A more indirect advantage of the UPREIT is the possibility to effectively de-lever or eliminate personal mortgage debt on a DST investment while still enjoying the tax shelter from additional basis provided by the debt. If the original DST investment has mortgage debt, the UPREIT will assume the mortgage debt encumbering the DST property being transferred to an UPREIT through the 721-exchange process. The DST investor will receive OP units for the full value of the appreciated equity interest in the DST and at the same time be released of the nonrecourse debt the investor assumed when the DST was acquired. Nonrecourse DST debt is often used in the 1031 exchange to replace the debt on the original relinquished property to avoid mortgage boot and enjoy a fully tax-deferred exchange.

When the DST, without an UPREIT option, is ultimately sold and another 1031 exchange is utilized, the DST debt must be rolled into a replacement DST with equal or greater debt. The continuous assumption of debt for a tax deferred 1031 exchange must be perpetually carried forward. The debt carryforward can be reduced by amortization along the way but the investor needs to continue to assume non-recourse debt until the investment is either cashed out and taxes paid, or the investment is passed to heirs tax-free with the stepped-up basis. Alternatively, the UPREIT of a DST is the end of the road for the assumption of debt by the individual investor as the operating partnership or the REIT will assume the debt at the entity level. This provides for an effective de-leveraging of the investment that can pass to heirs or others debt free.

When the debt is assumed by the UPREIT, the investor’s tax basis in the OP units is the adjusted tax basis carried over from the contributed DST and includes any additional tax basis from additional debt that was assumed (above the relinquished debt) when the DST was acquired. This adjusted tax basis will continue to provide tax shelter to the investor on income from the UPREIT for decades or as long as the UPREIT interest is held (the maximum limit being 27.5 years for residential and 39 years for DST commercial properties contributed to the UPREIT).