The Truth About Drop and Swaps: Timing, Costs, and Case Law with Brandon Hall

On this episode of the Major League Real Estate Podcast, Nathan Sosa welcomes Brandon Hall, CPA, founder of Hall CPA, back to the mic. With co-host Matt Hamilton on leave after welcoming his first child, Nathan and Brandon dive into one of the most nuanced topics in real estate tax strategy: drop and swap transactions and how a New York tax court case sheds new light on their viability.

What is a Drop and Swap?

Most real estate investors are familiar with 1031 exchanges, which allow them to defer taxes by exchanging one property for another. But when partnerships are involved, things get complicated.

A drop and swap happens when partners want to go their separate ways. Some want to continue with 1031 exchanges, while others simply want to cash out. By converting partnership interests into tenants-in-common (TIC) ownership, partners can split up and pursue individual strategies. While effective, the IRS often scrutinizes these transactions, making careful structuring and documentation essential.

Who Benefits from Drop and Swap?

This approach is particularly useful for:

• Partnerships with dissenting members: Some investors want to keep rolling gains into new properties, while others want out.
• Syndications where flexibility is critical.

The timing of these moves matters. Ideally, planning starts months or even years in advance. But as the case discussed in this episode shows, even same-day transactions can be upheld under the right circumstances.

The Case: UpWest Co.

The discussion centers on a decades-long investment in a New York apartment complex. Purchased in the 1980s for under $1 million, it was sold in 2016 for more than $56 million.

When the partners decided to sell, not everyone wanted to stay in real estate. To accommodate differing goals, they executed a drop and swap:

• Created new LLCs to hold TIC interests
• Distributed ownership out of the partnership
• Completed 1031 exchanges—on the same day as the sale

New York tax authorities argued this was invalid, claiming there should be a holding period before executing the exchange. However, the court sided with the taxpayers, referencing federal case law (such as Magneson and Bolker) that establishes no minimum holding period under 1031 rules.

Key Takeaways

1. Planning is everything – This group worked with attorneys years in advance to document intent and structure properly.
2. Same-day doesn’t mean invalid – While often risky, the court found substance over form. Clear documentation proved genuine business intent.
3. Operating agreements matter – Including a 1031 clause can provide flexibility for future exits and prevent disputes.
4. Documentation wins cases – Settlement statements, contracts, and entity records all told a consistent story that the court accepted.

Practical Advice for Investors

• Don’t shy away from drop and swaps, but recognize they require high-level legal and tax expertise.
• Avoid relying on shortcuts—attorney involvement is critical.
• Be cautious with what you document in writing; emails and texts can surface in audits or court.
• Most importantly: make business-driven decisions first and layer tax strategy on top.

🎙️ If you’re considering a drop and swap or want to ensure your operating agreement sets you up for tax-advantaged flexibility, reach out to Hall CPA. As Nathan and Brandon note, these strategies aren’t cheap or simple, but done correctly, they can save investors millions in taxes.

Book a free discovery call with our team.

Disclaimer: This podcast summary was generated from the transcript and may contain some errors or miss key points from the audio recording. Any mention of third-party vendors, products, or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging with any vendor.