OP Units
OP units are operating partnership units received when contributing property to a REIT's partnership in a 721 exchange, deferring tax while paying distributions.
Definition
OP units, operating partnership units, are the ownership interests an investor receives when contributing real estate to a REIT's operating partnership through a 721 exchange. Instead of getting cash or REIT stock, which would be taxable, the investor gets OP units and defers the capital gains tax.
OP units generally have economic rights equivalent to REIT shares: they pay the same per-unit distributions and track the same value. Over time, holders can typically convert OP units into REIT common shares on a one-for-one basis, but that conversion is a taxable event, triggering the deferred gain.
The appeal is a passive, diversified interest in a large REIT portfolio with continued tax deferral, and if the investor holds the units until death, heirs may receive a step-up in basis that erases the deferred gain. The main limitation is that OP units are illiquid until converted, and you generally cannot 1031 exchange back out of them.
Key points
- Received for contributing property in a 721 exchange
- Defer tax and pay distributions like REIT shares
- Convertible to REIT stock, but conversion is taxable
- Eligible for step-up in basis if held until death
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.