Drop and Swap 1031?

Question

I have a long term rental property that I bought with a partner in 2018 that we plan on selling (we are equal partners and have the property in a LLC).  We just got an offer that needs to pass inspection and we could close on the property as soon as January 30th.

I would love to do a 1031 exchange, if possible and if it makes sense. I asked my accountant and they recommended doing a "Drop and Swap 1031 exchange" but they also informed me that they have never been involved in one. My partner and I are leaving on great terms and may do something together in the future but he does not want to 1031 exchange with me. Is this the best way to go forward? This was my first rental property and I have never done a 1031 exchange before. Other than knowing about the qualified intermediary and the strict timelines of 45 and 180 days I am a novice so any advice is helpful.

Dave Foster · Answer

Thanks for the shout-out @Caleb Brown!! @Tim Jernberg, The reason for doing the drop n swap is that one of the requirements of the 1031 exchange is that whoever the taxpayer is for the old property must also be the taxpayer for the new property. When you dissolve the LLC and/or distribute the property from the LLC, you and your partner will then own the property as TIC (Tenants in Common) and will be able to part ways with each other and do a 1031 on only your interest in the property.

If you own 50% on a $100k property in order to defer all the tax on your portion of the proceeds, you must purchase at least $50k or greater in investment real estate.

Aaron Zimmerman · Answer

I'd look to see how big the gain is. You could sell the current property in 2026, then buy another property, place in service, and do a cost seg to wipe out the gain.

How much would the gain be?

Caleb Brown · Answer

@Dave Foster is a good 1031 guy

Michael Plaks · Answer

@Bernard Reisz published some excellent content on this topic on his own website and on LinkedIn, but since it's not on BP, I cannot link it here. Google it or contact Bernard directly.

Tim Jernberg · Answer

I really want to thank everyone that posted here it was a big help for me.  Due to the condensed timeline, I opted against trying the drop and swap as the gain wasn't going to be high enough for the risk/complexity.  Looking forward to finding the next property!

Sandy Hu · Answer

Drop-and-swap can work, but it’s one of those strategies where execution and timing really matter, and it’s not something I’d treat as a default solution—especially for a first 1031.

A few high-level points I’ve seen in practice (not tax advice):

• The IRS scrutiny risk usually comes down to holding period and intent. If the LLC drops the property to individual members and immediately sells, that’s where things can get uncomfortable.
• Many QIs and tax attorneys prefer seeing a seasoning period post-drop before the exchange, which doesn’t always line up with an imminent closing.
• If one partner doesn’t want to exchange, sometimes it’s cleaner for one partner to cash out and recognize tax, while the other plans a straightforward 1031—depending on structure.

The IRS scrutiny risk usually comes down to holding period and intent. If the LLC drops the property to individual members and immediately sells, that’s where things can get uncomfortable.

Many QIs and tax attorneys prefer seeing a seasoning period post-drop before the exchange, which doesn’t always line up with an imminent closing.

If one partner doesn’t want to exchange, sometimes it’s cleaner for one partner to cash out and recognize tax, while the other plans a straightforward 1031—depending on structure.

Since your CPA hasn’t handled one before, I’d strongly suggest looping in a 1031-focused tax attorney or a very experienced QI before you commit to this path. They’ll be able to sanity-check whether drop-and-swap is even viable given your timeline.

You’re right to pause here—this is one of those “measure twice, cut once” situations.

Bernard Reisz · Answer

@Michael Plaks Honored by the mention. Thank you!

@Tim Jernberg First off, worth mentioning that your scenario is one we encounter every day (literally). That being said, there's more than one way "to skin this cat." Drop and swap, which is very common, is not a risk free transaction - but a pure drop and swap does remain the easiest and cleanest approach, hence its appeal.

Jason Malabute · Answer

Before getting too deep into a 1031, I’d start by quantifying the gain, since that largely determines whether deferral is even worth the complexity. In some cases, selling and then acquiring a new property that’s placed in service shortly after can allow accelerated depreciation to offset a large portion of the gain, depending on timing and facts.

If the property is owned through a partnership or LLC, a 1031 is much trickier because exchanges generally need to occur at the same taxpayer level. A drop-and-swap can work, but it comes with elevated IRS scrutiny and has to be done well in advance of closing. The LLC would typically need to distribute tenancy-in-common interests before the sale, and only the exchanging partner would roll their interest while the other takes cash. If this is done too close to closing, the IRS may challenge whether the interest was truly held for investment.

With timing this tight, it’s critical to involve a qualified intermediary and an experienced 1031 specialist immediately and review the entity documents, basis, and debt allocation. If there isn’t enough runway to do this properly, paying the tax and planning a future, more tax-efficient reinvestment may be the lower-risk option.

Ashish Acharya · Answer

@Tim Jernberg,

A drop-and-swap 1031 exchange is the only practical way for you to exchange while your partner cashes out, but it carries heightened IRS scrutiny. To qualify, the LLC must distribute tenancy-in-common interests to each partner before the sale, and you would exchange only your interest while your partner takes cash. The tax risk is that if the drop occurs too close to closing, the IRS may argue the interest was not held for investment. This can work only if structured carefully, documented properly, and executed with an experienced 1031 attorney and qualified intermediary. If timing is tight, paying the tax and planning a future tax-optimized reinvestment may be the safer option.

Fulton Abraham Sanchez · Answer

@Tim Jernberg, hi. A 1031 with a partnership/LLC is tricky because the exchange usually has to happen at the same taxpayer level (often the partnership).

A “drop & swap” can work, but doing it right before closing can create IRS, title, and closing complications—timing and intent matter.

There may be alternative structures depending on basis, debt, and how the LLC is taxed.

With a Jan 30 close, the priority is to involve a 1031 specialist + qualified intermediary ASAP and review the LLC docs/returns to choose the safest approach.

Drop and Swap 1031?

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