Drop and Swap (Multi-Member LLC 1031)
Because the IRS treats a multi-member LLC as a single taxpayer, all members must do a 1031 exchange together. A "drop and swap" is the escape valve: the LLC distributes property interests to individual members before the sale, letting each member pursue an individual exchange (or cash out). The catch is timing — the IRS scrutinizes drops done close to a sale.
Key Points¶
- Distribution should occur at least 1 year before the sale, ideally 2+.
- Members must hold their interests as investment property; near-sale drops draw IRS scrutiny.
- Doing this in 2026 for a near-term sale is risky — requires tax counsel.
- Practical implication: resolve member alignment (all four: Mark, Farzin, Azita, Afsaneh) before listing the apartments.