NY State Drop and Swap

In New York State, the "drop and swap" refers to a valid real estate tax strategy used in §1031 like-kind exchanges. The New York Division of Tax Appeals (DTA) has officially approved the use of this strategy, even when the property distribution and the subsequent sale occur on the same day. 

What is a "Drop and Swap"?

A "drop and swap" is a planning technique used when a property is owned by a partnership or an LLC and not all members want to participate in a like-kind exchange, or they wish to acquire separate replacement properties.

The process generally involves two main steps:

1. The "Drop": The partnership or LLC distributes an undivided interest in the real property to the individual partners/members, converting their ownership structure into a tenancy-in-common (TIC).

2. The "Swap": Each individual TIC owner then sells their interest and uses a qualified intermediary to perform their own separate §1031 exchange to defer capital gains tax. 

Key Points on New York State Treatment

• No Minimum Holding Period: A significant 2025 NY DTA decision, In the Matter of Hadar & Shomron, clarified that New York tax law (which largely conforms to federal §1031 rules) does not require a minimum holding period for the distributed property.

• Form and Intent Matter: The NY ruling emphasized that the key is proper documentation and a consistent investment purpose, not an arbitrary length of time the property is held. As long as the transaction is properly structured, documented (e.g., recording deeds, using a TIC agreement), and follows the legal form, it can qualify for tax-deferred treatment.

• State vs. Federal: While this is a major win for NY taxpayers, it is a state-level decision and not binding on the IRS or other states (like California, which has historically been more scrutinizing of these transactions).

• Professional Advice is Crucial: Given the complexities of tax law and potential IRS scrutiny, it is essential to consult with qualified tax and legal advisors for specific guidance on your situation. 

For more information, you can review the official NY Division of Tax Appeals opinion regarding the case (Hadar & Shomron decision).