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Is There An Alternative To IRC Section 1031, Particularly When The Real Estate Is Held By A Partnership Or LLC?

Yes, there is an alternative to IRC Section 1031 for partnerships and LLCs. One option is to consider using a “drop and swap” strategy, which involves first distributing the property from the partnership or LLC to its partners or members and then completing a 1031 exchange individually.

Here’s how it works:

  1. The partnership or LLC distributes the property to the partners or members in accordance with their respective ownership percentages. This is called a “drop.”
  2. Each partner or member then completes their own 1031 exchange, using their share of the property that was dropped to them. This is called a “swap.”
  3. The partners or members can choose to either hold onto the new property individually or contribute it back to the partnership or LLC.

It’s important to note that this strategy can be more complex than a straightforward 1031 exchange, and there may be additional tax and legal considerations to take into account. It’s always recommended to consult with a qualified tax advisor or attorney before proceeding with any real estate transaction.