“When one shareholder needs cash and another wants to keep building, the structure you choose in the first thirty days usually decides what the family nets in the next thirty years.”

— Daniel Raupp, Founder & Managing Partner, Fortitude Investment Group LLC

Family-owned real estate held inside an S corporation creates one of the more common — and most misunderstood — planning challenges we see at Fortitude. The setup usually looks something like this: a parent and an adult child each own a piece of an S corp that holds a piece of appreciated real estate. The property is ready to sell. One owner wants cash. The other wants to keep deferring tax through a 1031 exchange.

On paper it sounds like a simple split. In practice, the IRS does not let shareholders 1031 their share of an S corp’s property. The corporation owns the asset, so the corporation is the only taxpayer that can do the exchange. That single rule is what makes these transactions interesting — and what makes the right structure worth real money.

The Core Problem

A 1031 like-kind exchange has to be done by the taxpayer who owns the property being sold. Inside an S corp, that taxpayer is the entity itself, not the individual shareholders. So you cannot simply carve off one shareholder’s economic interest, cash them out, and let the rest of the entity exchange. Any approach has to solve for three things at once: getting one shareholder real liquidity, preserving the other shareholder’s ability to defer, and avoiding the step-transaction and entity-level gain traps that the IRS uses to unwind deals it views as engineered.

Four Structures Worth Considering

1. Redeem the Exiting Shareholder Before the Sale

The S corp buys back the exiting shareholder’s stock — funded by a note, outside financing, or existing cash — leaving the remaining shareholder in full control. The corporation then sells the property and completes a 1031. If the redemption qualifies as a complete termination of interest under IRC §302, the exiting shareholder gets capital gain treatment. This is often the cleanest path when the family has the liquidity or borrowing capacity to fund the buyout up front.

2. “Drop and Swap” Into a Tenancy-in-Common

The S corp distributes the property to the shareholders as tenants in common before sale. Each TIC owner then independently chooses what to do — one sells and pays tax, the other does a 1031. The catch: distributing appreciated property out of an S corp triggers gain at the entity level under §311(b), which then flows through to both shareholders. And the IRS scrutinizes how long the TIC structure was held before sale. Done too close to closing, it can be collapsed back to a corporate-level transaction.

3. Partial 1031 With Boot

The S corp does a partial exchange — reinvesting most of the proceeds in replacement property and taking the remainder as taxable boot. The boot is used to redeem the exiting shareholder. Cleaner mechanically than a drop-and-swap, but the tax on the boot passes through to both shareholders pro rata, which can feel unfair to the one staying invested.

4. Installment Treatment on the Exiting Interest

The corporation sells, completes the 1031 on the continuing shareholder’s economic share, and pays out the exiting shareholder over time through an installment note. This spreads the tax bill but does not solve the entity-level issue — and it leaves the exiting shareholder economically tied to the family for years. It is rarely a first choice but occasionally fits.

“The right answer almost never comes from picking a strategy off a shelf. It comes from understanding the family — the basis, the timeline, the relationships — and then reverse-engineering the structure to fit.”

— Daniel Raupp, Founder & Managing Partner, Fortitude Investment Group LLC

Hypothetical Case Study: The Hartman Family

Note: The following is a hypothetical scenario for illustration only. Names, figures, and details are not based on any actual client engagement.

The setup. Robert Hartman, 68, and his daughter Elena, 34, own an S corporation that holds a commercial property in suburban Atlanta. Robert owns 70%, Elena owns 30%. The property was purchased in 2002 for $1.4 million and is now under contract to sell for $6.2 million. Elena is buying her first home and wants her share of the proceeds in cash. Robert wants to defer gain and roll into a portfolio of triple-net retail properties for passive income in retirement.

The challenge. If the S corp simply sells, the entire gain flows through to both shareholders. Elena gets her cash but Robert loses the chance to defer. If Robert tries to do a 1031 inside the corp, Elena cannot pull her share out without the family scrambling to fund her separately, and the timing pressure of the 45-day identification window makes ad-hoc fixes risky.

The structure. Working with the family’s CPA and tax attorney, the team modeled four options and landed on a pre-sale redemption. Roughly six months before closing, the S corp redeemed Elena’s 30% interest, funded with a combination of corporate cash and a short-term bank line secured by the property. Elena received a lump sum at the redemption, recognized capital gain on the difference between her redemption proceeds and her stock basis, and walked away clean. Robert became the 100% shareholder. The S corp then sold the property at closing and executed a full 1031 exchange into three replacement properties identified within the 45-day window.

The outcome. Elena netted her capital, paid her tax, and closed on her home without delay. Robert deferred his share of the gain, repositioned into income-producing assets that fit his retirement plan, and avoided the entity-level gain that a drop-and-swap would have triggered. The bank line was retired from the 1031 proceeds permitted under the exchange rules. The total tax savings versus a straight pro-rata sale was meaningful enough to fund Robert’s first two years of replacement-property cash flow.

Why the Sequencing Matters

Every one of these structures is sensitive to timing. The IRS uses the step-transaction doctrine to collapse pieces that happen too close together, treating them as a single integrated event. A redemption funded the day before closing looks very different from one completed six months earlier. A TIC distribution that exists for a week before sale is not a TIC distribution — it is a corporate sale wearing a costume. Getting the sequence right is often more important than getting the strategy right.

“We see families come to us after they’ve already signed a purchase contract. By then, half the planning options are off the table. The conversation that matters is the one you have before the property hits the market.”

— Daniel Raupp, Founder & Managing Partner, Fortitude Investment Group LLC

What Families Should Have Ready

Before sitting down with tax counsel, families considering this kind of transaction should be ready to discuss:

• Exact ownership percentages and how each shareholder acquired their stock
• The property’s current value, tax basis, and any debt against it
• Each shareholder’s stock basis — not just the company’s basis in the asset
• Whether the entity was ever a C corp (built-in gains tax can apply)
• The exiting shareholder’s liquidity need and timing
• The continuing shareholder’s replacement-property goals
• Whether a buyer or LOI is already in place — timing changes what’s possible

The Bottom Line

Splitting outcomes inside an S corporation is one of the highest-leverage planning moments a family will face. Done well, one shareholder walks with clean capital and the other defers a meaningful tax bill into a portfolio built around their next chapter. Done poorly, the family pays full tax on the entire gain and wonders later what could have been different.

At Fortitude Investment Group, we work alongside CPAs and tax attorneys to model the trade-offs before the structure is locked in — because by the time the contract is signed, most of the options are gone.

About Fortitude Investment Group

Fortitude Investment Group LLC, founded and led by Managing Partner Daniel Raupp, works with families, business owners, and professional advisors on the planning decisions that shape long-term outcomes — from entity structure and concentrated-asset transitions to tax-efficient wealth transfer. If your family is navigating a real estate sale inside a closely held entity, we welcome the conversation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Fortitude Investment Group is independent of CIS and CAM.

This material is for informational purposes only and is not an offer to buy or sell any security or investment product. Past performance does not guarantee future results. All investments involve risk, including possible loss of principal. Consult your tax, legal, and financial advisors before making investment decisions.