At 1031 Exchange Place, one of the most common questions we get as we provide comprehensive 1031 exchange services is this: I want exchange benefits, but my business partners want to cash out – what can I do? Can I do a 1031 exchange in a partnership?
In short, the answer is often ‘yes’ – using a procedure called the “Drop and Swap.” However, there are some important requirements that need to be understood.
This is simple enough in some cases, but in others, it can get a bit complex. If you’re part of an LLC, partnership or trust where other members are looking to cash out but you or other parties in the arrangement want to use a 1031 exchange to defer capital gains, the most common technique here is the “Drop and Swap.”
During a Drop and Swap transaction, you’re basically “dropping” yourself from your partnership – instead, it becomes a tenant in common relationship with your partners. From there, you then “swap” into a replacement property. In essence, the Drop and Swap changes the property title in this partnership, removing individual names to achieve the transfer.
To understand how this works, let’s look at a basic example. Let’s say you’re one of four members in an LLC that own a pro rata share of a commercial building. As a group, the LLC is considering selling the property within the next year – for simplicity, we’ll say the asking price is $1,000,000.
The other three members of the LLC are looking to pay taxes and receive net sales proceeds on the sale – but in your case, you want to put your portion toward another investment property using a 1031 exchange. Here are some important factors in your Drop and Swap transaction:
This can be a complex process, and you want 1031 exchange advisors on your side. We invite you to contact us at 1031 Exchange Place – we’d love to help!