1031 Exchange Options for Multi-Owner Properties: LLCs, TICs and Co-Owned Rentals

Decision tree: the deed tells you who owns, the tax return tells you who the IRS thinks owns

Work through the branches below in order, because the second one overrides the first. Old Republic Exchange gives the same starting instruction to co-owners: ‘clearly allocate each investor’s interest in the property before you sell’.

• Deed shows two or more individuals as tenants in common or joint tenants, and no partnership return has been filed: each owner is a separate taxpayer (Route A below).
• Deed shows an LLC, LP or general partnership with more than one member: the entity is the taxpayer (Route B).
• Deed shows individuals but the group has filed Form 1065 and issued K-1s: the IRS treats you as partners regardless of the deed, so you are in Route B unless reporting is corrected long before the sale.
• Deed shows one single-member LLC per owner: each LLC is disregarded and its owner is the taxpayer, so treat it as Route A.
• Deed shows a married couple, filing jointly: one taxpayer for the exchange, with both spouses on both deeds.
• Deed shows a revocable trust: the grantor is the taxpayer and the trust can hold the replacement.

Route A: co-owners as separate taxpayers, and the closing mechanics that keep them separate

Reg. §301.7701-1(a)(2) draws the line: a venture can be a tax partnership if the participants ‘carry on a trade, business, financial operation, or venture and divide the profits’, but ‘mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity’. Co-owners on that side of the line each own real property and can each exchange.

Hypothetical: siblings A, B and C hold a $1,500,000 rental in thirds. A wants $500,000 in cash, B wants a duplex and C wants DST income; all three sign one purchase contract as sellers, B and C each sign their own exchange agreement and assignment with an intermediary, and the closing statement splits the proceeds so that A is paid $500,000 directly while $500,000 goes into each of B’s and C’s exchange accounts.

From there the exchanges run in parallel: B and C each identify within 45 days, each may identify the same property and buy it together as tenants in common again, each closes within 180 days and each attaches a Form 8824 to their own return. Rev. Proc. 2002-22 §6.07 expects exactly this at a TIC sale: proceeds ‘must be distributed to the co-owners’ in proportion to their interests.

The Form 1065 trap: a deed that says tenants in common cannot beat a return that says partnership

Legal 1031 describes Gluck v. Commissioner, affirmed by the Second Circuit in 2022, where the taxpayers believed they had bought a like-kind interest in real estate but the Tax Court found they ‘had purchased only an interest in the partnership’ because the group ‘filed a Form 1065 Partnership return, and distributed K-1s’. The deed did not save them.

So before planning separate exchanges, confirm in writing ‘that no Form 1065 is being filed’, as Legal 1031 advises, or, if one is, decide with your CPA whether to correct the reporting or to use the entity routes below. Asset Preservation’s vesting rule applies either way: the ‘tax owner of the relinquished property should be the same tax owner of the replacement property’.

Groups that hold investment property passively and have filed partnership returns by habit may qualify for the §761(a) election described in our drop-and-swap guide, which restores co-owner status for §1031.

Route B: entity-held property exchanges as one, or the group restructures before it sells

When the taxpayer is an LLC taxed as a partnership, there is one exchange: the entity signs one exchange agreement, its intermediary holds all the proceeds, it identifies, it buys and it files Form 8824 with Form 1065. Every member rides along, and a member who wants cash creates boot for the whole entity unless the group restructures.

The restructuring tools have their own pages: deeding undivided interests out before the sale (drop-and-swap), taking a buyer’s note that is distributed to the departing member (partnership installment note), or exchanging everything and redeeming the member later from a refinance. Each one changes the Form 1065 answers to Schedule B Questions 11 and 12 and requires the receiving member to file Form 7217.

The Form 8824 instructions are explicit that ‘interests in a partnership’ are not real property, so no version of Route B lets a member buy a replacement in their own name with entity proceeds.

Spouses, single-member LLCs and revocable trusts count as one taxpayer, but the deeds still have to match

A single-owner LLC is ‘disregarded as an entity separate from its owner if it has a single owner’ under Reg. §301.7701-3(b)(1)(ii), so an individual may sell in their own name and buy through a new single-member LLC, which Asset Preservation notes also satisfies lenders’ single-asset-entity demands. A revocable trust is likewise the grantor for tax purposes.

Spouses need care with the deeds. Legal 1031 reports TAM 8429004, where a couple sold as tenants by the entirety, the husband alone took title to the replacement, and the wife ‘was deemed to have gifted her share of the proceeds to her husband thereby failing her exchange’ and reporting half the gain. In community-property states, Rev. Proc. 2002-69 lets an LLC owned only by the two spouses be disregarded, so one LLC can serve both.

Lenders sometimes push the other way: Asset Preservation warns that when a wife is the only exchanger but the loan relies on the husband’s income, ‘the lender may require that the husband appear on the deed’, which can impair her exchange unless the purchase is a trade-up large enough for him to buy a separate interest.

Lenders, buyers and the TIC agreement: what co-ownership costs, and when a DST consolidation is simpler

Co-ownership keeps each owner’s tax options open at the price of shared control. Rev. Proc. 2002-22 caps its guideline structure at 35 co-owners, requires unanimous approval for any sale, lease or refinancing, has each co-owner share debt in proportion to their interest, and lets each transfer or encumber their own undivided interest; Legal 1031 warns the form is ‘not good for unfriendly partners due to TIC rights issues’ and that lender approval of a title change ‘can present a hurdle’.

When the co-owners want the same thing, passive income in different amounts, splitting the sale and exchanging each share into DST interests can be simpler than buying another building together: each owner subscribes for their own interest in one or more trusts, sized to their own proceeds, with no co-ownership agreement among them afterwards. Owners who later want liquidity can consider trusts that offer a §721 UPREIT path, and owners who want cash simply take it at closing.

We arrange DST, triple-net and UPREIT replacement interests for each exchanging co-owner separately, so one sibling’s choice never delays another’s day-45 list. Have your CPA or attorney confirm the vesting for every owner before the purchase contract is signed, since the closing statement has to be built around it.