A drop and swap 1031 is a procedure in which partners in a property-owning 1031 LLC change (drop) their status from partners to tenants-in-common in order for one of the LLC members to leave and cash out without forcing the other members to cash out. When you cash out from a 1031, you owe tax on the money you get. For people who don't want to pay that tax yet, being forced out of a property-owning LLC is not a good situation. Drop and swaps help LLC members come to a compromise that protects everyone's shares.
You Can't Risk Reducing Available Money With Today's Prices
If you and your partners sell the property and split the profits, you'll all be taxed on those profits. That leaves you with a smaller amount of money than you'd anticipated, and a smaller amount of money to reinvest in a new property. With today's property prices, you can't breezily give away a bunch of money—which is what those taxes can feel like—and reduce what you can spend. By using the drop and swap method, those members who want to cash out can do so, and you can stay in the LLC, reinvest the money, and legally postpone the taxes on that money.
You Can't Prevent Someone From Being Able to Pay Their Bills or Get out of Real Estate
If one member of the LLC wants to cash out due to needing the money or just wanting to get out of the real estate, it's really not a good idea for the others in the LLC to block them. That one person can start to work against the interests of the others in the partnership in an effort to start swaying decisions if blocked. Letting that person drop and swap allows them to go on their way while the rest of you stay and manage the property as you see fit.
You Do Have to Be Careful About Timing and Ensuring All Parties Are Satisfied
You have to hold onto property for a certain amount of time in a 1031 and have to time drop and swap carefully to fulfill IRS requirements, so don't assume you can have a drop and swap at any time. Also, the remaining LLC members need to discuss what to do after the drop and swap is complete to make sure all are in agreement; if one person wants to invest in one property, and another person wants to invest in a different property, you've got to work that out before making any moves. Everyone in the LLC has to be on the same page.
Seek legal help before initiating a drop and swap. A tax attorney who understands what these partnerships and actions mean can help you find the right timing so that your 1031 does not violate any tax laws.