Co-Owners Selling in San Francisco: What to Settle Before the Sale Contract

When several people own a building together, the exchange question comes before the price question. Who holds title, whether it is held through an entity, and whether every owner wants to exchange decide what is possible. Those facts are much harder to change once a buyer is under contract.

The short answer

A 1031 exchange is made by the taxpayer that owns the real property. If the building is owned by an LLC or partnership, the entity is that taxpayer, and an interest in the entity is generally not real property that an individual member can exchange. If the co-owners hold title directly, for example as tenants in common, each owner's share can be real property, and each can decide separately. Whether a particular arrangement is real co-ownership or a partnership depends on the facts.

So the first question is how title is held today, and whether the owners agree on what should happen to it.

Where are you in the process?

• Before a listing agreement or a contract. The best time. Work through the questions below with your attorney and CPA.
• Already under contract. The exchange can still be put in place before closing. Changes to how title is held are much riskier now, so don't improvise.
• Buying first. That is a reverse exchange, with its own rules. See reverse 1031 exchanges.
• Already closed. An intermediary can't be added after the proceeds reach the owners (Treas. Reg. §1.1031(k)-1(f)).

Educational next steps, not an eligibility determination.

Federal rules for co-owners

• Entity interests are excluded. Stock and interests in a partnership are not real property for section 1031, however state law classifies them. The one exception is a partnership with a valid election under section 761(a) (Treas. Reg. §1.1031(a)-3(a)(5)(i)). An LLC with several members is usually taxed as a partnership.
• Direct co-ownership can qualify. The same regulation lists co-ownership of real property as an interest in real property.
• Rev. Proc. 2002-22 is not a safe harbor. It sets the conditions under which the IRS will consider a ruling request that a co-ownership of rental real estate is not a business entity. One condition is no more than 35 co-owners. The IRS says its guidelines "are not intended to be substantive rules and are not to be used for audit purposes." Meeting them guarantees nothing; missing one does not by itself make the arrangement a partnership.
• Changing the structure shortly before a sale is where the risk sits. Moving from an entity to direct co-ownership close to a sale, often called "drop and swap", turns on the facts. In one California case, the Office of Tax Appeals allowed an exchange that followed a partnership's redemption of a partner for a tenancy-in-common interest. That decision is marked nonprecedential and includes a dissent, so it binds no one else. We mention it only so you know the question exists. Don't restructure without your attorney and CPA. See drop and swap explained.
• Everyone who exchanges runs their own clock. Each exchanging taxpayer needs the exchange in place before closing, identifies replacement property within 45 days, and receives it by the earlier of day 180 or their own tax return due date, including extensions (26 U.S.C. §1031(a)(3)).
• Related co-owners. If related persons exchange with each other and either disposes of the property within two years, the deferral is generally lost (26 U.S.C. §1031(f)).

California

• FTB 3840. If an exchanging owner's replacement property is outside California, that owner files FTB 3840 for the year of the exchange and each year after, generally until the deferred California gain is recognized. Partnerships and LLCs file it too; for a disregarded entity, the owner files.
• Form 593. Real estate withholding applies at closing unless the exchange exemption is certified on Form 593. An owner who receives more than $1,500 in cash or other property is subject to withholding on it. If an exchange fails, the intermediary withholds 3 1/3% of the sales price.
• Tax rate. California has no lower rate for capital gains; recognized gain is taxed as ordinary income.
• Facilitator law. California requires exchange facilitators to keep a fidelity bond of at least $1,000,000 or a permitted alternative (Fin. Code §51003), errors-and-omissions coverage of at least $250,000 or a deposit (§51007), and to hold exchange funds under a prudent-investor standard, not mixed with operating accounts (§51009). Ask any intermediary which option it uses, and for the documents.

For more on the California side, see selling in Los Angeles and buying elsewhere and California's clawback rule.

San Francisco transfer tax

San Francisco charges transfer tax when a deed is recorded. It also charges it when ownership interests in a legal entity change hands in a way that is a change of ownership of San Francisco real estate (S.F. Bus. & Tax Regs. Code §1114(b)), and on leaseholds with 35 years or more remaining. A Transfer Tax Affidavit is required even when no tax is due.

That matters for co-owners. A restructuring step inside an entity can be a transfer-tax event of its own. Ask your attorney before any interest changes hands.

Rates published by the City, as of October 2026:

The rate for a tier applies to the entire value or consideration, not only to the part above the threshold (§1102). A measure on the November 3, 2026 ballot (Proposition I) would restructure the top two tiers, so confirm the rates with your title company on your closing date.

The City's transfer-tax pages and affidavit list no exemption for 1031 exchanges.

Questions to answer together, before listing

1. How is title held today: an LLC or partnership, tenants in common, or joint tenancy? Take the vesting from a title report, not from memory.
2. Does every owner want to exchange? If not, who wants cash, and how will they be paid?
3. If the building is in an entity: will the entity exchange as a whole, or are the owners considering a change in structure? That is an attorney-led decision, with timing and transfer-tax consequences.
4. Who signs the exchange agreement and the identification notice, and who is the taxpayer on each return?
5. How will the existing loan be paid off and replaced for each exchanging owner? Debt that is paid off and not replaced is generally taxable boot.
6. If any replacement property is outside California, who will file FTB 3840 each year?

Before closing: checklist for co-owners

Watch

General rule explainer — not recorded for San Francisco

If the Funds Hit Your Account, It's Over · 20 seconds

For co-owners, this applies to each person who exchanges: the proceeds go to the intermediary, not to any owner. The clip covers that general rule only. Co-ownership, entities and transfer tax are covered in the text above.

A hypothetical

Hypothetical — not a client and not a result. Three siblings own a six-unit building in San Francisco through an LLC taxed as a partnership. Two want to keep investing through an exchange; one wants cash. Because the LLC holds title, the LLC is the taxpayer, and the siblings' LLC interests can't be exchanged one by one. Before listing, they meet an attorney and a CPA and weigh the options those advisers raise. The LLC could exchange as a whole and handle the third sibling's exit separately. Or they could consider changing how title is held, well before any sale; their advisers explain the timing risk of that path and the San Francisco transfer tax on entity changes. No option is recommended here. The point is the order: the owners settle the structure first, then sign a listing and a sale contract.

Frequently asked questions

We own the building through an LLC. Can one member do a 1031 exchange with their share?

Not with the LLC interest itself. An interest in a partnership, which is how an LLC with several members is usually taxed, is generally not real property for section 1031. The LLC is the taxpayer that can exchange (Treas. Reg. §1.1031(a)-3(a)(5)(i)).

Is a tenancy in common "approved" under Rev. Proc. 2002-22?

No. That revenue procedure lists the conditions for asking the IRS for a private ruling. The IRS says its guidelines are not substantive rules and are not to be used for audit purposes.

Does San Francisco charge transfer tax if we reorganize the ownership entity?

It can. The City's code treats a transfer of ownership interests in a legal entity as a taxable transfer when it is a change of ownership of the real estate under California law (S.F. Bus. & Tax Regs. Code §1114(b)). Ask your attorney whether your step is one.

If two of us exchange and one takes cash, do we all have the same deadlines?

Each exchanging taxpayer has their own 45-day and 180-day periods, and the 180 days can be cut short by their own tax return due date (26 U.S.C. §1031(a)(3)).

Does a 1031 exchange avoid San Francisco transfer tax on the sale?

No. The City lists no exemption for 1031 exchanges, and the tax is based on the value or consideration for the property transferred.

Who you'll work with

Leah Badach is a Certified Exchange Specialist with 11+ years of 1031 exchange experience. Leah coordinates the exchange side with your attorney, CPA and escrow officer. How title is held, and any change to it, is legal work for your attorney. Before you sign, Leah confirms in writing which qualified intermediary will hold your funds and gives you its account, bond and insurance documents. You can verify the credential in the FEA CES directory.

Related: 1031 exchanges in California · Los Angeles: selling and buying elsewhere · Drop and swap · 1031 exchanges and LLCs · Deadline calculator · Questions to ask any qualified intermediary

Sources

• Treas. Reg. §1.1031(a)-3: partnership interests and stock are not real property; co-ownership is.
• Rev. Proc. 2002-22: conditions for a ruling request on co-ownership of rental real estate.
• 26 U.S.C. §1031: the 45- and 180-day periods, and related persons.
• Treas. Reg. §1.1031(k)-1: receipt of proceeds, and qualified intermediaries.
• Appeal of Mitchell, California Office of Tax Appeals (2018), nonprecedential.
• FTB 3840 instructions: annual reporting of California like-kind exchanges.
• Form 593 instructions: real estate withholding and the exchange exemption.
• FTB, capital gains and losses: California's rate on capital gains.
• California Financial Code, Division 20.5: exchange facilitators (§§51000 to 51013).
• City and County of San Francisco, transfer tax: rates, legal entities and the affidavit.
• S.F. Business and Tax Regulations Code, Article 12-C: §§1102, 1108.3, 1111 and 1114.

Educational information, not tax or legal advice.