An UPREIT, short for umbrella partnership real estate investment trust, is a structure in which a REIT operates through an umbrella operating partnership rather than owning properties directly. This arrangement allows a property owner to contribute real estate to the operating partnership in exchange for partnership units, known as OP units, instead of cash, deferring the capital gains tax that would otherwise be due on an outright sale.
OP units generally carry economic rights similar to REIT shares, including a share of distributions, and can typically be converted into REIT shares at a later date, though that conversion is itself a taxable event that ends the deferral. This structure gives owners of appreciated property, particularly those who might otherwise face a large tax bill on sale, a path to diversify into a portfolio of properties held by the REIT while postponing tax recognition. UPREIT contributions are sometimes discussed alongside 1031 exchanges as alternative routes to deferring gain, though the two mechanisms work differently and lead to different long-term ownership structures.
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