Updated August 17, 2026
A drop and swap distributes undivided tenancy-in-common interests from a partnership or LLC to its members before a sale, so each former member can individually complete a 1031 exchange or take cash.
It exists because a 1031 is available to the taxpayer that owned the property. Where an entity holds the building the entity is the taxpayer, and partnership interests are excluded from like-kind treatment — so members wanting different outcomes cannot simply go separate ways.
The contested point is the holding period: the property must be held for investment, and a conversion executed during escrow invites challenge on the basis that the interest was created to facilitate the sale rather than held for investment. There is no bright-line safe period, and California's Franchise Tax Board asks about these transactions directly. Plan it a year ahead, not during escrow.
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