Drop and Swap
A drop and swap is a technique where a partnership distributes property to partners as tenants in common before a 1031 exchange so each can exchange separately.
Definition
A drop and swap is a strategy for partnerships, or LLCs taxed as partnerships, whose members want to go separate ways in a 1031 exchange. Section 1031 does not allow exchanging partnership interests themselves, so the partnership first drops the property down to the individual partners as tenants in common, then each partner swaps their share independently.
This lets one partner cash out and pay tax while another defers via a 1031 exchange, flexibility a single partnership-level exchange cannot provide. The catch is timing: the IRS may challenge the exchange if the conversion to tenant-in-common ownership happens too close to the sale, arguing the partner did not hold the property for investment long enough.
Because of that held for investment risk, practitioners generally recommend completing the drop well before listing the property, ideally in a prior tax year. It is a common but scrutinized maneuver requiring careful legal and tax guidance.
Key points
- Partnership distributes property to partners as tenants in common
- Lets each partner exchange or cash out independently
- Partnership interests themselves cannot be 1031-exchanged
- IRS may challenge if done too close to the sale
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.