--- title: Drop & Swap 1031 | What Are The Risks of A 1031 Exchange description: What are the risks of a 1031 exchange? Learn more about Drop & Swap and other notable problems with 1031 exchanges. image: http://www.realized1031.com/hubfs/Images/photo/people/lifestyle/concerned-man-computer-paperwork-optimized-is13758612.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Three Notable Problems with 1031 Exchanges Posted Jul 15, 2016 **![Drop & Swap 1031 - Risks of 1031 Exchange Cover Photo](http://www.realized1031.com/hs-fs/hubfs/Images/photo/people/lifestyle/concerned-man-computer-paperwork-optimized-is13758612.jpg?width=631&name=concerned-man-computer-paperwork-optimized-is13758612.jpg "Concerned 1031 Investor")** There are many rules and regulations that govern  the completion of a  [1031 exchange](https://www.realized1031.com/glossary/1031-exchange), which often make the process nerve racking for investors.  Fortunately, there are many resources available to investors, including the Realized guidebook on the 1031 exchange process.  Below are three common challenges of 1031 exchanges and potential solutions for each.    **PROBLEM ONE**: The buyer of a [replacement (new) property](https://www.realized1031.com/glossary/replacement-property) must be the same legal entity as the seller of the[ relinquished (original) property](https://www.realized1031.com/glossary/relinquished-property). For example, if a husband and wife own the relinquished property together, then both the husband and wife must be the owners of the replacement property.  The same is true with any form of ownership including LLCs, partnerships or family trusts. This often leads to conflicts between partners when some want to complete an exchange, but others do not.  For example XYZ partnership sells a property,  the replacement property purchased using a 1031 exchange must also be purchased by XYZ.  The same is true of  a [limited liability company (LLC)](https://www.realized1031.com/glossary/limited-liability-company-llc) .    **SOLUTION**:  For years, investors in partnerships and LLCs have used what’s known as a “drop and swap” to overcome this problem.  In a drop and swap, before the sale of the relinquished property, the partnership or LLC is is converted to a [tenants-in-common (TIC)](https://www.realized1031.com/glossary/tenants-in-common-tic) structure. Each investor is now a co-owner and has a direct interest in the property, instead of an ownership stake in a partnership. The IRS views this as a collection of individual owners, thus allowing *each individual investor* the choice of whether to complete a 1031 exchange.  For example, shortly before the sale, ownership of the relinquished property would be transferred from XYZ, LLC  to each of the XYZ owners as tenants-in-common and in proportion to the amount of XYZ the each owned. It should be cautioned that drop and swaps carry considerable risk.  In the event the IRS determines these violate the tax code, the 1031 exchange will not be allowed.    **PROBLEM TWO:** The property must be held for investment, not for resale. So, what does this mean?  Typically, a property is considered “[held for investment](https://www.realized1031.com/glossary/held-for-investment)” by the IRS when the property is owned for at least one year and it is not the owner’s primary residence (i.e. their home).  If a property is owned for less than one year, the IRS typically considers it “held for resale” and does not qualified for a 1031 exchange. In addition, the profits on a property “held for resale” are typically taxed at [ordinary income](https://www.realized1031.com/glossary/ordinary-income) rates, which are higher than [capital gains rates](https://www.realized1031.com/glossary/capital-gain-tax).     **SOLUTION:** A potential solution is simply to sit back and wait at least one year before selling a property. Investors should consider the trade-off between selling before this time period versus potential tax liabilities of doing so. Investors should consult their accountants for guidance on their specific situation as the tax impact can vary significantly based on individual circumstances.   **PROBLEM THREE**: You must use a [Qualified Intermediary (QI)](https://www.realized1031.com/glossary/qualified-intermediary). Big picture, a Qualified Intermediary is a person, company, or entity that holds your 1031 funds from the sale of your relinquished property until you are ready to reinvest in your replacement property.   The problem is that virtually anyone can be a Qualified Intermediary.  In most states QI’s are not regulated, even though they are holding your hard earned profits from selling your real estate.   **SOLUTION**: [Choosing reputable and experienced qualified intermediary](https://www.realized1031.com/blog/simple-guide-to-choosing-a-1031-qualified-intermediary) is a good start. However, the best way to protect your 1031 funds is by asking your QI to opening a “Segregated Escrow Account” where your money  is set aside in a separate account.  In addition, it’s smart to make sure that both your signature and the QIs are required to move the funds.      [![Find A Qualified Intermediary](https://no-cache.hubspot.com/cta/default/733513/a2067463-cf90-4c6a-ac51-a3fd97d5caa6.png)](https://cta-redirect.hubspot.com/cta/redirect/733513/a2067463-cf90-4c6a-ac51-a3fd97d5caa6)   Download The Guide To 1031 Exchange [![The 1031 Investor's Guidebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-250.png?width=250&height=250&name=1031-Exchange-eBook-250.png "Tackle the art and science of ...") ](https://www.realized1031.com/blog/three-notable-problems-with-1031-exchanges#blogform) Download eBook ---   --- ### The 1031 Investor's Guidebook ![Download The Guide To 1031 Exchange](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-550.jpg?width=550&height=650&name=1031-Exchange-eBook-550.jpg) Tackle the art and science of completing your 1031 exchange. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "There are many rules and regulations that govern the completion of a 1031 exchange, which often make the process nerve racking for investors. Fortunately, there are many resources available to investors, including the Realized guidebook on the 1031 exchange process. Below are three common challenges of 1031 exchanges and potential solutions for each. PROBLEM ONE: The buyer of a replacement (new) property must be the same legal entity as the seller of the relinquished (original) property. For example, if a husband and wife own the relinquished property together, then both the husband and wife must be the owners of the replacement property. The same is true with any form of ownership including LLCs, partnerships or family trusts. This often leads to conflicts between partners when some want to complete an exchange, but others do not. For example XYZ partnership sells a property, the replacement property purchased using a 1031 exchange must also be purchased by XYZ. The same is true of a limited liability company (LLC) . SOLUTION: For years, investors in partnerships and LLCs have used what’s known as a “drop and swap” to overcome this problem. In a drop and swap, before the sale of the relinquished property, the partnership or LLC is is converted to a tenants-in-common (TIC) structure. Each investor is now a co-owner and has a direct interest in the property, instead of an ownership stake in a partnership. The IRS views this as a collection of individual owners, thus allowing each individual investor the choice of whether to complete a 1031 exchange. For example, shortly before the sale, ownership of the relinquished property would be transferred from XYZ, LLC to each of the XYZ owners as tenants-in-common and in proportion to the amount of XYZ the each owned. It should be cautioned that drop and swaps carry considerable risk. In the event the IRS determines these violate the tax code, the 1031 exchange will not be allowed. PROBLEM TWO: The property must be held for investment, not for resale. So, what does this mean? Typically, a property is considered “held for investment” by the IRS when the property is owned for at least one year and it is not the owner’s primary residence (i.e. their home). If a property is owned for less than one year, the IRS typically considers it “held for resale” and does not qualified for a 1031 exchange. In addition, the profits on a property “held for resale” are typically taxed at ordinary income rates, which are higher than capital gains rates. SOLUTION: A potential solution is simply to sit back and wait at least one year before selling a property. Investors should consider the trade-off between selling before this time period versus potential tax liabilities of doing so. Investors should consult their accountants for guidance on their specific situation as the tax impact can vary significantly based on individual circumstances. PROBLEM THREE: You must use a Qualified Intermediary (QI). Big picture, a Qualified Intermediary is a person, company, or entity that holds your 1031 funds from the sale of your relinquished property until you are ready to reinvest in your replacement property. The problem is that virtually anyone can be a Qualified Intermediary. In most states QI’s are not regulated, even though they are holding your hard earned profits from selling your real estate. SOLUTION: Choosing reputable and experienced qualified intermediary is a good start. However, the best way to protect your 1031 funds is by asking your QI to opening a “Segregated Escrow Account” where your money is set aside in a separate account. In addition, it’s smart to make sure that both your signature and the QIs are required to move the funds.", "articleSection" : [ "1031 Exchange" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2020-12-02T20:20:06+0000", "datePublished" : "2020-12-02T20:20:06+0000", "description" : "What are the risks of a 1031 exchange? Learn more about Drop & Swap and other notable problems with 1031 exchanges.", "headline" : "Three Notable Problems with 1031 Exchanges", "image" : { "@type" : "ImageObject", "height" : 553, "url" : "http://www.realized1031.com/hubfs/Images/photo/people/lifestyle/concerned-man-computer-paperwork-optimized-is13758612.jpg", "width" : 830 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/three-notable-problems-with-1031-exchanges", "name" : "Three Notable Problems with 1031 Exchanges", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "http://www.realized1031.com/hubfs/Images/photo/people/lifestyle/concerned-man-computer-paperwork-optimized-is13758612.jpg" } ```