Can co-owners each take their own DST interest after one sale?

The ruling that authorises DSTs already has two taxpayers buying into one trust

This is not an accommodation sponsors invented. In Rev. Rul. 2004-86 two persons, B and C, exchange two separate properties for all of the interests in a single Delaware statutory trust through a qualified intermediary, and the ruling holds that each may do so without recognition of gain.

The reason it works for both is the same reason it works for one. Each beneficial owner is treated as owning an undivided fractional interest in the trust's real estate, so what B receives and what C receives are separate interests in the same building rather than shares in a common venture.

The trust agreement in the ruling issues a single class of interests representing undivided beneficial interests in the trust's assets, freely transferable but not publicly traded. Your sponsor's documents will describe something similar; the wider framing is in the Delaware Statutory Trust 1031 guide.

Each co-owner runs a separate file from the first call to Form 8824

Treat the two of you as two clients who happen to share a closing date. Each co-owner signs an exchange agreement with the intermediary before the sale closes, receives their own share of the proceeds into their own sub-account, makes their own written identification and files their own Form 8824.

The closing paperwork already assumes this. Under the Form 1099-S instructions, for multiple transferors of the same real estate the settlement agent must file a separate Form 1099-S for each transferor and must request an allocation of the gross proceeds among them at or before closing.

Give that allocation in writing and match it to the deed percentages, because it is the first number the IRS sees against each co-owner's return. What the intermediary needs from each of you is listed in what the qualified intermediary needs to open my exchange.

State withholding at the closing is also measured transferor by transferor, so the co-owner who is exchanging files whatever exemption or certificate their state requires while the co-owner taking cash does not; the general rule is in will the state withhold tax at closing.

Worked example: one sibling takes $465,000 in cash while the other defers

Round hypothetical figures make the split obvious. A duplex owned 50/50 as tenants in common sells for $1,000,000 free of debt, closing costs and commission come to $70,000, and $930,000 is left to divide.

One sibling's $465,000 goes straight to him at the closing table and he reports an ordinary sale, with tax on his half of the gain and his half of the depreciation recapture. The other sibling's $465,000 goes to her intermediary, she identifies within 45 days and subscribes for a trust interest sized to it.

Nothing the first sibling does affects the second, because the tenancy-in-common deed makes them two sellers of two interests rather than one seller of one property. The wider version of this decision is worked through in 1031 exchange when only one partner wants to cash out and how each heir can choose cash or a 1031.

• Gross price $1,000,000, costs $70,000, net $930,000, split $465,000 each.
• Cashing-out owner: taxable sale reported on his own return, no intermediary involved.
• Exchanging owner: her $465,000 goes to her own exchange account before the deed records.
• Hypothetical and rounded; basis, depreciation and state tax will move each side's real numbers.

Two subscriptions instead of one changes what each of you can actually buy

A split halves the cheque each of you brings to an offering, and sponsor minimums are tested per subscription rather than per family. That can put one of you below the floor of the offering you both liked, which is the practical constraint set out in DST minimum investment sizes.

The alternative, a single subscription in both names, keeps the buying power but ties the two of you together for the life of the investment. Every later decision, including whether to exchange again when the trust sells, then needs both signatures.

That later moment is worth thinking about now, because a DST usually ends with a sale and a fresh 1031 or a roll-up offer; see what happens when a DST sells and what is a springing LLC.

If the property sits inside an LLC, the split has to happen before the sale

An LLC with several members is one taxpayer for this purpose, and the gain belongs to it until the property leaves. Distributing the real estate to the members as undivided interests is generally tax-deferred, since §731(a)(1) recognises gain to a partner only where money distributed exceeds the adjusted basis of that partner's interest.

After the distribution each member holds real property in their own right and must satisfy §1031 on their own facts, including the requirement that the interest be held for investment. Section 6.03 of Rev. Proc. 2002-22 records the Service's discomfort with co-ownerships formed out of a partnership immediately beforehand.

That is why the distribution belongs well ahead of the listing, not in the week before closing. The timing arguments on both sides are in drop-and-swap and swap-and-drop strategies.

What to give the closing agent and the sponsor when two exchanges land in one trust

Say who gets what, in writing, before the settlement statement is drafted. Confirm the plan with your own CPA or attorney, since each co-owner's tax result is decided on their own return and their own basis.

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. Tell us the sale price, the ownership percentages and who wants income rather than another building, and we will show what vetted national sponsors can accommodate for each of you.

• A written proceeds allocation matching the deed percentages, delivered to the settlement agent before closing.
• A separate exchange agreement and separate sub-account for each co-owner who is deferring.
• Separate identification notices, each signed by that co-owner and sent within their own 45 days.
• Separate subscription documents, accreditation support and W-9s for each subscriber.