Exploring the Drop and Swap 1031 Exchange

As with most real estate transactions, 1031 exchanges can be relatively simple, or extremely complex depending on the various factors involved. This is especially true when you’re dealing with property owned by a business entity. The drop and swap is a common 1031 exchange tactic used when there are multiple co-owners of a property. In this article, we are going to talk about drop and swap exchanges of like-kind property.

What is a Drop & Swap Exchange?

Real estate can often be held collectively by multiple owners in a partnership, trust, or LLC. This type of set up can make things tricky if some of the owners want to sell the property while others want to do a 1031 exchange. This is where a drop and swap can come in handy. Essentially, this involved reconfiguring the ownership of the property to tenancy-in-common. That allows each individual owner to do a 1031 exchange on their interest in the property.

It’s important to get ahead of the curve with a situation like this and get planning well before the sale of the property. If you scramble at the last minute (right before closing) to set up a tenancy-in-common, the IRS may not treat the exchange as legitimate. Early planning is key.

Commercial Real Estate 1031 Exchange

Are you looking to sell commercial real estate, but don’t want to be saddled with a capital gains tax bill? A 1031 exchange may be the best option for your situation. Working with a qualified intermediary can ensure that your exchange of real property goes off without any issues. Reach out to our qualified intermediaries today to discuss the details of your like-kind exchange. Our offices are located in downtown Minneapolis but we work with clients all over the state and across the country.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Section 1033 is the Kissing Cousin to Section 1031

IRC Section 1033 is similar in nature to Section 1031, but 1033 exchanges are specifically for involuntary condemnation sales.

Section 1033(a)(2)(B) provides, in general, that the replacement period begins on the earlier of the date of disposition of the converted property or the earliest date of the threat or imminence of requisition or condemnation of the converted property, and ends two years after the close of the first taxable year in which any part of the gain on the conversion is realized.

Section 1.1033(a)-2(c)(1) of the Income Tax Regulations provides:

If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into money or into property not similar or related in service or use to the converted property, the gain, if any, shall be recognized, at the election of the taxpayer, only to the extent that the amount realized upon such conversion exceeds the cost of other property purchased by the taxpayer which is similar or related in service or use to the property so converted . . . if the taxpayer purchased such other property . . . for the purpose of replacing the property so converted and during the period specified in subparagraph (3) of this paragraph.

Conclusion – you can purchase your replacement property even before you have sold and conveyed your relinquished property in a Section 1033 exchange if you have received a credible threat of seizure, or requisition or condemnation.

Defer Your Gains with a 1031 Transaction

Take advantage of section 1031 of the Internal Revenue Code and defer your gains today with a like-kind exchange of real estate. When you sell a piece of investment real property, typically you need to pay capital gains taxes on the sales proceeds. Depending on your situation, this can be a sizeable tax bill. Many tax-savvy investors use the 1031 exchange to defer this capital gains tax bill and continue to build their wealth in a replacement property. If this piques your interest, contact a qualified intermediary to learn more!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges of Partnership & LLC Member Interest

Many people own property in LLCs or partnerships and they want to do a 1031 exchange on their specific interest in the partnership. That causes a lot of problems because partnership and LLC ownership interests are excluded from 1031 treatment.

Tenancy in Common

If you have a time machine you might want to go back in time and change the ownership of your relinquished property to a tenancy in common so you could own your piece of the pie as a co-tenant rather than a partner.

Some people want to convert their partnerships to a tenancy in common right before they close on the sale of their relinquished property. That can sometimes work, especially if the person that’s jumping out of the partnership isn’t the one that wants to do the 1031 exchange.

An LLC Example

For example, let’s say that 55% of the partners want to stay inside of the partnership and they’re going to conduct an exchange under the name of the old surviving partnership. But 45% of the partners want to jump out of the LLC and become tenants in common and they just want to take their cash and pay their taxes. That’s a safer way to construct a drop-and-swap because the old taxpayer (the partnership that’s owned the property all these years) is the entity that does the exchange.

The more problematic situation occurs when everyone wants to break up and the partnership is going to terminate because more than 50% of the ownership leaves in a 12 month period.

Planning and advanced thinking is the name of the game. If you’ve got clients that are in partnerships or LLCs that have property they may be selling in the near future, it’s best to get ahead of this issue. Break up the partnership way in advance. Even before you have a tacit agreement to sell, reconfigure the partnership or LLC to a tenancy in common.

• Start Your Exchange: If you have questions about 1031 exchanges of partnership or LLC membership interests, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Explaining the Swap & Drop 1031 Exchange

We have talked before about the drop and swap exchange and how it can be beneficial in certain like-kind exchange situations. In this article, we are going to explain the inverse of the drop and swap exchange – the swap and drop 1031 exchange.

What is a Swap & Drop 1031 Exchange?

A swap and drop 1031 exchange is essentially the inverse of a drop and swap exchange.

To quickly review – a drop and swap exchange is a 1031 exchange tactic often used by taxpayers in a partnership. If there are 3 partners who own a piece of real property, but only 2 of them wants to do a 1031 exchange on the property, the partners can convert their interests in the property to tenancy-in-common interests. This allows the odd partner out to cash out their share, while the remaining 2 partners conduct a 1031 exchange.

In a swap and drop exchange, the partners would conduct the 1031 exchange of their property. Then at some point down the line, the partner who wants out would exit the partnership and cash out. Both the drop and swap and swap and drop techniques need to be carefully constructed in order to be successful.

Qualified Intermediary Services

At CPEC1031, our intermediaries have the skills and experience to help you through the details of your 1031 exchange. We have over two decades of experience helping taxpayers throughout the state and around the country with their 1031 exchanges of real estate. If you are looking for a way to defer taxes on the sale of real estate, we can help you! Contact our qualified intermediaries today to discuss the details of your exchange. Our office is located in downtown Minneapolis but we work with clients across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

How to Determine Which Specific DSTs are Offered by Financial Institutions

Each financial institution (RBC Wealth Management, US Bank, Morgan Stanley, etc.) decides what investment products can be put onto their platform. They do their own due diligence on their properties and the sponsors. They also restrict their financial representatives to only sell those products that are approved.

A financial representative for a particular institution can introduce to their clients these approved products. You can communicate with the alternatives desk at one of these institutions to determine what DSTs are available and the details of those DSTs.

If you need help finding the right DST to use for your 1031 exchange, reach out to a qualified intermediary who can point you in the right direction.

MN Qualified Intermediaries You Can Count On

At CPEC1031, LLC you can count on our qualified intermediaries to handle all aspects of your like-kind exchange from start to finish. Our qualified intermediaries have more than two decades of experience facilitating exchanges of all types. Let us take care of all the specifics of your next 1031 exchange and make sure that you are able to defer 100% of your capital gains tax burden. You can find us at our downtown Minneapolis offices, but note that we provide 1031 exchange services throughout the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved