A DownREIT is a type of property transaction that can be used as a tax-deferred exit strategy when selling real estate. It combines the benefits of a property sale and a tax-deferred exchange.

A property owner (the “down” part of DownREIT refers to the “drop” in property) forms a joint venture with a real estate investment trust (REIT), and then contributes the property to the joint venture. The REIT contributes cash or other property. The property owner receives operating units in the joint venture, which are similar to partnership interests and can typically be converted into shares of the REIT, or redeemed for cash at a later date.

One advantage of a DownREIT structure is that it allows the property owner to defer capital gain recognition, similar to a 1031 exchange, but with more flexibility since the owner can convert the operating units into REIT shares or cash over time. This can be a great way for property owners to gradually transition out of active property management while maintaining a level of investment in the real estate market.

However, there can be complexities and risks with DownREIT transactions, including the fact that the property owner’s return is tied to the performance of the specific assets in the joint venture, rather than the REIT as a whole. Because of these complexities, property owners considering a DownREIT transaction often seek advice from tax and legal professionals.