What is a DownREIT and can I use it to create my own REIT?

What Is a DownREIT?

A DownREIT is a strategic partnership between a property owner and a Real Estate Investment Trust (REIT), designed to unlock the unique benefits of REIT ownership while maintaining a tailored focus on specific real estate assets. At its core, a DownREIT allows property owners to contribute appreciated real estate to a newly formed partnership in exchange for Operating Partnership (OP) units, providing tax deferral, income generation, and estate planning advantages.

Unlike an UPREIT, where all contributed properties are pooled into a single umbrella partnership, a DownREIT focuses on individual properties or portfolios, granting property owners more control over their contributions and their legacy. This targeted structure enables a direct connection between the performance of the contributed property and the value of the OP units, creating a clear and measurable link between your portfolio and its benefits.

For property owners seeking the best of both worlds—maintaining a vested interest in their properties while enjoying the tax efficiencies and liquidity options of a REIT—a DownREIT offers an innovative, flexible, and highly effective solution.

Why Create a DownREIT?

For property owners with significant real estate holdings, the question isn’t whether to plan for the future—it’s how to do so effectively. A DownREIT provides a unique opportunity to preserve and grow wealth while minimizing the challenges that often accompany traditional real estate ownership and estate transitions.

One of the most compelling reasons to create a DownREIT is the ability to defer capital gains taxes. When you contribute property to a DownREIT, the transaction qualifies under IRC §721, allowing you to defer the taxes that would typically be due upon sale. Over time, this strategy can save millions of dollars, freeing up capital to reinvest or pass on to future generations.

A DownREIT also creates liquidity options for you and your heirs. By holding OP units, you gain the flexibility to convert these units into REIT shares or cash at a later date, ensuring your portfolio is adaptable to changing circumstances. For heirs, this liquidity provides the freedom to make decisions that align with their financial goals, whether that means holding onto the assets for income or converting them to cover expenses like estate taxes or personal investments.

Another significant advantage is the transition to passive management. With a DownREIT, you can shift operational responsibilities to the REIT at your own pace, maintaining control until you’re ready to step back. This ensures you enjoy the benefits of ownership without the day-to-day stress of managing properties, a particularly valuable feature as you plan for retirement or other priorities.

Finally, a DownREIT eliminates the rigid deadlines and constraints associated with 1031 exchanges, offering you the flexibility to plan on your terms. There’s no pressure to identify replacement properties within 45 days or close within 180 days—deadlines that can lead to rushed decisions or suboptimal investments. With a DownREIT, your legacy remains firmly under your control, allowing you to act strategically rather than reactively.

By creating a DownREIT, you join an exclusive group of investors who recognize its potential to preserve their portfolio for the future. As tax laws evolve and opportunities narrow, taking action now ensures you secure the benefits of this sophisticated strategy while they remain available.