For accredited investors, navigating the tax complexities of selling real estate requires strategic planning. A Delaware Statutory Trust (DST) with an UPREIT (Umbrella Partnership Real Estate Investment Trust) option can provide a sophisticated solution for mitigating tax exposure while unlocking diversification and liquidity benefits.

Step 1: DSTs and the 1031 Exchange

DSTs are popular among real estate investors because they allow for a 1031 exchange, enabling deferral of capital gains taxes when transitioning from actively managed real estate into passive ownership. The DST structure provides fractional ownership of institutional-grade properties, relieving investors of property management headaches while preserving their tax deferral benefits.

Step 2: Transitioning into an UPREIT

Many DSTs offer an UPREIT option, allowing investors to convert their fractional DST interests into Operating Partnership (OP) Units in the REIT. This step transitions the investment from specific properties into a diversified portfolio of real estate assets managed by the REIT. The conversion does not trigger an immediate tax event, maintaining the 1031 exchange’s deferred status.

The UPREIT structure also provides liquidity benefits. While direct real estate ownership is relatively illiquid, OP Units can eventually be converted into publicly traded REIT shares, giving investors the ability to monetize their investment at their discretion.

Step 3: Applying IRC Section 733 for Tax Mitigation

Once the REIT shares are ready for sale, IRC Section 733 offers an avenue to further reduce tax exposure. This provision adjusts the investor’s outside basis through distributions of cash or property. As the REIT distributes income or returns capital, the investor’s basis is reduced accordingly.

By strategically timing distributions, investors can effectively lower the taxable gain recognized when selling REIT shares. For example, periodic cash distributions from the REIT may return a portion of the investor’s original investment, reducing the amount subject to capital gains tax upon sale.

Why This Matters

This combination—leveraging a DST to defer taxes, transitioning into a diversified REIT portfolio, and strategically applying Section 733 to minimize taxable gains— can provide investors with a comprehensive approach to managing their wealth. It can be an ideal strategy for those looking to avoid capital gains tax burdens, achieve passive income, and maintain liquidity options.

If you’re navigating a sale of highly appreciated real estate or seeking to diversify your portfolio, understanding how these tools interact could save you substantial taxes while positioning your assets for growth.

Ready to explore this strategy? Let’s connect to discuss how it can benefit your financial goals.

Important Disclosures:

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). This material is not to be interpreted as tax or legal advice. IRC Section 1031 and IRC Section 721 are complex tax concepts; therefore, you should consult your legal or tax professional regarding the specifics of your individual situation. Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor. There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million exclusive of primary residence, and/or possessing an annual income of over $200,000, or $300,000 with a spouse and expects the same or greater for the current year) and accredited entities (generally described as an entity owned entirely by accredited investors and/or owning investments in excess of $5 million). Please check with a qualified CPA or attorney to determine if you are accredited. An UPREIT (umbrella partnership real estate investment trust) is a REIT structure that allows property owners to exchange their property and defer taxes on the sale of property in exchange for UPREIT units though capital gains taxes on UPREIT units are subject to standard REIT taxation. UPREITs are generally subject to Internal Revenue Code (IRC) Section 721 exchanges. Diversification does not guarantee returns and does not protect against loss.  Potential cash flow, potential returns and potential appreciation are not guaranteed. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.