Michael and Steve owned a $2.4 million warehouse through a 50/50 LLC, but one wanted to cash out and retire while the other wanted to keep deferring taxes, and a single entity sale can't deliver both. Eighteen months before selling, they converted to tenants-in-common so each could decide separately: Michael sold his half for cash, Steve rolled his into a 1031 exchange and a DST. The catch is timing, because the IRS treats last-minute restructuring as a tax-avoidance move.
This case study is illustrative. Names, figures, and details are composite examples based on common investor scenarios. Consult a qualified tax professional for advice specific to your situation.
Two owners, one warehouse, opposite plans
Michael and Steve had been friends since college. Fifteen years ago they bought a 35,000-square-foot industrial warehouse together for $1.2 million and split it 50/50 through an LLC. A single tenant sat on a long-term net lease, the kind where the tenant covers taxes, insurance, and upkeep, so the rent arrived steadily and the building barely needed managing. It was the easiest investment either of them had ever made.
By early 2025 the warehouse appraised at $2.4 million, double what they paid, and each partner's stake was worth about $1.2 million.
Then their goals split. Michael's health had changed. He wanted to retire, see his grandchildren, and simplify his money, which meant leaving real estate entirely - not trading into another building, but out. Steve, still working at 65, wanted the opposite: keep investing, defer the taxes, grow the portfolio. Over coffee one evening they said it plainly. Michael wanted cash. Steve wanted a 1031 exchange, the provision that lets an investor roll gains from one investment property into another and postpone the tax. And they owned the warehouse through one LLC.
Why one LLC can't do two things
Their accountant put the problem in a single rule. Under Section 1031 of the tax code, the "same taxpayer" rule requires that whatever entity sells the property is the same entity that buys the replacement. If the LLC sold the warehouse, the LLC - not Michael, not Steve - would have to complete the exchange.
That left three paths, and two of them were dead ends.
If the LLC exchanges, Michael stays trapped
The LLC could sell and roll the proceeds into another property. But Michael didn't want another property; he wanted cash. After an exchange he'd still be a member of a real estate LLC, exactly what he was trying to leave. Distributing cash to him from the LLC afterward would likely be taxable, the very outcome he was trying to avoid.
One entity can't make two choices
They considered having the LLC sell, then letting Michael take cash while Steve exchanged his share. It doesn't work. The LLC is a single taxpayer: it either exchanges or it doesn't. The IRS won't let one member exchange while another cashes out of the same entity sale. The rule doesn't bend for individual members.
Convert to tenants-in-common first
The path that worked was to dissolve the LLC before any sale and convert to a tenants-in-common (TIC) arrangement, where each partner owns 50% of the physical property directly rather than through an entity. As separate owners, each could decide on his own when the property sold. Michael could sell his half for cash. Steve could exchange his.
The 18-month head start
Their tax attorney agreed TIC was the right structure, then delivered the warning that shaped everything: the IRS scrutinizes restructurings that happen close to a sale. Dissolve the LLC the week before listing, and the IRS could argue the move had no purpose beyond dodging tax, then recharacterize the whole thing as a single-entity sale and force both partners into the same 1031 decision.
So the attorney set a clock: restructure at least 18 months before any planned sale. The gap would show the conversion was driven by the partners' genuinely diverging plans, not by a deal already on the table.
In January 2024 the attorney drafted the deed transfer moving the property out of the LLC and into direct ownership, Michael 50%, Steve 50%. The county recorded it in February 2024. Because they were changing the form of ownership rather than selling or exchanging anything, the conversion itself was non-taxable.
For the next 18 months they ran the property as co-owners, collecting rent together, splitting expenses, and managing it jointly. That stretch of real TIC operation mattered as much as the paperwork. It showed the restructuring was a genuine change in how they held the property, not a one-transaction arrangement.
From one sale, two closings
In August 2025 the tenant declined to renew and moved out. Renovate and re-lease, or sell? Given where the two of them stood, Michael out and Steve exchanging, selling was the obvious move.
They listed the warehouse as a single asset but structured the deal to close with two separate TIC sellers, and found a buyer willing to purchase both halves at once. It closed in March 2026 for $2.4 million. After the 6% broker commission and closing costs, net proceeds came to about $2.2 million. On closing day the proceeds were split and handled separately.
Michael cashed out
Michael's 50% of the net proceeds came to about $1.1 million. Against an adjusted cost basis of roughly $600,000, that left a capital gain of about $500,000. He took the cash, paid roughly $150,000 in combined federal, state, and net investment income tax (NIIT), and walked away. The after-tax proceeds bought a retirement condo in a warm climate. No exchange, no ongoing real estate to manage. A clean exit.
Steve exchanged into a DST
Steve's half produced the same figures: about $1.1 million in proceeds, roughly $600,000 in basis, about $500,000 in gain. Instead of taking the cash, his proceeds went straight to a qualified intermediary (QI), the neutral party that holds exchange funds so the seller never takes possession of them, while he identified a replacement property.
He chose a Delaware Statutory Trust (DST), a diversified portfolio of commercial properties that let him stay invested in real estate, collect monthly income, and defer the roughly $150,000 in tax he'd otherwise have owed. By deferring, he put the full $1.1 million to work rather than the $950,000 he'd have kept after taxes; that extra $150,000 stays invested across the 7-to-10-year hold instead of going to the IRS now.
What made it work, and what would have broken it
Several things carried this deal, and each had a mirror image that would have sunk it.
Start with the legitimate business purpose. The IRS looks at whether a restructuring has economic substance apart from its tax benefit. Michael and Steve's diverging plans, retire versus keep investing, gave the LLC's dissolution a real reason to exist, and the 18-month gap reinforced that it wasn't built around a pending sale. Had they dissolved the LLC a week before listing, the IRS could have called the restructuring a tax maneuver and treated the deal as a single-entity sale, pushing Michael into an exchange he didn't want or Steve into taxes he meant to defer.
Then documentation. The deed transfer was recorded; the TIC operating period left a trail of shared expenses, rent collection, and management correspondence. An examiner opening the file would see a genuine change in the business relationship, not a costume worn for one closing.
Then the clean separation at closing. Michael's proceeds went to Michael; Steve's went to his QI. If the QI hadn't been engaged before closing and the money had touched Steve's hands first, his exchange would have been disqualified. Taking receipt of the funds before the intermediary is in place is a common and avoidable way to blow up a 1031. The title company, the buyer's attorney, and both partners' counsel coordinated to keep the two paths from crossing.
Underneath all of it was timing on the human side. Michael raised his retirement plans early, which is the only reason there was room to restructure at all. Had he waited until the lease was expiring, they'd have been negotiating an imperfect fix against a clock. And they brought in a real estate tax attorney, not only their accountant, before making any decisions. The attorney is who spotted the same-taxpayer problem, recommended the TIC conversion, and set the 18-month timeline. Wait until a sale is imminent and that option is gone.
How it ended
Michael retired with a clean exit and enough after-tax cash to fund the next chapter of his life. Steve deferred about $150,000 in tax, put the full $1.1 million into a DST, and kept building a real estate portfolio without the management. Neither gave up the thing he actually wanted.
What made that possible wasn't clever paperwork at the end. It was Michael raising the subject early and the patience to let 18 months pass before selling. One property, two opposite goals, and enough runway to serve both.
If you're weighing a similar structure, talk to an advisor with experience in partnership restructuring and 1031 exchanges. For more on entity structures, see 1031 exchanges with LLCs and partnerships.
Partners who want different 1031 outcomes generally can't get them from one entity sale; separating into individual ownership before the sale is what opens two paths. Timing is what makes it hold up: the more time between the restructuring and the sale (18 months in this case), the harder it is for the IRS to read the move as a last-minute tax-avoidance maneuver.
Frequently asked questions
Why couldn't Michael and Steve both achieve their goals without restructuring?
Section 1031's "same taxpayer" rule requires that whatever entity sells the property is the entity that buys the replacement. If the LLC sold, the LLC had to be the one to exchange, so Michael couldn't take cash personally while Steve exchanged personally out of the same sale. Getting different outcomes meant owning their shares separately.
What is a tenants-in-common (TIC) structure?
Tenants-in-common is a form of ownership where two or more people each hold a percentage of a property directly, rather than through an entity like an LLC. Because there's no single entity in the middle, each owner can make an independent decision about their share: Michael could sell his, Steve could exchange his.
Why did timing matter so much for the restructuring?
The IRS scrutinizes restructurings that happen close to a sale. Convert on the eve of a deal to engineer a specific tax result and the IRS may call it tax avoidance and challenge it. A gap of well over a year, 18 months here, shows the change had a real business purpose.
What would have happened if they tried to restructure a week before the sale?
The IRS could have argued the restructuring lacked a legitimate business purpose and treated the deal as a single-entity sale. That would have forced Michael and Steve into the same 1031 decision: either both exchange or both pay the tax.
Could Michael and Steve have split the proceeds after the sale with the LLC exchanging?
In theory the LLC could sell, reinvest through a 1031, and later distribute to the partners, but it gets messy. A distribution after an entity-level exchange can trigger its own tax questions, and the IRS would probe whether the LLC really meant to hold the replacement property for investment. Separating ownership before the sale avoids all of that.