But when he smells treats in my pocket or hand he won't do anything like hold his toy, so while I can do sit, down, stay, I can't do leave it or drop it.
This is pretty common. After 1 or 2 trials they get the "why would I want that thing when you have FOOD in your hand" look on their face. That is why most of my training for "leave it" or "drop it" takes place as single trials. Here's an overview of my typical "leave it" training progression.
When he isn't looking, put a really tasty treat in your pocket and place an item in the middle of the floor. Not something super high-value, just something that he is going to want to investigate. Wait for him to notice it and move toward it. As he does, cue "leave it" and step between him and the item. If he tries to go around just step into his space and herd him back. This is easier to do the farther away he is from the item so make sure you catch him early in his approach. It is easier to stop and correct the intent to engage with the item than if he's actually engaged with the item. Switch around the items that you use so you don't accidentally teach him that "leave it" means only leave one particular item.
The minute he yields to you and stops attempting to get the item, mark the behavior with a happy "Yes!", tell him "good boy", give him the food from your pocket and some physical praise and petting. Then go over and pick up the item and put it away. Do a couple of these trials throughout the day. For the first couple of days you will be rewarding with the food every time. You should need less and less of the body blocking and see him starting to break away from the item as soon as you say the cue. Then start occasionally leaving out the food reward--like maybe once out of every 3 times for a few days. Then once out of every 5 times then once out of every 7 times, then once out of every 10 times.
Once you've got great reliability to the initial "leave it" cue, you can start working on duration--leaving an item alone that sits there for a while. For this one go back to basics and start rewarding every successful trial. For these trials though, you aren't going to remove the item after you reward. Let it sit there and give him the opportunity to make a choice--"do I go for the item again or do I continue to leave it?"
If he attempts to go toward it again, cue "leave it" and block again. If he stops, don't reward with food, just reward with praise and petting then go pick up the item. If however, he doesn't go for the item a second time, mark that behavior with your happy "Yes!" and reward him with verbal praise, physical praise and a second food reward. Once you've got him not going for the item even if it sits there for a little while after he's left it, then you can start fading the rewards to once out of every 3 times, then out of every 5 times, then out of every 7 times, etc.
You can use the same method with an item that you "accidentally" drop. Dropped items are usually more interesting and if you drop it near him it will be harder for him to resist so make sure you are quick with the cue and the body block. Again, in the beginning go back to using an easy item and rewarding every trial with verbal and physical praise and food. Then once you've got it reliable, start to taper off the use of the food in your reward.
Same goes for "drop it". Just look for chances to do single trials when he's already got something in his mouth. It shouldn't always be a forbidden or stolen item either. If he's carrying around his own toy, just walk up and cue "drop it" then show him a treat. When he drops the toy, give your happy "Yes!" with verbal and physical praise and feed him the treat, then pick up his toy and give it back to him--you can even play with him with it as a bonus reward.
After a lot of repetitions of that, he'll likely start dropping the toy in anticipation of the reward but before you actually have a chance to show the food to him. If so, continue to reward every one of those trials with verbal and physical praise and food for a good long while to build up a great value in dropping things when you ask. Then, when you've got the behavior reliable, start tapering off the use of food in your rewards.
One of the keys to using food wisely is to fade the lure pretty quickly so you are truly rewarding your dog, not bribing it. Additionally, present food rewards immediately after verbal and physical praise. If you do this then you are classically conditioning your dog to like verbal and physical praise even more. That way when it comes time to taper off the food element you have a dog that enjoys the verbal and physical praise almost just as much as when it was accompanied by food.
All too often people don't realize this and they either reward with praise OR food. The dog learns this and they check out or start to ignore you because, after all, your gums are flapping so you must not have food otherwise they'd have seen it by now. This makes it easy for dogs to realize when the owner intends to reward with food and the dog starts holding out for the presence of food.
Another mistake in training with food is that people present the food first and the praise comes second and only half-heartedly. This means that the classical conditioning is never taking place. If that happens, it nearly impossible to get to the stage where the dog continues to work through non-food-rewarded trials.
The last common error in training with food is going from rewarding every trial with food to suddenly rewarding none or almost none with food. Imagine if every day you put money in a soda machine, pushed the button and got a soda. Then one day you put money in and no soda came out. You'd think the machine was broken or empty and you wouldn't bother performing the behavior of putting money in anymore. Well, that's what dogs feel like when we stop using food rewards cold turkey.
Now, think of a slot machine. It's kind of the same thing really, we put money in and push a button. Sure we aren't hoping for a soda. Instead we're hoping for a payout. What happens to those machines that never seem to pay out? People stop the putting-in-money behavior, move away from them and try their luck elsewhere. But if the payout comes often enough--not every time, heck, sometimes not even very frequently at all. And if sometimes it's a little and sometimes it's a lot, people stay at those machines all day long just repeating the putting-in-money behavior over and over and over and over again.
Our job is to convince our dogs that we are slot machines. That a great payout is coming--they just have to work for it. And if we intersperse verbal praise, physical praise, access to real-life rewards, and play from you with great food rewards, you will condition your dog to see all of those as great payouts.
. At least at first. 
