Code Sec. 1031 Drop-Swap Cash-Outs and Unrecaptured Section 1250 Gain

Abstract

Drop-swap cash-outs are in the same transaction group as drop-and-swaps and swap-and-drops with one important distinction — at least one member of the exchanging tax partnership takes cash instead of continuing an investment in like-kind property in a drop-swap cash-out. This article describes several different structures that parties can use to effect drop-swap cash-outs, and it explains how the different structures may affect the amount and timing of gain recognized and deferred on the transaction and who recognizes gain currently and who might recognize it in the future. If the exchange property is depreciable, the parties must also consider who will recognize any unrecaptured section 1250 gain and when they will recognize it. The article shows how the structures can affect the allocation of unrecaptured section 1250 gain.

Keywords: Section 1031 exchange, section 1250 recapture, unrecaptured section 1250 gain, drop-and-swap, swap-and-drop, drop-swap cash-out, partnership installment note sale