Tax help: Selling house with handshake equity agreement

[Palmer Thomas]

I have a rental house I'm in the process of selling.  When I first purchased the house, it needed a lot of work.  I have a friend who is good at doing just that so I agreed that I would give him an equity stake in the house to match the percentage of the value of work he did.  After rehab, he now owns 30% of the property.

Since this was a house I purchased in the beginning of my real estate adventures, I had no idea about long term tax implications. I didn't put him on either the title or put him as a member of the LLC under which the property is owned. There is no paperwork at all drawing up the agreement. It was just a friend to friend handshake deal. From a combination of the rehab and appreciation the house value has gone from roughly $50k to $200k.

How can I get my friend his share of the profit without being double taxed (I pay taxes on sale then he pays taxes when I give him his share) all while trying to do a 1031 exchange with my portion of the sale?