Can I use 1031 proceeds to buy out a co-owner's share of another property?

A deed for their half is like-kind; an assignment of their membership interest is not

The distinction is written into the regulation, not into practice. Under Treas. Reg. §1.1031(a)-3(a)(5)(i), fee ownership, co-ownership, a leasehold, an option and an easement are all real property for §1031, while "interests in a partnership" are not, other than an interest in a partnership that has in effect a valid election under §761(a).

So the closing you need is a recorded conveyance of an undivided percentage from the co-owner to you, with your name on the deed and on the title policy. A transfer of the entity that holds title, however carefully drafted, gives you a security interest and not a real property interest.

Where the target really is an entity, the answer does not change with the size of the slice; that ground is covered in can I 1031 into a syndication, fund or LLC interest. The §761(a) route exists but is rare, because the election is open only to organisations held for investment where each participant reserves the right to take or dispose of its own share.

If the co-owner is your brother or your mother, the cash they take is what breaks it

Rev. Rul. 2002-83 is the exact pattern: a taxpayer hands relinquished property to a qualified intermediary, the intermediary buys the replacement from a related person, and that related person is paid cash. The holding is that nonrecognition does not apply, because §1031(f)(4) reaches any exchange "structured to avoid the purposes" of the related-party rule.

One detail deserves attention before you lean on a fairness argument. The relative's property there carried a basis equal to its value, so the relative reported nothing at all, and the deferral was refused anyway because the buyer had turned low-basis real estate into cash.

The reporting follows. The Form 8824 instructions say that where you end up owning replacement property a related party sold into the exchange for cash through a qualified intermediary, you "don't report the transaction on Form 8824 unless one of the exceptions on line 11 applies" and instead report the sale as taxable. Who falls inside that net is set out in who counts as a related party.

Worked example: $420,000 of exchange money against a half interest worth $460,000

Round hypothetical numbers show where the friction sits. A duplex appraises at $920,000 free of debt, the co-owner's undivided half is therefore $460,000, and your relinquished sale left $420,000 with the intermediary after costs.

You are $40,000 short of a full deferral, and the fix is your own money rather than a smaller deed: adding outside cash to the closing is allowed and is explained in adding your own cash to the exchange. Taking a 45.65% interest instead would leave $40,000 sitting at the intermediary as taxable boot.

Run it the other way and the problem inverts. If your sale netted $500,000, the $40,000 left after the half interest closes is boot unless you place it, which is where a small second position such as a trust interest sized to the remainder earns its keep; see DST minimum investment sizes and what happens to leftover cash.

• Half interest $460,000, exchange funds $420,000, outside cash needed $40,000 for full deferral.
• Buy a 45.65% interest instead and $40,000 becomes recognised boot.
• Net $500,000 against the same $460,000 purchase and $40,000 is again boot unless placed elsewhere.
• Figures are hypothetical and rounded; your own costs and depreciation change the tax on any shortfall.

The co-ownership agreement is what stops the arrangement being read as a partnership

Once you own a fraction alongside others, the risk shifts from like-kind to entity classification: if the co-ownership is treated as a business entity, what you hold is a partnership interest. Rev. Proc. 2002-22 sets out the conditions the Service applies when it is asked to rule that an undivided fractional interest is not an interest in a business entity.

The conditions worth reading before you sign are §6.03, which bars the group from filing a partnership return, trading under a common name or holding itself out as a business entity, and §6.05, which requires unanimous approval for any sale, lease, manager hiring or blanket-lien change while allowing a simple majority for everything else.

It is a ruling framework rather than a mandatory safe harbour, and §6 itself says the Service may still consider a request where the conditions are not met but the facts "clearly establish that such a ruling is appropriate." Most buyers never request a ruling; they draft to the conditions and keep the file.

Financing a fraction is the practical brake, not the tax law

A lender asked to secure a loan against one person's undivided interest will usually want the lien to cover the whole parcel and every co-owner to sign, which turns your private purchase into a negotiation with people who are not selling anything. Build that conversation into your 45 days, not your 180.

Two conditions shape what the loan can look like. Under §6.09 of the revenue procedure the co-owners must share any debt secured by a blanket lien in proportion to their undivided interests, and §6.14 bars the lender from being a person related to any co-owner, the sponsor or the manager.

Where the financing cannot be pinned down in time, the answer is a second identified property that can actually close, not an extension; my identified property fell through and using DSTs as backup properties cover that fallback.

Four things to settle before your identification goes in

Each of these is cheap to fix on day 20 and expensive on day 170. Run each answer past your own CPA or attorney while the purchase agreement is still a draft, because the related-party analysis turns on facts only you and the seller know.

Breakwater Exchange is a 1031 exchange broker with over twenty years of experience and more than a billion dollars in DST transactions, licensed in all 50 states within a regulated broker-dealer framework. Where a buyout leaves an amount too small or too large to place cleanly, we can show you vetted national sponsor offerings sized to the remainder.

• Confirm in writing that the seller will convey a recorded undivided interest, not an entity interest.
• Establish whether the seller is related to you under §267(b) or §707(b)(1), and what they will do with the money.
• Get the lender's written position on a fractional borrower before the identification deadline.
• Price the interest from an appraisal of the whole property multiplied by the percentage, and keep the appraisal.