The short answer
A partnership cannot run one exchange and hand each partner a different replacement, because the partnership is the taxpayer and a partnership interest is not real property for section 1031. There are two working paths. Before the sale, the LLC deeds undivided tenancy-in-common shares to the members, and each member sells its share and runs a separate exchange into whatever it wants; or the LLC exchanges into several properties and divides them later. Both work only if each owner can show the property was held for investment, so the timing, the lender and your state's transfer tax decide which path is safe. The longer guide to drop-and-swap structures covers the mechanics in depth.
At a glance
| Who the taxpayer is | The partnership, not its members, when the LLC holds title |
|---|---|
| Partnership interests | Not real property for section 1031, so members cannot exchange them |
| Election-out exception | A valid section 761(a) election treats each member as owning the assets |
| Separate exchanges | Each tenant in common signs its own exchange agreement and files its own Form 8824 |
| Deadlines per exchange | 45 days to identify, 180 days or the return due date to close |
| Holding test | Each owner must hold the property it sells and buys for investment |
| Debt relief | Each member's share of the payoff counts as cash received unless replaced |
The partnership is the taxpayer, so one exchange buys one set of replacement property for everyone
When an LLC taxed as a partnership holds title, the LLC sells, the LLC signs the exchange agreement and the LLC files Form 8824. The members cannot step in and exchange their own slices, because Reg. section 1.1031(a)-3(a)(5) lists interests in a partnership among the intangibles that are not real property, and Reg. section 1.1031(a)-1(a)(1) says section 1031 does not apply to exchanges of partnership interests.
The partnership can still buy more than one replacement. Under Reg. section 1.1031(k)-1(c)(4) it may identify up to three properties of any value, or any number whose combined value does not exceed 200 percent of what it sold. But every member then co-owns every replacement through the same LLC, which is exactly what partners who want different futures are trying to avoid.
The narrow exception is section 1031(e): an interest in a partnership with a valid section 761(a) election out of subchapter K is treated as an interest in each of its assets. Reg. section 1.761-2 limits that election to co-owners who hold investment property, reserve the right separately to take or dispose of their shares, and do not actively conduct a business. Most operating LLCs do not fit, so the election is something to test with your CPA rather than assume.
Deeding tenancy-in-common shares out before the sale lets each member run a separate exchange
The common answer is the drop: the LLC distributes the property to the members as undivided tenancy-in-common shares in proportion to their interests, and each member then sells its share to the same buyer. A distribution of property generally produces no gain to the member under section 731(a)(1), which taxes a partner only where money distributed exceeds the basis of the partner's interest; watch the debt, because section 752(b) treats a drop in a partner's share of liabilities as money.
After the drop, each member is its own exchanger. Each signs an exchange agreement with a qualified intermediary, sends its share of the proceeds there, identifies its own replacement within 45 days and closes within the 180-day exchange period set by section 1031(a)(3). One member can buy a rental, another can identify DST interests and a third can take cash.
The co-owners then have to behave like co-owners. Rev. Proc. 2002-22 is an advance-ruling checklist rather than a substantive rule, but its conditions are the usual test of whether a co-ownership is really a partnership: no partnership return, no common business name, unanimous approval for any sale or lease, and revenues, costs and debt shared in proportion to each undivided interest. The same revenue procedure says the IRS generally will not rule where the co-owners held their interests through a partnership immediately before forming the co-ownership, which is the drop-and-swap fact pattern.
Timing decides whether the drop holds up, because each owner must hold for investment
Section 1031 requires property held for investment on both sides. In Magneson v. Commissioner, the Ninth Circuit restated that the taxpayer must intend to hold the acquired property for investment at the time of the exchange, and listed cases in which an intent to sell or give the property away disqualified the exchange.
Neither the Code nor the regulations set a minimum period between a drop and a sale. The facts that help are an early drop, ideally before a listing or a signed contract, deeds recorded in the members' names, rents and expenses split by share, and a final partnership return filed for the LLC. A deed signed the morning of closing, with the contract and escrow still in the LLC's name, is the version most exposed to challenge.
The reverse order, a swap-and-drop, has its own problem. If the LLC exchanges and then distributes the replacements, the LLC must have held them for investment, and Magneson cites Click v. Commissioner, 78 T.C. 225, for the rule that acquiring property with the intent to transfer it away fails that test. Magneson itself protected only a contribution of replacement property to a partnership that continued to hold like-kind real estate for investment.
The lender, the title company and the state transfer tax can block a drop before the tax law does
A mortgage almost always restricts transfers of title. Rev. Proc. 2002-22 acknowledges that lender-imposed restrictions consistent with customary commercial lending practice are normal, but you still need the lender's consent to deed the property to the members, or a payoff at closing that makes the question moot.
Each member's share of the loan payoff is part of that member's own exchange. Under Reg. section 1.1031(d)-2, liabilities you are relieved of count as money received, offset by debt you take on or cash you add. A member who buys an all-cash replacement without adding cash equal to its share of the old debt has boot; whether DST debt counts as replacement debt explains how that member can close the gap.
Transfer tax rules differ by state, and the deed from the LLC to its members is a transfer. California's documentary transfer tax shows both sides: Revenue and Taxation Code section 11925(d) exempts a transfer that only changes the method of holding title while proportional interests stay the same, but section 11925(b) treats a partnership termination as a conveyance of all its realty at fair market value. Check your state's rule on the state pages before anyone signs a deed.
Worked model: three members, one warehouse and three different exits
Hypothetical round numbers. An LLC owned in equal thirds holds a warehouse that will sell for $3,000,000 with a $600,000 mortgage. Well before listing, it deeds one-third tenancy-in-common shares to each member, so each owns $1,000,000 of value subject to $200,000 of debt.
Member A buys a $1,200,000 rental with a $400,000 loan; price and debt both exceed what A gave up, so A defers fully. Member B wants no management, sends $800,000 of net proceeds to a separate intermediary and places it in traditional DST interests, covering its $200,000 of debt relief with DST-level debt or $200,000 of added cash. Member C takes $800,000 and reports a one-third share of the gain; the one partner wants cash guide prices that choice.
The order matters more than the arithmetic: lender consent and the deeds first, then the listing, then three exchange agreements signed before closing. Run your own numbers with your CPA, and use the same-taxpayer rules to confirm each member takes title to its replacement in the same name it held the relinquished share.
Related questions
Can the LLC buy three properties and give each member one afterward?
It can, but the distribution after the exchange is the weak point, because the LLC must have held the replacements for investment. A planned hand-off at closing looks like the gift-intent cases Magneson describes, so most advisers prefer the drop before the sale.
Do we need a section 761 election instead?
Only an organization that fits Reg. section 1.761-2, co-owners holding investment property who can separately take or dispose of their shares, can elect out. If the LLC runs the property as a business, the election is unlikely to fit.
How long before the sale should the LLC deed out the shares?
No Code section or regulation sets a period. The earlier the deeds are recorded, and the longer the members operate as true co-owners before a contract exists, the better the record of investment intent.
Does each member need its own qualified intermediary?
Each member is a separate taxpayer after the drop, so each needs its own exchange agreement under which the intermediary holds that member's share of the proceeds. The member, not the LLC, must be the party to that agreement.
Is a tenancy-in-common share itself like-kind real property?
Yes. Reg. section 1.1031(a)-3 lists co-ownership as an intangible that is real property for section 1031, which is why a member who receives a deeded share can exchange it. A tenancy-in-common interest is the same asset on the buying side.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 1031, like-kind exchanges
- Reg. section 1.1031(a)-1, property held for productive use or investment
- Reg. section 1.1031(a)-3, definition of real property
- Reg. section 1.1031(k)-1, treatment of deferred exchanges
- Reg. section 1.1031(d)-2, treatment of assumption of liabilities
- Reg. section 1.761-2, exclusion of certain unincorporated organizations
- 26 U.S.C. section 731, recognition of gain on partnership distributions
- 26 U.S.C. section 752, treatment of certain liabilities
- IRS, Rev. Proc. 2002-22, undivided fractional interests in rental real property
- Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985)
- IRS, Instructions for Form 8824
- California Revenue and Taxation Code section 11925