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Drop and Swap Calculator
When a partnership wants to sell but LPs disagree on whether to 1031 into a replacement, the solution is 'drop and swap' — distribute tenant-in-common interests before sale so each LP can do their own 1031 separately. This calculator sizes the tax savings across dropping LPs and compares to legal/accounting cost.
Net tax savings after legal cost
$140,000
Total capital gain tax deferred
$175,000
Total deferred gain
$700,000
LPs taking individual 1031 paths
2
LPs continuing in replacement
4
How the math works
Drop and swap: before sale, the partnership distributes undivided interests to individual LPs (the 'drop'). Each LP can then do their own 1031 exchange on their portion (the 'swap'). Lets partners disagree on replacement property while preserving 1031 deferral for those who want it.
IRS has historically scrutinized drop-and-swaps for 'held for investment' purpose — dropping too close to closing can invalidate the 1031. Best practice: drop at least 2 years before sale. Also called 'swap and drop' or the opposite structure.
How to Use
- Enter property value and number of LPs.
- Enter percentage of LPs taking individual 1031 paths.
- Enter deferred gain per dropping LP and tax rate.
- Enter legal/accounting cost.
- Read net tax savings.
Frequently Asked Questions
Timing requirements?
IRS historically scrutinizes drops too close to sale. Conservative: drop 2+ years before sale. Aggressive: drop on day of sale. The more time between drop and swap, the stronger the 'held for investment' position.
Does the partnership still exist?
Yes — the remaining LPs continue the partnership, now holding fewer TIC interests. A partial dissolution. Legal and accounting fees handle the restructure.
State tax?
1031 is federal. Most states follow federal treatment, but some (CA, PA, NY, OR) have state-specific rules. Always confirm state treatment before relying on the savings.
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