The short answer
A swap and drop is a sequence in which an entity, usually a partnership or multi-member LLC, completes a section 1031 exchange in its own name and afterwards distributes the replacement property, or undivided interests in it, to its owners. It is the reverse order of a drop and swap, where the entity distributes first and the owners exchange. No statute or regulation names it; whether it works turns on the requirement that replacement property be held for investment or business use, as read by the courts in Magneson and Maloney.
At a glance
| Order of steps | Entity exchanges first, then distributes the replacement property |
|---|---|
| Exchanging taxpayer | The entity, which must also hold the replacement for investment or business use |
| Main risk | A prearranged distribution is argued to show the entity never held the replacement |
| Leading cases | Magneson (9th Cir. 1985), Bolker (9th Cir. 1985), Maloney (Tax Court 1989) |
The term comes from practice, and its support comes from three cases decided in the 1980s.
Section 1031(a)(1) requires that both properties be held for productive use in a trade or business or for investment. The IRS position in Rev. Rul. 75-292, as described by the Ninth Circuit, was that property transferred to a controlled corporation right after an exchange was no longer held by the taxpayer, so gain was recognized.
In Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985), the taxpayers exchanged one property and the same day contributed the replacement to a limited partnership for a general partnership interest; the court allowed the exchange, reasoning that a contribution to a partnership continues the investment rather than liquidating it. In Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985), a shareholder who received property in a corporate liquidation and then exchanged it also won.
Maloney v. Commissioner, 93 T.C. 89 (1989), is the closest to a swap and drop: a corporation exchanged real estate intending to liquidate and distribute the replacement to its shareholders, and the Tax Court held the exchange tax-free, saying the addition of another nontaxable transaction 'does not automatically destroy' section 1031 treatment.
A hypothetical: the LLC exchanges, holds, and only later deeds out tenant-in-common shares.
Hypothetical figures: a two-member LLC sells a $2,000,000 retail building through a qualified intermediary and buys a $2,200,000 replacement in its own name. Both members want to own their halves directly so each can decide separately what to do next.
The LLC reports the exchange on its own return. If it holds the replacement and runs it for a period before distributing undivided interests to the members, the record shows the entity held the property for investment. If the deed out happens at the replacement closing under a plan made before the sale, the IRS can argue the entity never held the replacement, and the court results above came from the Ninth Circuit and Tax Court rather than every circuit. Run your own numbers with your CPA.
It bites on timing, on who reports the exchange, and on what the owners do next.
No rule sets a safe holding period after the exchange before a distribution. The facts that tend to matter are the intent recorded at the time of the exchange, how long the entity operated the property and whether the distribution was arranged before the sale. Planning around holding periods is covered in hold the replacement before selling again.
Once distributed, each owner holds a separate undivided interest and can exchange it later as an individual, which the partnership interest exclusion would have prevented while the property sat inside the LLC. Whether to drop first or swap first is compared in drop and swap strategies.
Related questions
Is a swap and drop safer than a drop and swap?
Neither has a regulatory safe harbor. A swap and drop keeps the same taxpayer through the exchange, which removes one question, but the later distribution invites the holding argument; the drop and swap raises the same question about the owners' holding of the relinquished property.
Is the distribution itself taxable?
A distribution of property from a partnership is often tax-free to the partners, but that depends on liabilities, the partners' bases and other partnership rules outside section 1031. Have your CPA model the distribution before you plan it.
Can an individual do a swap and drop into an LLC?
That is the Magneson pattern: exchange in your own name, then contribute the replacement to a partnership. If the LLC has a single owner and is disregarded, the owner is still treated as holding the property, as explained in moving from your personal name into an LLC.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.