Drop-and-Swap
A drop-and-swap is a pre-exchange restructuring that distributes partnership real estate to individual partners as tenants-in-common, so each partner can then execute their own 1031 exchange (or cash out) independently.
What it means
Partnership interests are not like-kind property. When a partnership owns real estate and some partners want to 1031 while others want cash, a drop-and-swap dissolves or distributes to convert partnership interests into tenant-in-common (TIC) interests in the underlying property. Each TIC holder can then exchange (or sell for cash) independently.
The IRS scrutinizes drop-and-swap timing closely. A "drop" very close to the exchange can be challenged as a step transaction. Best practice is to complete the drop well in advance of the sale — ideally more than a year — but practitioners commonly succeed with shorter gaps when structured carefully. Coordinate with a CPA and exchange attorney; this is not a DIY structure.
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