Brooklyn Journal of Corporate, Financial & Commercial Law

First Page



The popularity of nonrecognition of gain under section 1031 of the Internal Revenue Code attracts advisors from several corners of the real estate industry, including real estate attorneys; real estate professionals, such as brokers; section 1031 qualified intermediaries; and tax advisors. The varying degrees of professional training often results in advice varying from one advisor to the next. Nowhere is this more apparent than with respect to so-called “drop-and-swap” and “swap-and-drop” transactions. Some advisors claim that property owners must hold property for a specific period of time before or after an exchange to qualify for section 1031 nonrecognition. Others advise property owners to hold property for some period of time as a precaution to help buoy up the support for claiming section 1031 nonrecognition. This Article presents an overview of tax law analysis and the authority that governs section 1031 exchanges that occur in proximity to business transactions, i.e., drop-and-swaps and swap-and-drops. The Article shows that very strong authority supports section 1031 nonrecognition even if an exchanger receives exchange property in a tax-free distribution from an entity immediately before an exchange or transfers replacement property as a tax-free contribution to an entity immediately following an exchange. The same cannot be said for advice to hold property for a specific period of time before or after an exchange. In fact, such advice runs the risk of exposing exchangers to other tax and non-tax risks and could expose advisors to advisory risk. Given the popularity of drop-and-swaps and swap-and-drops, it is important that advisors look to the law when providing advice and that they apply tax-law analysis when considering authorities in this area of the law.

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