The IRS allows Partnerships or LLCs to defer the recognition of gain in the exchange of property of like kind. However, where two partners of the LLC wish to separate in an exchange, a “drop and swap” where the leaving partners are dropped, before the rest of the partners of the LLC perform the swap with their undivided interest in the to be relinquished property, is employed. At the end of the transaction, the new property will be owned party by the LLC, and partly by the ex-partners by way of a Tenancy in Common, and each ex-partners interest in the distributed interest in of real property will be the basis of their liquidated partnership interest.
