Updated August 17, 2026
This is the most common avoidable disappointment in co-owned LA multifamily sales. Two or three owners sell a building; one wants cash, another wants to defer into a replacement property. They raise it three weeks before closing and are told it is too late. It usually is — not because the structures do not exist, but because they all require planning well ahead of the sale, and often well ahead of the listing.
This is specialist tax territory. What follows is what a seller should understand well enough to raise it at the right time with the right advisors.
A 1031 exchange is available to the taxpayer who owned the relinquished property. If a partnership or LLC holds the building, the partnership is the taxpayer — not the individual members.
So the partnership can exchange into a replacement property, as a partnership. What it cannot straightforwardly do is let one member take cash while another member's share rolls into a replacement they will own individually. Partnership interests are explicitly excluded from like-kind treatment.
That is the wall. Everything below is a way around it, and each has conditions.
The simplest answer, and the one most often overlooked because the members have already decided they want different things. The entity exchanges into a replacement property and continues to hold it jointly.
Requires: agreement. No tax complexity, no timing risk, no IRS scrutiny. If the members can live with continuing to co-own something, this is by far the cleanest route.
The partnership distributes undivided tenancy-in-common interests in the property to the members before the sale, "dropping" out of partnership ownership. Each former member then owns a direct real property interest and can individually exchange, or take cash.
The issue is the holding period. The exchanged property must have been held for investment, and the IRS has challenged conversions done immediately before a sale on the grounds that the TIC interest was not held for investment — it was created to facilitate the sale. There is no bright-line safe period, which is exactly why timing matters: a drop executed a year or more before the sale sits in far better shape than one executed during escrow.
California adds its own layer. The Franchise Tax Board asks about drop-and-swap transactions on its returns, so these are visible rather than obscure.
The reverse sequence: the partnership completes the exchange, then distributes interests in the replacement property afterwards. It moves the same holding-period question to the other end of the transaction, and carries similar scrutiny.
The remaining owners buy out the member who wants cash — funded by a refinance or their own capital — well before the sale. The exiting member has a taxable event on their own timetable, and the partnership then exchanges cleanly with the remaining members intact.
Often the most defensible route, and the one that requires the earliest decision.
Various arrangements can stagger who receives what and when. All are structure-dependent and all need real tax counsel.
How early you start. This is the whole thing. A drop executed during escrow is the weakest version. Twelve months or more before the sale is a different conversation.
How title is actually held right now. Members already holding TIC interests directly are in a much simpler position than members of an LLC. Check the deed, not everyone's recollection.
What the operating agreement says. Some already contain buy-sell mechanisms, transfer provisions, or contemplated exit structures.
Whether everyone will cooperate. These structures need signatures from people who by definition want different outcomes.
Whether the numbers justify the complexity. On a modest gain, the cost and risk of a drop-and-swap may exceed the tax being deferred.
Two things worth naming for co-owned buildings here.
Property tax reassessment. Restructuring ownership can trigger reassessment depending on how much of the interest changes hands and how the entity is organized. On a building held at a decades-old Proposition 13 assessed value, that is a large number and it belongs in the analysis before any structure is chosen — not after.
Measure ULA still applies to a sale inside the City of Los Angeles regardless of how the ownership is arranged, and structuring around the thresholds runs into rules designed to catch exactly that. Covered in pricing near a ULA threshold.
Sometimes it is. If the members cannot agree, cannot fund a buyout, and did not plan far enough ahead, the workable answer is a clean sale with proceeds distributed and each member paying their own tax.
That is not a failure. It is frequently better than a hurried structure that draws scrutiny, costs real money to build, and may not survive examination. A deferral is worth having; it is not worth having at any price.
The related decision — whether one owner should be bought out rather than the building sold — is covered in selling the whole building vs. a partial interest.
Can one partner do a 1031 and another take cash?
Not directly out of a partnership, because partnership interests are not like-kind property. It requires a structure — most commonly a drop and swap, or buying out the exiting member in advance — and every one of them needs to be planned before the sale rather than during escrow.
How long must I hold a TIC interest before exchanging?
There is no bright-line rule, which is precisely the difficulty. Longer is materially safer, and a conversion executed immediately before a sale is the version most likely to be challenged. Your tax counsel should advise on your facts.
Is drop and swap legal?
The structure is used and recognized. What is contested is whether the resulting interest was genuinely held for investment when the drop happened days before a closing. Legality is not the question; defensibility is.
We are already tenants in common rather than an LLC. Is it simpler?
Considerably. Each co-tenant owns a direct real property interest and can individually exchange or take cash, subject to the usual requirements. Check the recorded deed to confirm that is actually how title is held.
When should we raise this?
Before listing. Ideally a year before selling. The single most common version of this conversation is the one that happens too late to act on.
Co-owners wanting different outcomes is normal and it is solvable — but almost every solution is a planning exercise rather than a transaction one. If your building is co-owned and anyone might want out, have the conversation with a CPA and a real estate attorney now, not when an offer is on the table. The structures that work are the ones that were set up early enough not to look like they were set up for the sale.
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