What is a Drop & Swap in a 1031 Exchange?

1031 exchanges sound simple on the surface, but can actually be quite intricate in many cases. In this article, we are going to discuss a strategy for tenants-in-common carrying out a 1031 exchange - the drop and swap.

Real Estate with Multiple Owners

Often, people will own real estate collectively in a trust, partnership, or other business entity, and maybe one or some of those owners in the entity really want to do a 1031 exchange on the sale of the entity’s property.

Well before the closing - maybe even before the listing agreement is signed - those owners of the entity have a planning opportunity in which they can reconfigure the ownership of the property to make it most advantageous and flexible for those owners to do separate 1031 exchanges.

The Drop & Swap

A drop and swap can occur where the entity transfers out some or all of the property to the various co-owners as tenants-in-common. So rather than having the business entity own the property, the owners of the entity become the tenant-in-common co-owners of the real estate.

Remember that section 1031 states that you must have held the property for investment or business purposes. So these individual owners are going to want to satisfy the holding requirement and receive ownership well prior to any sale or disposition of the relinquished property.

Plan Early

If you do the drop and swap at the eleventh hour right before the sale is to occur the IRS may not respect that transfer to the various co-owners. Furthermore, they may say that those co-owners have not satisfied the holding requirement because they only held it for a brief period of time before immediately selling it. And if they did hold it for such a short period of time, their argument would be that they held it primarily for resale and not for investment or business purposes.

• Start Your 1031 Exchange: If you have questions about drop and swaps in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 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

The Benefits of Tenancy-in-Common Property

Being a Tenant in Common (TIC) gives the opportunity to investors to diversify their real estate investments as it is allows the ability to invest in more larger properties, rather than smaller properties. This also gives the potential of Increase in the Net Cash Flow. Ownership in Tenants in Common (TIC) properties gives the chance to increase cash flow, provides tax write-offs as well as property appreciation benefits. It is accomplished without a time commitment of active property management that otherwise is required, as the sole owner of the property.

Benefits of Tenancy-in-Common

Tenants in Common (TIC) include some of the following benefits:

• The Scope for an Investment for larger properties.

• Purchasing investment properties as tenants in common (TIC) allows an investor to invest in a large amount of properties similar to warehouses, shopping centers, industrial property, etc. which generally will cost a few million or more.

• Allowing the diversifying of Real Estate Investments.

The Nation’s Leading Real Estate Companies have a source of investment properties and acquires a fixed rate, non-recourse financing with terms for Tenants In Common (TIC) owners. With the Tenants In Common (TIC) property investment, may gain the access to select, national real estate companies, who look for the investment properties for you. The companies can be referred to as TIC Identification companies and they generally provides extensive due diligence on the part of investors. These real estate companies, the lenders and the security companies conduct an extensive due diligence on the investment properties being offered to Tenants in Common (TIC). During the time and resources necessary are being provided in a scale far larger than the most individual investors are capable.

Tenants In Common (TIC) investment property locators use professional property and asset management teams to allow Tenant In Common (TIC) investors to have the benefits of real estate ownership, without the day-to-day property management.

CPEC1031

At CPEC1031, we specialize in 1031 exchanges of all shapes and sizes. Our team has been facilitating exchanges for taxpayers around the United States for more than two decades. We are well-equipped to work with you through every step of your exchange – from start to finish. Reach out to our intermediaries today to see if your property qualifies for a 1031 exchange. Our main office is located in downtown Minneapolis, but we have additional locations 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.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Things to Remember When Dealing with TIC Property

When a property is held in a partnership of LLC, it can get a little contentious between the partners when it comes time to sell. Some of the partners may want to sell the property outright, while others may prefer to do a 1031 exchange to avoid the associated capital gains taxes. Converting the ownership structure into tenancy-in-common is a great way to deal with this type of situation. In this article, we are going to discuss a few things to keep in mind when dealing with Tenancy-in-Common Property.

Prepare Accordingly

The first thing to remember with tenancy-in-common exchanges is to give yourself plenty of lead time. This is a good practice in any 1031 exchange, but especially when TIC property is involved. It’s important to make the switch to tenancy-in-common property as early as possible in the process. If you wait until the day before your exchange to convert, the IRS may not recognize your exchange.

Don’t Forget Your Holding Requirement

Your 1031 property needs to be held for investment purposes or for use in your trade or business. Be sure to hold onto the property for a sufficient time period before beginning your exchange.

1031 Exchanges of Tenancy-in-Common Property

When dealing with tenancy-in-common property, it is important to understand the ins and outs of the 1031 exchange process. At CPEC1031, our qualified intermediaries have more than two decades of experience working with clients in all industries on their real estate exchanges. We can work with you through every stage of your exchange – explaining the process and answering all of your questions along the way. Contact us today at our downtown Minneapolis offices to set up a time to chat with one of our intermediaries about your exchange.

• 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.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Tenancy in Common Property

A lot of times people own real estate in a partnership or LLC that's taxed as a partnership. If the property goes up in value some of the partners may be inclined to sell the underlying real estate while other partners are not so inclined because they don't want to pay the taxes.

This divergent opinion between the partners can be exasperated if there's been a death of one of the partners and the heirs of the now-deceased step into the partnership with a stepped-up basis and perhaps a more cavalier attitude about selling the underlying real estate. Because they may not have much of a tax burden if the property is sold, they may be less concerned about the tax consequences of a sale.

Setting up a Tenancy in Common

Furthermore, they may not want to be in a partnership with all the other folks. So when this sort of divergent opinion exists it may be a prudent step to bifurcate the ownership of the asset so that rather than having a partnership we would have a tenancy in common. If a sale were to ever occur, the exchange minded folks could be in one entity, and the cavalier folks that have a high basis and are less concerned about taxes would be in a separate distinct tax-paying entity.

When the sale occurs, hopefully we have two sellers on the purchase agreement, and two sellers that are separately 1099’d by the title company. The exchange minded group can set up their proceeds to go with a qualified intermediary and defer their gain, while the cavalier high basis folks that are less concerned with the tax can simply take their share of the proceeds and go.

Give Yourself Time

When do you want to set up this bifurcation? Do you want to set up the split up on the eve of the closing right before you sell the relinquished property? Do you think the IRS will respect a last minute switch? Probably not. The better course of action is to have this conversation amongst the partners early, before there's even a tacit agreement to sell the property and to break up the property well in advance of any proposed sale. Let some time pass after the break up before you actually sell the property. The IRS is much more likely to respect a reconfigured ownership arrangement if it is done well in advance of any sale and some time has passed.

1031 Holding Requirement

Furthermore, remember there's a holding period requirement in section 1031 that the relinquished property must have been held for investment or business purposes. If you do a drop and then a swap immediately you may not have held your property for a sufficient period to satisfy the requirements of 1031.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved