural differences between UPREITs and DownREITs center on the partnership structure. In an UPREIT, there's one operating partnership holding all properties, with all contributors holding units in that single partnership. In a DownREIT, there are multiple partnerships — the contributed property goes into a separate lower-tier partnership, and the REIT owns properties at multiple levels. So the UPREIT is single-partnership; the DownREIT is multi-partnership.
This structural difference affects the units' nature and economics. In an UPREIT, all OP units are in the same operating partnership (uniform), and they typically convert to REIT shares on consistent terms. In a DownREIT, the units are in specific lower-tier partnerships, so their economics and conversion features may differ by partnership (and can be more complex). So DownREIT units can be less uniform and more complex than UPREIT units.
The DownREIT's multi-partnership structure also makes it more complex to administer and understand — the layered partnerships, the REIT's multiple ownership levels, and the partnership-specific terms add complexity that the UPREIT's single-partnership structure avoids. So the UPREIT is generally simpler; the DownREIT is more complex. Key structural differences — the UPREIT's single operating partnership (uniform units) versus the DownREIT's multiple lower-tier partnerships (partnership-specific, more complex units and economics) — distinguish the two structures. The single-vs-multiple-partnership difference drives the others. Understanding the structural differences clarifies how the two structures diverge. The UPREIT's simplicity (one OP) and the DownREIT's complexity (multiple partnerships) are the key structural contrast.
Tax treatment differences
Both UPREITs and DownREITs allow tax-deferred 721 contributions (the core tax benefit is the same — Section 721 defers the gain on contributing property for partnership units). So the fundamental tax deferral works in both structures. However, the tax mechanics can differ in complexity due to the structural differences.
In a DownREIT, the layered partnership structure can introduce additional tax complexity — the allocation of income, gain, and liabilities across the multiple partnerships, the specifics of the lower-tier partnership's tax treatment, and the interaction with the REIT's other holdings can be more intricate than in an UPREIT's single operating partnership. So while both defer the gain, the DownREIT's tax mechanics can be more complex, warranting careful professional handling.
The tax protection arrangements (protecting the contributor's deferred gain from a partnership sale) and the conversion mechanics (units to REIT shares) can also differ in the DownREIT's structure. So the tax treatment, while fundamentally similar (deferral under Section 721), can be more complex in a DownREIT. Tax treatment differences — both structures deferring the gain under Section 721 (the core benefit is the same), but the DownREIT's layered structure introducing additional tax complexity (allocations, lower-tier partnership specifics, conversion and protection mechanics) — show that the DownREIT's tax mechanics can be more intricate. The deferral works in both, but the DownREIT is more complex. Understanding the tax differences clarifies that both defer the gain, with the DownREIT adding complexity. The fundamental deferral is the same; the DownREIT's tax mechanics are more complex, requiring careful professional handling.
When each is used
Understanding when each structure is used clarifies their roles. The UPREIT is the default, common structure — most REITs that accept 721 contributions are UPREITs, using the single operating partnership. So most 721 exchanges involve an UPREIT. The UPREIT's simplicity and standardization make it the typical choice for REITs accepting property contributions.
The DownREIT is used in specific circumstances where the UPREIT structure isn't used. For example, a REIT that wasn't originally structured as an UPREIT (it owns properties directly), but wants to accept a property contribution tax-deferred, might use a DownREIT structure (forming a separate partnership for the contributed property) rather than restructuring into an UPREIT. Or specific deal structures or REIT circumstances might call for a DownREIT. So the DownREIT is a tool for situations where the single-umbrella-operating-partnership UPREIT structure isn't in place or suitable.
So the UPREIT is the common default, and the DownREIT is the less common alternative for specific circumstances (often where the REIT isn't structured as an UPREIT). Most owners encountering a 721 exchange will deal with an UPREIT; some may encounter a DownREIT. When each is used — the UPREIT as the common default (most 721-accepting REITs), the DownREIT in specific circumstances (where the UPREIT structure isn't in place, e.g., a non-UPREIT REIT accepting a contribution) — clarifies their respective roles. The UPREIT is typical; the DownREIT is situational. Understanding when each is used helps owners know what to expect (usually an UPREIT). The UPREIT is the standard structure, with the DownREIT used in particular circumstances where the umbrella structure isn't available.
- Both UPREITs and DownREITs allow tax-deferred 721 contributions (the core benefit is the same).
- An UPREIT holds all properties in one umbrella operating partnership (simpler, uniform units); a DownREIT uses separate lower-tier partnerships (more complex).
- The DownREIT's layered structure can introduce additional tax complexity, though the fundamental deferral works in both.
- The UPREIT is the common default (most 721-accepting REITs); the DownREIT is used in specific circumstances (e.g., a non-UPREIT REIT accepting a contribution).
What it means for property owners
For property owners, the UPREIT-vs-DownREIT distinction has some practical implications. First, most owners will encounter an UPREIT (the common structure), so the standard 721-exchange understanding (single operating partnership, OP units) applies to most situations. The UPREIT is what most owners deal with.
Second, if you encounter a DownREIT (in specific circumstances), understand that it's more complex — the layered partnership structure, the partnership-specific unit terms, and the more intricate tax mechanics warrant extra care and professional guidance. So a DownREIT contribution requires understanding its specific structure and terms (which may differ from a standard UPREIT contribution). The added complexity means closer attention to the deal's specifics.
Third, in both cases, the core benefit (tax-deferred contribution for partnership units, with the deferral, eventual conversion, and step-up) is similar — so the fundamental 721 exchange benefits apply to both. The structural difference mainly affects the complexity and specifics, not the core benefit. What it means for property owners — most encounter an UPREIT (the standard structure and understanding apply); a DownREIT (in specific circumstances) is more complex, warranting extra care; and both offer the core 721 benefit (tax-deferred contribution) — translates the structural distinction into owner implications. The UPREIT is typical and standard; a DownREIT requires extra attention. Understanding what it means for owners helps you navigate whichever structure you encounter. Most owners deal with UPREITs, but understanding the DownREIT's added complexity prepares you if you encounter one.
How Baker 1031 helps with both structures
Baker 1031 Investments helps property owners understand and navigate both UPREIT and DownREIT structures — explaining the structural and tax differences, and helping you understand whichever structure you encounter (usually an UPREIT, occasionally a DownREIT). We help you grasp the specifics of the structure and terms, especially the added complexity of a DownREIT, coordinating with your CPA and attorney.
REIT units and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review — both UPREIT and DownREIT contributions involve securities, available to suitable investors after a review. We help you understand the structure's implications for your units, conversion, tax, and protection. Our role is to help you navigate whichever structure applies — the common UPREIT (single operating partnership) or the less common DownREIT (separate lower-tier partnerships) — understanding the differences and the added complexity of a DownREIT. Both offer the core 721 benefit (tax-deferred contribution), and we help you understand the specific structure you encounter so you can make an informed decision. We guide you through the structural nuances of UPREITs and DownREITs.
Frequently Asked Questions
What is the difference between an UPREIT and a DownREIT?
An UPREIT (umbrella partnership REIT) holds all its properties in a single operating partnership beneath the REIT, with contributors receiving units in that one partnership. A DownREIT uses a separate, lower-tier partnership for contributed property — the REIT owns properties at multiple levels, and the contributed property goes into a specific lower-tier partnership. So the UPREIT is single-partnership (simpler); the DownREIT is multi-partnership (more complex). Both allow tax-deferred 721 contributions, but their structures differ. The UPREIT is the common default; the DownREIT is used in specific circumstances.
Do both UPREITs and DownREITs allow 721 exchanges?
Yes — both allow property owners to contribute property tax-deferred (under Section 721) in exchange for partnership units. So both enable the 721 exchange, with the core tax benefit (deferral of the gain) the same. The difference is structural: the UPREIT uses one operating partnership, the DownREIT uses separate lower-tier partnerships. But the fundamental 721 deferral works in both. So whether you encounter an UPREIT or a DownREIT, you can do a tax-deferred 721 contribution — the structures differ, but both offer the core benefit.
What is a DownREIT?
A REIT structure where the REIT forms (or uses) a separate, lower-tier partnership for contributed property, rather than one umbrella operating partnership for everything. In a DownREIT, the REIT typically owns some properties directly and forms separate partnerships with contributing owners for contributed properties — so it owns properties at multiple levels. The contributing owner holds units in that specific lower-tier partnership (DownREIT units). It's less common and more complex than an UPREIT, used in specific circumstances (e.g., a non-UPREIT REIT accepting a property contribution tax-deferred).
Why is the DownREIT more complex?
Because of its layered, multi-partnership structure — the REIT owns properties at multiple levels, with contributed property in separate lower-tier partnerships. This adds complexity: the units are partnership-specific (less uniform than an UPREIT's), the economics and conversion features may differ by partnership, and the tax mechanics (allocations of income, gain, and liabilities across the multiple partnerships) are more intricate than an UPREIT's single operating partnership. So the DownREIT's multi-partnership structure makes it more complex to administer, understand, and handle tax-wise than the simpler, single-partnership UPREIT.
When is a DownREIT used instead of an UPREIT?
In specific circumstances where the UPREIT structure isn't in place or suitable. For example, a REIT that wasn't originally structured as an UPREIT (it owns properties directly) but wants to accept a property contribution tax-deferred might use a DownREIT (forming a separate partnership for the contributed property) rather than restructuring into an UPREIT. Or specific deal structures or REIT circumstances might call for a DownREIT. So the DownREIT is a tool for situations where the single-umbrella-operating-partnership UPREIT structure isn't available, while the UPREIT is the common default.
Are the tax benefits the same in both?
The core tax benefit — tax-deferred contribution of property for partnership units under Section 721 — is the same in both. So both defer the gain. However, the tax mechanics can be more complex in a DownREIT, due to its layered structure (allocations across multiple partnerships, lower-tier partnership specifics, conversion and protection mechanics). So while both defer the gain (the fundamental benefit), the DownREIT's tax treatment can be more intricate, warranting careful professional handling. The deferral works in both; the DownREIT adds complexity to the mechanics.
Which structure will I encounter?
Most likely an UPREIT — it's the common default, used by most REITs that accept 721 contributions. So most owners doing a 721 exchange will deal with an UPREIT (single operating partnership, OP units). Some may encounter a DownREIT in specific circumstances (e.g., a non-UPREIT REIT accepting a contribution). So expect an UPREIT in most cases, but be prepared to understand a DownREIT's added complexity if you encounter one. The structure you encounter depends on the specific REIT and deal, but the UPREIT is typical.
Are DownREIT units different from UPREIT units?
They can be — UPREIT units are all in the same operating partnership (uniform, typically converting to REIT shares on consistent terms), while DownREIT units are in specific lower-tier partnerships, so their economics and conversion features may differ by partnership (and can be more complex). So DownREIT units can be less uniform and more complex than UPREIT units. If you receive DownREIT units, understand their specific terms (conversion, economics, protection), which may differ from standard UPREIT units. The partnership-specific nature of DownREIT units is part of the DownREIT's added complexity.
Does the DownREIT affect my deferral or step-up?
The fundamental deferral (under Section 721) and the step-up at death generally apply in both structures — so a DownREIT contribution defers the gain, and holding the units until death can erase it via the step-up, like an UPREIT. However, the specific mechanics (how the deferral, conversion, and protection work) can be more complex in a DownREIT, so the details warrant careful professional attention. So the core benefits (deferral, step-up) apply in both, but the DownREIT's mechanics are more intricate. Your CPA and attorney handle the specifics in either structure.
Should I avoid a DownREIT because it's more complex?
Not necessarily — a DownREIT can offer the same core benefits (tax-deferred contribution, deferral, step-up) as an UPREIT, just with more complex mechanics. If a DownREIT is the structure available for a contribution you want to make (e.g., to a particular REIT), it can still achieve your goals, with appropriate professional guidance for the added complexity. So don't avoid a DownREIT solely for its complexity, but do ensure you understand its specifics and have good professional guidance. The complexity warrants care, not necessarily avoidance — evaluate the specific opportunity on its merits.
How does Baker 1031 help with these structures?
We help you understand and navigate both UPREIT and DownREIT structures — explaining the structural and tax differences, helping you grasp the specifics of whichever structure you encounter (usually an UPREIT, occasionally a DownREIT), and addressing the added complexity of a DownREIT. We coordinate with your CPA and attorney on the structure's tax and legal specifics. Both involve securities, offered through the broker-dealer (Aurora Securities, member FINRA/SIPC) after a suitability review. We help you understand the structure's implications for your units, conversion, tax, and protection, so you can make an informed decision.
Does the structure affect my ability to convert to REIT shares?
It can — in an UPREIT, the OP units in the single operating partnership typically convert to REIT shares on consistent, standardized terms. In a DownREIT, the units are in specific lower-tier partnerships, so their conversion features may differ by partnership and can be more complex (the conversion mechanics and terms may not be as uniform). So if you're in a DownREIT, understand the specific conversion terms of your units, which may differ from a standard UPREIT's. The structure affects the conversion details, though both generally allow eventual conversion to REIT shares. Your advisors clarify the specific conversion terms in either structure.
Why don't more REITs use the DownREIT structure?
Because the UPREIT structure (single operating partnership) is simpler and more standardized, making it the preferred default for most REITs that accept property contributions. The DownREIT's multi-partnership structure adds complexity (administration, tax mechanics, less uniform units) without offering advantages for most situations. So REITs generally use the UPREIT unless specific circumstances call for a DownREIT (e.g., a non-UPREIT REIT wanting to accept a contribution without restructuring). The UPREIT's simplicity is why it dominates; the DownREIT is reserved for particular situations where the umbrella structure isn't in place or suitable.
Should the structure affect my decision to do a 721 exchange?
The core decision (whether a 721 exchange fits your goals) is largely the same regardless of structure, since both offer the fundamental deferral and benefits. But the structure affects the complexity and specifics — a DownREIT's added complexity warrants extra attention to the terms and more careful professional guidance. So while the structure isn't usually decisive (the REIT's quality, your goals, and the overall fit matter more), you should understand the structure you're entering, especially a DownREIT's complexity. Evaluate the specific opportunity (REIT, structure, terms) holistically, with the structure as one factor among several in your decision.
Do most DST-to-REIT transitions use UPREIT or DownREIT structures?
Most use the UPREIT structure — when a DST is acquired by a REIT via a 721 exit, the REIT is typically an UPREIT, and the DST investors' interests convert into units in the REIT's single operating partnership. The UPREIT's standardized, single-operating-partnership structure is well-suited to the DST bridge, which is why it's the common framework. DownREIT structures are less common in this context. So if you're pursuing the DST-then-721 path, you'll most likely end up with UPREIT OP units, with the standard understanding applying. The UPREIT is the typical structure for both direct and DST-bridge 721 transitions.
Is the term 'UPREIT' sometimes used loosely for both?
Yes — in casual usage, 'UPREIT' or 'UPREIT conversion' is sometimes used broadly to refer to 721 exchanges generally, including those technically using a DownREIT structure. Strictly, UPREIT and DownREIT are distinct structures (single vs. multiple partnerships), but the term 'UPREIT' is often used loosely for the overall strategy of contributing property to a REIT for units. So if you see 'UPREIT' used broadly, it may encompass the general 721-exchange concept rather than the specific structure. When precision matters (e.g., understanding your specific deal), clarify whether it's technically an UPREIT or DownREIT, since the structures differ in complexity and specifics.
Glossary
- UPREIT
- A REIT holding all properties in a single umbrella operating partnership.
- DownREIT
- A REIT using separate lower-tier partnerships for contributed property.
- Operating Partnership
- The single partnership in an UPREIT holding all properties.
- Lower-Tier Partnership
- A separate partnership in a DownREIT for contributed property.
- OP Units
- Units in an UPREIT's single operating partnership.
- DownREIT Units
- Units in a DownREIT's specific lower-tier partnership.
- Single-Partnership Structure
- The UPREIT's framework (one OP).
- Multi-Partnership Structure
- The DownREIT's framework (multiple partnerships).
- Section 721
- The provision deferring the gain in both structures.
- Umbrella Structure
- The UPREIT's single-operating-partnership hierarchy.
- Layered Structure
- The DownREIT's multiple ownership levels.
- Uniform Units
- The UPREIT's consistent units, unlike DownREIT units.
- Tax Complexity
- The DownREIT's more intricate mechanics.
- Default Structure
- The UPREIT, the common choice for 721 contributions.
- Situational Structure
- The DownREIT, used in specific circumstances.
- Conversion Features
- The unit-to-share terms, which can differ in a DownREIT.
Sources & References
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
- Nareit. What's a REIT (Real Estate Investment Trust)?
- Cornell Legal Information Institute. 26 U.S. Code § 856 — Definition of real estate investment trust
- IRS. Publication 541, Partnerships
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
