1031 Exchange Court Ordered Drop and Swap
David Moore of Equity Advantage, nationally recognized leader in 1031 Exchange facilitation, shared an important case win that ordered a 1031 Exchange Drop and Swap. This ruling adds additional weight to the argument that Drop and Swap transactions are an ordinary IRC § 1031 planning tool.

The Drop and Swap approach describes an exchange where a partnership interest is converted to Tenancy in Common or “TIC” before the exchange takes place.

The IRS recognizes a partnership as a single entity, a single person. This “person” may exchange real estate, but the individuals who make up the partnership may not exchange their individual shares. This creates a problem when one or more persons wish to break out of the partnership and go on their own without paying capital gains tax. – David Moore, Equity Advantage

In Gagne v. Gagne the appellate court reviewed and approved a trial court’s order to dissolve four LLC real property holding companies owned by a mother and her son, and then to swap TIC interests in those assets so that mother and son would each own a fee interest in two of the four properties.

In order to accomplish this distribution, the court ordered the LLCs to be liquidated, making Paula and Richard tenants in common, and then it ordered the appropriate tenancy in common interests to be exchanged between them, with Richard’s $107,182.06 cash balancing the transaction. Paula appealed on numerous grounds. For our purposes, the most important ground was her argument that an IRC § 1031 was an inappropriate way to distribute this property. The appellate court disagreed…The appellate court flatly contradicted Paula’s first argument, that the Act does not allow for in-kind distribution as tenants in common of LLC property “in this way.” – Lee David Medinets

Read the full article here: Tax Update: The Drop-and-Swap Gets a Win! – 1031 Exchange Experts Equity Advantage

Handling an 1031 Exchange involving a partnership requires an expert broker on your team. Call René Nelson, CCIM, CRE (541) 912-6583.