When Co-Owners of the Same Property Want Different Outcomes
Property held jointly for a long time often outlives the agreement that created it. Co-owners age at different rates, need money at different times, and develop different tolerances for risk and management.
This case study shows why the ownership structure — not the replacement property — is usually the first thing that has to be addressed when co-owners want different outcomes from the same sale.
Investor Snapshot
- Investor profile
- Linda, Paul, and Gregory T., three co-owners of a retail building.
- Ownership structure
- Held through a single limited liability company for more than 20 years.
- Competing objectives
- One wanted cash to fund retirement, one wanted to continue deferring gain, and one wanted passive income without further management.
- Sticking point
- The entity could only make one decision for all three owners.
- Goal
- Allow each owner to pursue an independent outcome from the same sale.
The Challenge: One Entity Can Only Make One Decision
The building had performed well and the co-owners agreed it was time to sell. That was the last thing they agreed on. One needed liquidity and was prepared to pay the tax. One wanted to keep deferring and had no interest in a taxable event. One wanted out of management but wanted to stay invested in real estate.
Under the existing structure, the entity was the taxpayer that held the property. It could complete an exchange, or it could sell and distribute proceeds — but it could not do one thing for one owner and something different for another. Any single choice left at least two of the three unhappy.
Why the Ownership Structure Has to Be Addressed First
A 1031 exchange is generally available to the taxpayer that held the relinquished property for investment. Where property is held through a partnership or an LLC taxed as a partnership, that entity is typically the taxpayer — not the individual members.
Interests in a partnership are specifically excluded from 1031 treatment. A member cannot simply exchange their membership interest into replacement real estate. For each owner to make an independent decision, each generally needs to hold a direct interest in the real property itself — commonly a tenant-in-common interest — rather than an interest in the entity.
Restructuring to accomplish that is well-trodden ground, but it is not automatic and it draws attention. The relevant questions include how long each owner has held their interest, whether the “held for investment” requirement is satisfied after the restructuring, how the timing relates to the sale, and how the transaction is documented. These are tax and legal questions, and the answers are fact-specific.
GCA 1031’s role in this scenario is the real estate and replacement-property analysis. The structure, the timing, and the documentation are directed by the owners’ CPA and attorney, and the restructuring decision belongs with them.
The Strategy: Independent Replacement Decisions Once Each Owner Holds a Direct Interest
In this scenario, once each owner held a direct interest in the property, the sale produced three separate sets of proceeds and three separate decisions.
- The owner who wanted liquidity took her proceeds and recognized gain, having planned for the tax with her CPA.
- The owner focused on continued deferral completed a 1031 exchange into replacement real estate.
- The owner who wanted passive income exchanged into DST interests sized to his individual share.
DSTs are workable here for the same reason they work in a partial exchange: fractional interests can be sized to one owner’s proceeds. A co-owner with a modest share of a mid-sized building may not be able to buy a suitable direct replacement property alone, but may be able to acquire a fractional interest in institutional real estate.
Why This Strategy Could Fit
- Removes the requirement that all owners accept the same outcome.
- Allows owners with smaller shares to access replacement real estate they could not acquire alone.
- Separates ownership before it passes to a second generation with even less alignment.
- Lets each owner’s tax position be managed individually rather than averaged across the group.
What Makes This Harder Than It Looks
Restructuring co-ownership ahead of a sale requires planning time. Decisions made in the weeks before closing, or after a property is already in escrow, have materially different characteristics than decisions made well in advance. Every owner needs independent tax advice, because what benefits one may not benefit another.
This is also an area of recognized tax complexity, and outcomes depend on facts and documentation rather than on general rules. Nothing here should be treated as tax or legal advice or as an indication of how the rules would apply to a particular set of owners.
The Outcome
Three co-owners reach three different outcomes from one sale. The property is sold once, but the exit is not a single decision imposed on everyone — it becomes three individual decisions, each matched to that owner’s stage of life, tax position, and appetite for management.
Investor Takeaway
If you own property with partners, siblings, or a family entity, the ownership structure will shape your options long before the replacement property does. Start that conversation with your CPA and attorney well before the property is listed — the range of options narrows sharply once a sale is underway.
This is a hypothetical case study — the investor described is not an actual client.
Case Study Disclosure
Illustrative example only. This case study does not represent an actual client and is not a guarantee of future results. It is a hypothetical composite informed by situations commonly encountered by real estate investors; the individuals described are not actual clients and the scenario is not an account of an actual transaction. Charts and diagrams are schematic illustrations of structure and do not depict actual amounts, offerings, or results. Photographs are stock imagery and do not depict actual clients, advisors, or properties. The appropriate 1031 exchange or DST strategy depends on an investor’s individual facts, objectives, tax situation, liquidity needs, and risk tolerance. DST and other private placement investments involve material risks, including illiquidity and the potential loss of principal. Nothing on this page is tax or legal advice. Investors should review the applicable offering documents and consult their tax and legal professionals before making an investment decision.