How to Structure Partner-Owned Real Estate So One Owner Can 1031 and Another Can Cash Out
What happens when a property is owned with partners, and some investors want cash while others want to exchange into another property?
This issue often comes up at the sale stage. But usually, the real issue is not the sale itself. The real issue is how title was structured before the sale.
If investment real estate is owned through a multi-member LLC taxed as a partnership, the entity owns the property. Under Section 1031, a partnership interest is not like-kind exchange property, so one member generally cannot simply exchange that member’s interest while the others cash out.
In the right situation, co-owners may instead choose to hold title as tenants in common, with each owner holding a separate undivided interest in the real estate.
That means a planning structure may look like this:
- Investor A owns LLC-A
- Investor B owns LLC-B
- LLC-A and LLC-B take title to the property as tenants in common
A structure like this may preserve LLC liability protection while also making it more likely that each owner holds a separate real estate interest rather than a partnership interest. If the property is later sold, that may create room for one co-owner to exchange and another to cash out, provided the structure is respected as a true TIC and not treated as a partnership for tax purposes.
But simply putting two LLCs on title is not enough. The ownership and tax treatment need to match the intended structure. If the arrangement is operated like a partnership, it may be treated like one.
That is why, if co-owners want flexibility later, the time to talk to their CPA and real estate attorney is before they buy, not when the property is already under contract for sale. The legal, tax, and ownership documents should match the intended structure from the start.
Why This Matters to Brokers
Brokers often hear some version of this:
“My client would do a 1031, but the partners want to cash out.”
By the time that issue comes up, the ownership structure may already limit the available options.
That is why this is a valuable issue to spot early. If a client is buying with partners, and there is any chance the owners may want different outcomes later, it is worth encouraging them to speak with their CPA and attorney about ownership structure before closing.
That does not mean every partner-owned deal should be structured as a TIC. It does mean the conversation is worth having early, while the structure can still be designed intentionally.
The Practical Takeaway
If partners may want different exit paths someday, structure for that possibility on day one.
Because once the property has been owned for years in the wrong entity, the menu of clean options gets much smaller.
Important Disclaimer
This article is for issue-spotting and general educational purposes only. The right ownership structure depends on the owners, the financing, the operating terms, liability considerations, and the tax facts. Investors should review any proposed ownership structure with their CPA and attorney before acquiring property.