Partnerships · not tax or legal advice

Drop and swap 1031

“Drop and swap” is not a Code section. It is a sequence people use when a partnership owns the real estate and a partner wants a 1031. Current §1031 defers gain on real property, not on a partnership interest. Moving title so that the exchanger holds the dirt — or moving the dirt into a new vehicle after the exchange — is a holding-purpose and related-party problem, not a QI product. This page names the statute, one narrow election, and two reported Ninth Circuit cases. It does not conclude that a drop-and-swap works.

Section 1031 is real property

IRC §1031(a)(1), as amended by the Tax Cuts and Jobs Act, applies to the exchange of real property held for productive use in a trade or business or for investment, solely for like-kind real property to be held for those purposes. A partnership interest is an interest in an entity. It is not, without more, the real property the partnership owns.

IRC §1031(e): an interest in a partnership that has in effect a valid election under §761(a) to be excluded from all of subchapter K is treated as an interest in each of the assets of the partnership and not as an interest in a partnership. That is a specific election with its own requirements. It is not the default for a multi-member LLC that files a partnership return.

What people mean by the slang

Drop then swap. The partnership distributes the relinquished property (or an undivided interest) to a partner; that partner then exchanges as the taxpayer. The distribution has to be a real transfer under state law and tax law. The partner has to hold the distributed real property for productive use or investment. How long is enough is the holding-purpose fight.

Swap then drop. The partnership exchanges, then distributes the replacement property (or an interest in a new vehicle) to the partner who wanted out. The partnership is the exchanger. The later drop is a separate nonrecognition or recognition event under subchapter K.

Either sequence can collide with§1031(f)if related persons dispose within two years, or with (f)(4) if the series is structured to avoid (f).

Two reported Ninth Circuit cases — not a playbook

Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985): a taxpayer received real property in a corporate liquidation and immediately contracted to exchange it. The Ninth Circuit held he held the property for investment even though he intended to exchange it at once. That is a holding-purpose case on those facts.

Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985): taxpayers exchanged real property and immediately contributed the replacement property to a partnership for a general-partnership interest. The Ninth Circuit held they held the replacement for investment. Again, those facts.

Neither opinion is a revenue procedure. Neither is a finding that distributing an LLC interest, or exchanging LLC units, is a §1031 of real property. Later statutes (including the real-property-only limitation and §1031(f)) sit on top of 1985 case law. Counsel has to read both.

What the QI can and cannot fix

A QI can paper a delayed exchange for whoever is the taxpayer on the deed and the exchange agreement. The QI cannot make a partnership interest into real property, cannot supply a §761 election, and cannot give you the (f)(2) “no tax-avoidance purpose” exception. If a QI markets “we do drop and swap,” ask which taxpayer will be on the exchange agreement and who held the real property overnight.

FAQ

Can a partnership interest be exchanged under §1031?

Current §1031(a)(1) applies to real property, not to a partnership interest as such. §1031(e) treats an interest in a partnership that has a valid §761(a) election to be excluded from subchapter K as an interest in each of the partnership’s assets — that is a narrow, elective path, not a general “swap the LLC units” rule. Ask counsel. This page does not treat an LLC membership interest as like-kind real property.

What is a drop and swap?

Practitioner slang for distributing (or contributing) real property so that the person who exchanges is not the partnership that wanted out of the asset. A “drop” then a “swap,” or a swap then a drop, is a sequence of title changes plus a §1031. The tax questions are holding purpose, who the taxpayer is, related-party rules, and whether the partnership interest itself was the thing exchanged. This page does not bless either sequence.

Did the Ninth Circuit approve drop and swap?

Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985), and Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985), are reported decisions about holding purpose immediately after a corporate liquidation or immediately before a contribution. They are not a statute, not a revenue ruling that drop-and-swap always works, and not authority that a partnership-interest exchange is like-kind. Read the opinions. They are fact-specific.

Sources

26 U.S.C. §1031(a)(1), (e), (f) — law.cornell.edu/uscode/text/26/1031. Real property; partnership with §761 election; related persons. Accessed 2026-09-11.
26 U.S.C. §761(a) — election to be excluded from subchapter K, cross-referenced by §1031(e).
Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985). Holding purpose after a liquidation, on those facts.
Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985). Holding purpose after an immediate contribution to a partnership, on those facts.

Editorial access date: 2026-09-11. This page is not tax, legal, or investment advice. It does not conclude that a drop-and-swap qualifies.