<p>The sale of easements, such as those for <a href="https://www.accruit.com/blog/renewable-energy-1031-exchanges-wind-farms… energy generation</a>, may qualify as the sale of a real property interest under IRC Section 1031. In this video, <a href="https://www.accruit.com/about/meet-team/max-hansen">Max Hansen</a>, Managing Director at Accruit, discusses&nbsp;how Exchangers can leverage proceeds from these sales as Relinquished Property to complete a 1031 Exchange, reinvesting in other real estate for investment purposes or productive use in a trade or business.</p>

<p>We also touch on the ability for Exchangers to use the proceeds to acquire nearly any type of investment or business use real estate based on the broad definition&nbsp;of like-kind, such as single/multi-family rentals, self-storage facilities, commercial buildings, and more.</p>

<p class="text-align-center"><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/F5kIhygSiWM?si=hS3kDvI0MOIYnKdZ&quot; title="YouTube video player" width="560"></iframe></p>

<p>&nbsp;</p>

<p>Can Exchangers go beyond the 180-day timeline in a reverse exchange? The short answer is yes, but only under specific conditions. To extend the timeline, the transaction must be structured as a "Non-Safe Harbor" Specialty Reverse Transaction. In this&nbsp;structure, an Exchange Accommodation Titleholder (EAT) holds the title to the property, typically the Replacement Property, within a Special-purpose Entity (SPE). Standard Reverse Exchanges, which follow IRS safe harbor rules, do not allow for this extension.</p>

<p>Exceptions to the 180-day limit are often discussed in the context of parking arrangements, where practical challenges like delays in injecting exchange value into property improvements can arise. While case law and tax authority support extending parking arrangements under an EAT in certain scenarios, it’s important to note that once the Relinquished Property is sold, the forward exchange timeline begins, and the strict 180-day limit to acquire Replacement Property applies.</p>

<p>In this educational video, understand how these exceptions work in specific Reverse 1031 Exchange strategies.</p>

<p class="text-align-center"><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/OfylfGn4BUc?si=F1wOOaCsGWkBP-x0&quot; title="YouTube video player" width="560"></iframe></p>

<p><a href="https://www.accruit.com/blog/same-taxpayer-requirement-1031-tax-deferre… Same Taxpayer Rule</a>&nbsp;is a key requirement in 1031 Exchanges. The same individual or entity selling the Relinquished Property(ies) must also acquire the Replacement Property(ies) in order to qualify for tax deferral using a 1031 Exchange. Navigating this can become complex when a property is held in a multi-member limited liability company “LLC” and the property owners involved have different financial or investment goals. Ownership by a three member LLC is not the same taxpayer as ownership by the three members individually. In such cases, the “Drop &amp; Swap” strategy can offer a practical solution. A Drop &amp; Swap involves restructuring ownership, generally by transferring shared ownership into individual ownership before proceeding with a 1031 Exchange. This strategy allows co-owners to either proceed with a 1031 Exchange or cash-out, meeting various objectives within a shared investment. To put this strategy into practice, we’ll examine a three-member LLC that owns an investment property, where each member has differing plans for the proceeds from the sale of the owned property.&nbsp;&nbsp;</p>

<h2 aria-level="2" paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{127}" paraid="842106443" role="heading">The Facts&nbsp;</h2>

<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{133}" paraid="631407208">Three members of an LLC—Joe, Sarah, and Matt—co-own a commercial property in Denver. The property, initially purchased for $2.5 million, is now valued at $4 million, having appreciated significantly over the 10 years it has been owned by the LLC. The members of the LLC have decided to sell the property and utilize a 1031 Exchange to defer taxes and reinvest in like-kind property. While Matt intends to "swap" his share for like-kind property using a 1031 Exchange, Joe and Sarah want to “drop” their interest and cash out due to personal reasons, such as needing funds to pay for their children’s college, wanting to invest in stocks using the funds, etc.&nbsp;</p>

<h2 aria-level="2" paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{151}" paraid="2034322484" role="heading">The Problem&nbsp;</h2>

<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{157}" paraid="590918088">Since two out of the three of the LLC members are "dropping," the decision is made to terminate the LLC in order to complete the transaction. Once the LLC dissolves, Joe and Sarah want to exit the transaction and receive their portion of the sale proceeds. The problem arises in how to appropriately structure the sale and distribution of the proceeds to allow each to proceed independently. &nbsp; &nbsp;</p>

<h2 aria-level="2" paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{179}" paraid="1446644651" role="heading">The Solution&nbsp;</h2>

<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{185}" paraid="787663336">Using professional advisers and a properly structured transaction, the property can be transferred with a single deed “dropped” from the LLC to the three individuals as <a href="https://www.accruit.com/resources/rev-proc-2002-22-tenants-common">Tena… (TIC)</a>. Below are the some of the general steps and considerations of the process in which the distribution and transfer of ownership could work:&nbsp;</p>

<ol role="list" start="1">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="" data-leveltext="%1." data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="6" role="listitem">
<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{202}" paraid="817087632"><strong>LLC Termination:</strong> The LLC will cease to exist upon conveyance of the property by deed to the members, and the property can then be sold by the three individuals. Since the LLC is now terminating, the ownership interests will be split among the three members, with each receiving a 1/3 interest in the property, with the value of approximately $500,000 attributed to each, not taking into account closing costs or any debt payoff.&nbsp;</p>
</li>
</ol>

<ol role="list" start="2">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="" data-leveltext="%1." data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="6" role="listitem">
<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{228}" paraid="2072551916"><strong>Sale of Property by the Tenants-in-Common:</strong> Once the property becomes held by them in their own names, at the time of closing, they can act at closing independently from one another. &nbsp; &nbsp;</p>
</li>
</ol>

<ol role="list" start="3">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="" data-leveltext="%1." data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="6" role="listitem">
<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{240}" paraid="1136190522"><strong>Alternative for Liability Protection:</strong> Alternatively, for liability protection, Joe, Sarah, and Matt may choose to hold their ownership interests in the property through multiple single-member LLCs. This allows them to maintain limited liability protection while still benefiting from the transition to individual ownership.&nbsp;</p>
</li>
</ol>

<ol role="list" start="4">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="" data-leveltext="%1." data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="6" role="listitem">
<p paraeid="{714fd4cd-dcb5-4cc7-ac89-5f4094cae21a}{254}" paraid="1203721617"><strong>Dropping and Swapping:</strong> While Joe and Sarah "drop" from the exchange and face taxation on their gains, Matt is still able to continue with the 1031 Exchange by completing a swap into like-kind property using his 1/3 interest. The drop for Joe and Sarah means they will not reinvest and will incur tax, while Matt will proceed with his swap.&nbsp;</p>
</li>
</ol>

<h3 aria-level="3" paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{7}" paraid="284750919" role="heading">Holding Period Considerations for a Drop &amp; Swap&nbsp;</h3>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{13}" paraid="1234306216">When the LLC is dissolved, and the property is distributed to individual members, it's beneficial that anyone doing an exchange hold the property for some period of time before initiating the exchange. If the drop (distribution) and swap (1031 Exchange) occur too close together, the IRS might question the transaction, at least in Matt’s case, as he intends to complete a 1031 Exchange. IRS Code Section 1031 states:&nbsp;</p>

<p style="margin-left:50px">"No gain or loss shall be recognized on the exchange of real property <strong>held</strong> for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be <strong>held </strong>either for productive use in a trade or business or for investment."</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{81}" paraid="1025693428">There is no specific defined term for which the property must be held. Clearly in a drop &amp; swap the property has been held for an extended period of time by the LLC, but not very long by the individual who is trying to execute the exchange. In general, the longer the period between the drop and the sale, the better it is to maximize the holding period.&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{87}" paraid="10323909">However, there are scenarios where re-establishing a holding period may not be necessary. For example, another common scenario involving a Drop &amp; Swap might occur if Joe and Matt both wanted to remain invested and complete a 1031 Exchange, while Sarah alone wanted to cash out. In this case, Sarah would receive a 1/3 Tenants-in-Common interest and 1/3 of the sale proceeds, resulting in a taxable event for her. Meanwhile, the multi-member LLC would remain intact, with Joe and Matt continuing as members to complete a 1031 Exchange using the remaining 2/3 of the proceeds.&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{98}" paraid="2060346325">By structuring the transaction this way, the LLC itself continues to satisfy the holding period requirements for the 1031 Exchange, avoiding the need to re-establish a fresh holding period. This approach can simplify the process for the remaining members, provided that the facts align, and the transaction is carefully structured.&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{109}" paraid="327100955">To enhance the validity of the drop &amp; swap, there are a few to keep in mind to plan ahead including the following:&nbsp;&nbsp;&nbsp;</p>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="8" role="listitem">
<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{119}" paraid="860219213"><strong>Complete the Drop Before Contract Execution:</strong> If possible, try and have the drop completed prior to the execution of the Relinquished Property disposition contract in order that it may be signed by the individuals rather than having it signed by the LLC and later assigned to the individuals.&nbsp;</p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="8" role="listitem">
<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{127}" paraid="2079227390"><strong>Separate the Transactions by Tax Years:</strong> Completing the drop in one tax year and the swap in a subsequent tax year helps separate the drop action from the IRS 1065 Partnership Return, particularly <a href="https://www.irs.gov/pub/irs-pdf/f1065.pdf">Schedule B 12</a>, from the reporting by the individual of an exchange on <a href="https://www.irs.gov/pub/irs-pdf/f8824.pdf">IRS Form 8824</a>.&nbsp;</p>
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}" data-listid="8" role="listitem">
<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{146}" paraid="147739674">While holding the property for a sufficient period, it does not necessarily affect Joe and Sarah who are cashing out anyway, but it can be helpful to Matt to establish a new holding period and minimizing raising red flags and maximizes his 1031 Exchange qualifying under IRS guidelines.&nbsp;</p>
</li>
</ul>

<h2 aria-level="2" paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{160}" paraid="217101162" role="heading">In Summary&nbsp;</h2>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{180}" paraid="1863224207">Joe and Sarah successfully "drop" out of the LLC, take their share of the sale proceeds, and pay taxes on their profits. Matt completes his 1031 Exchange and achieves tax deferral on his portion of the sale. While Joe and Sarah are no longer invested in the property and will pay taxes on their capital gains, Matt continues to expand his real estate portfolio.&nbsp;&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{186}" paraid="604148591">In the end, Joe, Sarah, and Matt achieve their respective objectives: Joe and Sarah use their taxed funds to pay for their children’s education and individual investment ventures, while Matt reinvests his share into like-kind investment property.&nbsp;&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{192}" paraid="764024897">Drop &amp; Swaps are complicated and involve many considerations and documentation not necessarily referenced here. As always, Exchangers are encouraged to consult with their tax and legal advisors before proceeding with the drop and swap as the sale of an investment or business-use property. Additionally, they should secure the services of a Qualified Intermediary before the first closing involved in their exchange.&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{198}" paraid="1961157196">&nbsp;</p>

<p paraeid="{dee420d0-7d0f-4a53-bf7d-270c1a1c5e31}{202}" paraid="2090153969"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.       </em></p>

<p>A Drop &amp; Swap is a strategy used in 1031 Exchanges when an investment property is owned by a multi-member partnership or LLC, and not all partners share the same financial or investments plans for the proceeds from the sale of the property. While some partners may want to defer all taxes that would otherwise be associated with the transaction, by conducting a 1031 exchange, others might prefer to cash out and pay associated taxes. This difference in plans for the proceeds creates a challenge, as the <a href="https://www.accruit.com/blog/same-taxpayer-requirement-1031-tax-deferre… Taxpayer Rule</a> dictates that the same individual or entity selling the Relinquished Property must also be the one to acquire the Replacement Property(ies) to meet the requirements for tax deferral.&nbsp;</p>

<p>In our latest educational video, we explore how a Drop &amp; Swap can be structured to address these situations, when this strategy is most effective, and key considerations Exchangers should keep in mind to ensure compliance.&nbsp;</p>

<p>&nbsp;</p>

<p class="text-align-center"><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/kKijocEl6fw?si=1ees_W3tdRm9w0Zz&quot; title="YouTube video player" width="560"></iframe></p>

<p paraeid="{e6e5e05e-8a32-472d-8a82-decd272fb8a7}{201}" paraid="1347991245">December 5th, 2024 (Denver, CO) - Accruit is pleased to announce the addition of <a href="https://www.accruit.com/about/meet-team/mark-adams-jd">Mark Adams</a> to their team of Subject Matter Experts and 1031 specialized attorneys. With a wealth of experience in 1031 exchanges and commercial real estate, Mark will be an invaluable asset to the organization, enhancing Accruit’s abilities and expanding their expertise in these critical areas.&nbsp;</p>

<p paraeid="{e6e5e05e-8a32-472d-8a82-decd272fb8a7}{215}" paraid="677433418">Mark Adams comes to Accruit with a distinguished career in legal consultation, real estate transaction law, as well as structuring 1031 exchanges. Prior to joining Accruit, he served as the Exchange Manager for the Pacific Northwest region at a national 1031 Exchange Qualified Intermediary. During his tenure, Mark provided expert consultation to clients regarding IRC Section 1031 like-kind, tax-deferred exchanges. He was responsible for preparing and reviewing transactional documents for legal compliance and presenting educational 1031 classes to industry groups, including commercial real estate brokers, realtors, escrow officers, and real estate investors. Additionally, Mark serves on the Board of Directors for the Federation of Exchange Accommodators (FEA), where he is also the Co-chair of the Membership Committee.&nbsp;</p>

<p paraeid="{e6e5e05e-8a32-472d-8a82-decd272fb8a7}{225}" paraid="1629963321">"I joined Accruit because of their commitment to innovation and delivering exceptional customer service. The organization's growth-oriented culture aligns with my passion for continuous learning and making a meaningful impact within the 1031 industry," stated Mark Adams, Senior Director at Accruit.&nbsp;</p>

<p paraeid="{e6e5e05e-8a32-472d-8a82-decd272fb8a7}{231}" paraid="1801360383">At Accruit, Mark will leverage his extensive background to provide expert guidance to support clients of Accruit’s integrated 1031 Exchange Platform, Managed Service. His deep understanding of 1031 exchanges and real estate transactions will enhance Accruit’s ability to deliver exceptional service and innovative solutions to clients nationwide.&nbsp;</p>

<p paraeid="{e6e5e05e-8a32-472d-8a82-decd272fb8a7}{249}" paraid="13456018">"We are thrilled to welcome Mark Adams to the Accruit team,” said Steven Holtkamp, Chief Revenue Officer at Accruit. "His extensive experience, proven track record in the 1031 exchange, and his 1031 industry contributions through his involvement with the FEA make him an ideal addition to our team. We are confident that Mark will play a pivotal role in our continued growth and success."&nbsp;</p>

<p paraeid="{76aa9b07-ccae-4837-a190-12b8d945e6ff}{20}" paraid="59775746">&nbsp;</p>

<p paraeid="{76aa9b07-ccae-4837-a190-12b8d945e6ff}{24}" paraid="112754570"><strong>About Accruit&nbsp;</strong></p>

<p paraeid="{76aa9b07-ccae-4837-a190-12b8d945e6ff}{30}" paraid="1322301535">Accruit, an Inspira Financial Solution, is a leading full service Qualified Intermediary and developer of the industry’s only patented 1031 Exchange technology. Founded in 2000 and acquired by Inspira Financial in 2023, Accruit has gained the trust of thousands of clients and become a leader in the industry through its highly credentialed experts, consistent delivery of service, innovative technologies, robust security protocols and financial strength.   &nbsp;</p>

<p>In our previous video on <a href="https://www.accruit.com/blog/video-1031-exchange-passive-real-estate-in… real estate investments</a>, we discussed what passive real estate investments are, how they differ from active investments, the benefits they offer investors, as well as types of passive investments including Triple Net Leases (NNNs), Tenants-in-Common (TICs), and Delaware Statutory Trusts (DSTs). In this video, we take a deeper look at one of those passive real estate investment options: Delaware Statutory Trusts (DSTs).</p>

<p>A Delaware Statutory Trust (DST) is a legally recognized trust created under Delaware law. In a DST, investors, also known as beneficiaries, hold fractional “beneficial interests” in the trust, with their ownership percentage determined by their equity investment. DSTs provide a passive real estate investment opportunity, allowing investors to benefit from investment grade property that they generally could not access on their own without the burden of active management.&nbsp;</p>

<p>In this educational video, as well as this <a href="https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in…;, learn more about this hands-off investment strategy and how it offers&nbsp;diversification, passive income, and tax deferral without the complexities of direct property management.</p>

<p class="text-align-center"><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://www.youtube.com/embed/xDJGcoZ1P3g?si=5rQnjJuDykYacD8_&quot; title="YouTube video player" width="560"></iframe></p>

<p>&nbsp;</p>