Selling a minority stake in a TIC, LLC, partnership or syndication? You own a slice of a building you did not pick the sale date for. The partners want to exchange, or the sponsor is selling, and you want out of real estate and into cash. Here is what your slice is taxed, what you can and cannot exchange, and who has to say yes.
By Hans Goldstein, EA · Updated October 15, 2026
A drop and swap 1031 exchange has the partnership distribute tenancy-in-common shares before the sale, so partners who want to exchange can swap into new real estate while a partner who wants cash sells and keeps the proceeds. Nobody can 1031 a partnership interest itself, and the cash partner owes tax on their own share of the gain.
A TIC interest is a direct share of real property, so you can exchange it under IRC §1031. An LLC, partnership or syndication interest cannot be exchanged (Treas. Reg. §1.1031(a)-3); you either sell it, or the partnership sells the property.
If you sell for cash, the gain is mostly capital gain, but the depreciation your K-1 allocated to you comes back at up to 25%, and some pieces are taxed as ordinary income (IRC §751).
On a $4 million stake with a $1.1 million tax basis, a California couple owes about $1,105,846 if all of it lands in 2026.
Paid over 10 years under a structure written into the sale, the tax on the gain falls to about $467,006, but the ordinary-income piece is taxed in year one either way. Email me your share and basis for your number.
A partnership cannot do a 1031 exchange for its partners, because an exchange needs the person who sold to be the person who buys. So before the sale, the partnership "drops" the property out to the partners as tenancy-in-common shares.
Each partner then sells their own share. The partners who want to stay in real estate "swap" their share into new property through a qualified intermediary. A partner who wants cash sells and keeps the proceeds. The steps, in order:
No. Since 2018 only real property qualifies for a like-kind exchange (IRC §1031(a)(1)), and the regulations list interests in a partnership as property that is not real property (Treas. Reg. §1.1031(a)-3). That is why a partner who wants to exchange needs the property distributed first. A TIC share is real property, so it can be exchanged. An LLC or partnership unit cannot (checked October 15, 2026).
| Drop and swap | Swap and drop | |
|---|---|---|
| Order | Partnership distributes TIC shares first, then each partner sells or exchanges | Partnership exchanges first, then distributes the replacement property |
| Who sells | The individual partners | The partnership |
| Fits a partner who wants cash | Yes: the cash partner sells their share at closing and is out | Poorly: the cash partner stays in the partnership until the replacement property is distributed |
| Main risk | The IRS argues the partnership really made the sale, so the exchange fails | The IRS argues the replacement property was not held by the same taxpayer |
| Holding period | Hold period after the distribution is a facts question (see below) | Hold period after the exchange before distributing |
The Code sets no minimum. It is a question of intent and facts: was the property held for investment by the partners after the distribution? Taxpayers have cited Bolker and Magneson (both Ninth Circuit, 1985) for continuity of investment.
The IRS has pointed to Rev. Rul. 77-337 and Rev. Rul. 75-292 and the step transaction doctrine when partners drop out right before the sale. Courts and state tax agencies have gone both ways, so the facts and the state matter.
What helps: a written plan to exchange before any contract, a distribution before a binding purchase agreement, recorded deeds, proceeds paid by deeded share, and each partner who got property filing Form 7217. Case and ruling cites are the ones tax authors use; have your attorney confirm them for your state.
Most drop and swap pages are written for the partner who exchanges. If you are the partner who wants cash, the picture is different:
| Partner who exchanges | Partner who takes cash | |
|---|---|---|
| What they do | Sell their TIC share, use a qualified intermediary, buy replacement property | Sell their TIC share at the same closing and keep the proceeds |
| Deadlines | 45 days to identify, 180 days to close | None |
| Tax | None on the exchanged gain if it holds; tax on any cash or debt relief received | Tax on their share of the gain in the year of sale |
| Paperwork | Form 8824, Form 7217 | Schedule D, Form 8949, Form 7217 |
| What can go wrong | The IRS unwinds the exchange | Their tax does not change, but a challenged distribution can pull the whole sale back to the partnership, so ask for a hold-harmless in the distribution agreement |
Hypothetical, run October 15, 2026. An LLC taxed as a partnership sells a commercial building for $6,000,000. Selling costs are $300,000, so the net is $5,700,000.
The adjusted basis is $2,000,000 after $1,000,000 of straight-line depreciation, so the total gain is $3,700,000. Three partners; the exiting partner owns 15% with an outside basis equal to 15% of the inside basis ($300,000). The other partners do a drop and swap and exchange their 85%.
| Exiting partner, 15% share | Amount | Rate | Federal tax |
|---|---|---|---|
| Share of the net price | $855,000 | ||
| Share of the gain ($855,000 less $300,000) | $555,000 | ||
| Depreciation part (unrecaptured §1250 gain) | $150,000 | 25% maximum | $37,500 |
| Remaining long-term capital gain | $405,000 | 20% | $81,000 |
| Net investment income tax (passive owner, income above $200,000 single) | $555,000 | 3.8% | $21,090 |
| Federal total | 25.1% of the gain | $139,590 | |
| Cash left after federal tax | $715,410 |
This shows the top federal rates: 20% on long-term gain starts above $545,500 of taxable income for a single filer and $613,700 for joint filers in 2026 (IRS Rev. Proc. 2025-32, section 3.03); 25% is the maximum on unrecaptured §1250 gain (IRS Topic 409); 3.8% is IRC §1411 (IRS Topic 559).
A partner with less other income pays less on part of the gain. State tax is on top: California taxes the gain as ordinary income at up to 13.3%. Your K-1 capital account and share of debt change the numbers, so these are an illustration, not a quote.
Two points. First, the cash partner's federal tax is generally the same whether they sell a TIC share after the drop or sell the partnership interest, because the depreciation part stays at up to 25% and ordinary-income pieces are taxed as ordinary income (IRC §751).
The drop does not add tax; it gives the cash partner a clean exit at the same closing. Second, if the gain is large, the buyer can still pay in full at closing while a third party pays the cash partner over the years they choose.
That can net more when each year's gain stays in a lower bracket, but depreciation recapture is taxed in year one either way. You are not the bank. Run it on the structured installment sale calculator.
States treat drop and swaps differently. A New York tax tribunal sided with the taxpayers in the Hadar matter, as exchange-industry articles report. California agencies have ruled against some taxpayers, and later decisions have not been uniform.
Transfer tax on the deed from the partnership to the partners also varies. Treat this as a map of where to ask your state attorney, not a ruling for your facts (summarized from published exchange-industry articles, October 15, 2026).
Nothing in the Code approves or bans it. It is judged on facts under the step transaction doctrine (Court Holdings, U.S. Supreme Court, 1945). Form 1065 Schedule B asks questions that draw attention to distributions, and exchange-industry articles say the IRS looks at them, so keep the paperwork clean.
The usual mistakes: distributing after a binding contract, one deed from the LLC straight to the buyer, a TIC set-up with more than 35 owners that does not meet the guidelines in Rev. Proc. 2002-22, skipping Form 7217, no lender consent, and ignoring a right of first refusal in the LLC agreement.
Start by finding out whether you own a deeded tenancy-in-common share or an LLC or partnership interest, because only the deeded share can be exchanged under a 1031 (a partnership interest is excluded by IRC §1031(a)(1)). Then get the K-1 and the agreement, and ask the sponsor early whether a payout over years can be written into the entity's sale, because that has to be in the contract before closing.
On a $4,000,000 stake with a $1,100,000 basis, a California couple owed about $1,105,846 in a 2026 cash sale and about $467,006 when the same sale was paid out over 10 years. The buyer pays in full at closing either way, and you are not the bank.
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| Option | It works when | It fails when |
|---|---|---|
| Sell for cash | The stake is small or the gain is modest. | A large gain and recapture land in one year. |
| Installment sale through a structured arrangement | The buyer or entity writes it into the contract before closing; the buyer pays in full and you are not the bank. | The sponsor will not cooperate, or most of the gain is recapture taxed in year one. |
| 1031 a deeded TIC share | You hold a real TIC share and want to stay in real estate. | You want out of real estate, or cannot replace in 45 days. An LLC unit cannot be exchanged. |
| Drop and swap | Some owners want to exchange and some want cash. | Done too close to the sale the IRS can challenge it, and the lender must consent. |
| Delaware statutory trust as the next step | You sold a deeded share and want a passive replacement. | It stays in real estate, with sponsor fees and little liquidity. |
| Sell to partners or on a secondary market | The agreement allows it and there is a buyer. | Price discounts for a minority stake, right of first refusal delays and related-party rules. |
| Partition (TIC only) | A co-owner refuses to sell and the agreement allows it. | Slow, costly and public. |
A structured slice is per seller. Keep it within the §453A threshold and confirm with your CPA before you set the amount.
A married California couple sells a 13%-type stake in a commercial LLC. The stake is worth $4,000,000 (equity plus their share of the loan). Their tax basis is $1,100,000.
The K-1 shows $1,400,000 of unrecaptured §1250 gain and $150,000 of §751 ordinary income. Selling costs are $80,000 and other income is $200,000 a year. Run October 14, 2026 with the Goldstein & Co. engine: 2026 federal brackets, the 3.8% net investment income tax and AMT (IRS Rev. Proc. 2025-32), and 2026 California brackets.
| Cash sale, all in 2026 | Paid over 10 years | |
|---|---|---|
| Gain | $2,820,000 | $2,820,000 |
| Tax on the gain | $1,105,846 (39.2%) | $467,006 over 10 years, plus $442,661 on the interest |
| Yearly payment | Not applicable | $507,658 |
| After-tax money at year 10, if untouched | $3,913,516 | $4,248,975 ($335,459 more) |
The $150,000 of ordinary income and any equipment recapture are taxed in year one either way, and only the rest is spread. The 5.0% payout rate is an assumption, not a quote, and the year 10 line assumes nothing is spent and both paths earn 5.0%, taxed every year. Your K-1 capital account, your share of liabilities and any negative basis change the numbers. These are estimates.
Only as the operating agreement allows. Most agreements require manager consent and give the other owners a right of first refusal at the same price first. A deeded tenancy-in-common share is easier to sell but the lender may need to consent.
Look at your K-1 capital account and the sponsor's basis schedule. Basis starts with what you paid, goes up with income and contributions and goes down with distributions and depreciation. Your share of the partnership debt is included, so basis can be low or negative. Your CPA should compute it.
It is the part of the gain that comes from depreciation you took on real property. Federal tax on it is capped at 25% rather than 20%, and the 3.8% net investment income tax and state tax can apply on top. Your K-1 shows your share of it.
Only for the part of the price you set up as an installment sale through a structured arrangement, and only if it is in the contract before closing. The buyer pays in full at closing and you are not the bank. Ordinary income from §751 hot assets is taxed in year one.
IRC §453A adds an interest charge on installment obligations over $5,000,000 per seller at year end, for the tax on the amount over that threshold. A stake that stays under it avoids this. The limit is applied per seller, so confirm the number with your CPA.
Run your own numbers: structured sale calculator; buyer offer gap calculator; Delaware statutory trust calculator. More problems like this one: forced to sell? step-by-step guides.
Sources, checked October 15, 2026: IRC §1031, like-kind exchanges; IRC §751, unrealized receivables and inventory; IRC §453, installment method; IRC §453A, interest on large installment obligations; IRC §469, passive activity losses; IRC §1, tax rates and the 25% rate on unrecaptured §1250 gain.
| You own | Can you 1031 it? | What a sale triggers |
|---|---|---|
| A TIC (tenancy in common) share, on the deed | Yes, the share is real property. Your 45 and 180 days run on your own sale. | Gain on your share. Your share of the loan counts as money received if you do not replace it. |
| A membership interest in an LLC or partnership interest | No, not as an interest. The property can be exchanged by the entity, or by the partners after a drop (below). | Capital gain on the interest, plus §751 ordinary income on "hot assets" such as recapture, plus 25% on unrecaptured §1250 gain. |
| A syndication unit (LP) in a fund that sells the building | No. The sponsor sells; you get a K-1 with your share of the gain. | Same layers as a partnership. Suspended passive losses are released when you fully dispose of the interest (§469(g)). |
| A Delaware statutory trust interest | You can sell it. It is treated as real property for a 1031 (Rev. Rul. 2004-86), so a sale can be the start of a new exchange. | Gain and recapture on the trust interest, as your CPA reports it from the sponsor statements. |
A married California couple sells a 13%-type stake in a commercial LLC. The stake is worth $4,000,000 (equity plus their share of the loan). Their tax basis is $1,100,000 after years of depreciation. The K-1 shows $1,400,000 of unrecaptured §1250 gain and $150,000 of §751 ordinary income (cost segregation on equipment). Selling costs: $80,000. Other income: $200,000 a year.
| Cash sale, all in 2026 | Paid over 10 years | |
|---|---|---|
| Gain | $2,820,000 | $2,820,000 |
| Tax on the gain | $1,105,846 (39.2%) | $467,006 over 10 years |
| Tax on the interest | Not applicable | $442,661 |
| Yearly payment | Not applicable | $507,658 |
| After-tax money at year 10, if untouched | $3,913,516 | $4,248,975 ($335,459 more) |
Two honest notes. The $150,000 of ordinary income and any equipment recapture are taxed in year one either way (§453(i)); only the rest spreads. And the numbers are a model: your K-1 capital account, your share of liabilities and any negative basis change them. You need the K-1s and the operating agreement.
Run on October 14, 2026 with the Goldstein & Co. engine: 2026 federal brackets, the 3.8% net investment income tax and AMT (IRS Rev. Proc. 2025-32), and 2026 California brackets. The 5.0% payout rate is an assumption, not a quote. After-tax money at year 10 assumes nothing is spent and both paths earn 5.0%, taxed every year. These are estimates, not a quote.
This is the usual fight. The property is under contract; some owners want to keep a 1031 going and one or two want cash.
Because a partnership interest cannot be exchanged, the group sometimes uses a drop and swap: before the sale, the entity distributes ("drops") a tenancy-in-common share to each partner, and each partner then exchanges or sells their own share. The partners who want out simply sell their share for cash.
Most minority owners have more exits than the one the sponsor offers. Dated October 14, 2026.
| Exit | What it does | When it wins | When it fails |
|---|---|---|---|
| Sell your interest for cash | One sale, tax in the year of sale | You want out and the stake is small or the gain is modest | Large gain and recapture all land in one year |
| Sell with a payout over years (structured installment sale) | The buyer pays cash at closing and the payments come from an annuity; the gain is taxed as payments arrive | Large gain, the buyer or entity will write it into the contract before closing | The sponsor will not cooperate, or most of the gain is recapture taxed in year one |
| 1031 your TIC share | Exchange a deeded tenancy-in-common share into other real estate | You own a TIC (not an LLC unit) and want to stay in real estate | You want out of real estate, or cannot replace in 45 days |
| Drop and swap | The entity distributes TIC shares before the sale; each owner exchanges or sells their own share | Some owners want to exchange and some want cash | Done too close to the sale, the IRS can challenge it; lender consent needed |
| Roll into a larger fund (§721) | Contribute the property to an operating partnership for units | You want to stay invested without managing | Units are illiquid; see 1031 vs 721 |
| Sell to your partners (buyout) | The others buy you out at an agreed price | The agreement has a buy-sell clause and the others have the cash | Price disputes; a minority discount; related-party rules |
| Hold and wait | Keep the stake until the sponsor sells | Distributions are healthy and you have no need for cash | You are locked in with no control over timing |
| Partition (TIC only) | A court orders the property sold or divided | A co-owner refuses to sell and the agreement allows it | Slow, costly and public |
Questions answered below: Questions about TIC interests · Questions about drop and swap and 1031 for partners · Questions about syndications and K-1 sales · Questions about selling or exiting an LLC or partnership
No. A partnership or LLC interest cannot be exchanged under a 1031 exchange, because IRC §1031(a)(1) limits exchanges to real property, which excludes partnership interests. That includes LP units in a syndication and multi-member LLC interests taxed as partnerships. The way around it is for the entity itself to sell and exchange the property, or for partners to hold the property directly before the sale (a drop and swap).
Two exceptions help: a single-member LLC that is ignored for tax is treated as you, so you can exchange its property, and a deeded tenancy-in-common share is real property you can exchange. You also cannot use a 1031 to buy an LLC or partnership interest as replacement; buy real property or a Delaware statutory trust interest instead.
Yes, if you hold a deeded tenancy-in-common (TIC) interest, because that share is real property. Your 45 and 180 days run on your own sale, and your share of the loan counts as money received if you do not replace it. If instead you own units in an LLC or partnership that owns the building, you cannot exchange them.
Check how you hold it: on the deed, or through an entity? Rev. Proc. 2002-22 lists the conditions under which the IRS will rule that a TIC arrangement is not a partnership, which is why many sponsored TIC deals are written to fit it. The other owners' consent and any right of first refusal may apply to your sale.
Yes, a tenant in common can usually sell, give away or mortgage their own undivided share without the other owners' consent, unless a co-tenancy agreement says otherwise. The buyer steps into your place as a co-owner. Many TIC agreements add a right of first refusal, lender consent or manager approval, so read yours first.
A single share is harder to sell than a whole building, because the buyer cannot control the sale and may have to join someone else's lawsuit to get out. Expect a discount, sometimes a large one. Marketing it to the other owners or the sponsor's secondary list is often the best route.
If the other owners will not agree to sell the whole property, a partition lawsuit is possible unless waived.
You are taxed on the gain on your share: your share of the sale price (including your share of the loan) minus your share of selling costs and your adjusted basis.
The depreciation you took comes back at up to 25% as unrecaptured §1250 gain, the rest is long-term capital gain at 0%, 15% or 20% in 2026, plus the 3.8% net investment income tax when modified AGI is over $250,000 MFJ or $200,000 single, and state tax.
A cash sale is taxed all in one year. The worked example above shows a $4 million stake, and the tax under a structured payout written into the sale (the buyer pays in full at closing and you are not the bank). For a modest-size TIC share, a 1031 into another TIC, a Delaware statutory trust, or cash is the usual choice.
A TIC is a tenancy in common: a way for two or more people to own a property together, each holding a deeded, undivided share they can sell, mortgage or leave to heirs. In commercial real estate, sponsors sell shares of a building to a few investors (often 35 or fewer), who can use 1031 money to buy in.
It differs from owning units in an LLC or a limited partnership, where you own an interest in an entity rather than in the real property, and it differs from joint tenancy, which has survivorship. TICs require agreement among owners for big decisions, and there is no guaranteed exit if the others will not sell.
Yes. You can sell a fraction of a deeded share, or part of your LLC units, if the agreement allows. The tax is on the part sold: your basis is divided in the same proportion. Selling half your interest uses half your basis, and the other half stays invested.
The practical problem is the buyer: a partial share has the same lack of control as a whole minority share. The other owners often have a right of first refusal, and the lender may need to consent. If the other owners will not buy, the next step is to ask whether a third-party investor may step in.
No statute gives a safe number of days, so there is no holding period you can count on. The risk is that the partners are treated as selling the property instead of exchanging, because they held the tenancy-in-common shares only briefly. Practitioners often recommend holding the TIC shares through at least one tax return, and the longer and more documented the better, but this is judgment, not a rule.
The mirror image, a swap and drop, has the partnership do the exchange first and distribute the replacement property later. It has its own risks. Because courts and the IRS have looked at both, do not plan a drop on a property already under contract. Get an exchange attorney and a tax opinion before any deed moves.
A drop and swap is a way for partners in an LLC or partnership that owns real estate to split: the entity distributes (drops) a tenancy-in-common share of the property to each partner, then each partner does their own 1031 exchange or sells their share for cash. It exists because a partnership interest cannot be exchanged, but real property can.
It is used when some partners want to exchange and others want cash. The risk is timing and intent: if the drop is too close to the sale, the IRS can argue the partners never held the property for investment. Lender consent, transfer taxes and the operating agreement are also in play. Use an exchange attorney early. See the drop and swap section above for the full steps.
Your choices are to sell your interest to the partners or a third party for cash, ask for a drop and swap so you take a tenancy-in-common share and sell it yourself, have the partnership redeem you before the sale, or accept the group's exchange and stay in. Which of these is possible is decided by the operating agreement, the lender, and the other partners.
Start by reading the buy-sell, drag-along and consent terms, and ask the manager in writing for the plan. If you are the minority, expect to negotiate. A written offer from the partners to buy you out at a fair price before the sale often ends the dispute.
Then ask your CPA to price each option, since cash taken from the partnership in a redemption can be taxed differently than a sale to a partner.
A partnership K-1 is due to you by the partnership's return date, March 15 for calendar-year partnerships, and many arrive later because the sponsor extends the return. The K-1 shows your share of gain, recapture and income on specific boxes and lines, which your preparer enters on Schedule D, Form 4797 and Schedule E.
Because the tax is due on April 15 whether or not the K-1 has arrived, ask your CPA to pay estimated tax based on the sponsor's estimate and to file an extension for your return. The year of the sale usually has an extra-large K-1, so plan for it in that year's estimated payments.
Usually the loss is a capital loss, which offsets capital gains plus $3,000 a year of other income, with the rest carried forward. If you sell the interest or the property sells in a fully taxable sale to an unrelated buyer, any passive losses you had suspended are released and can offset other income, including wages (IRC §469(g)).
If the investment simply goes to zero, the loss usually comes in the year the interest is worthless, and you need proof of an identifiable event. Your K-1 loss for the year may be limited by your basis, at-risk and passive loss rules. This is a CPA question, so gather the K-1s, the operating agreement and any sponsor letters.
If the sponsor will not buy you out, you can still: read the transfer clause for the exact conditions, send a written request for a redemption price, offer your units to other investors, ask for your records (limited partners often have a right to books and records under state law), and, if the sponsor is acting against the agreement, consult an attorney. Waiting for the sale event is often the real exit.
Units in private deals sell at a discount, and buyers are few. Expect the process to take months. Do not sign a purchase offer without the sponsor's written consent if the agreement requires it. A CPA can tell you what the sale would cost in tax before you accept a price.
You cannot avoid tax on your share of the gain on a syndication sale, but you can plan it. The K-1 will show your share of capital gain, depreciation recapture taxed at up to 25%, and possibly ordinary income. You pay the tax whether or not the sponsor has distributed the cash yet.
Your options are to roll over into the sponsor's next deal if offered, sell your units to a buyer, use suspended passive losses (released on a full sale), or invest only the gain in a qualified opportunity fund if the rules fit (confirm the current rules and dates with a CPA).
You cannot make your own 1031 exchange out of LP units. Ask the sponsor early for the estimated K-1 numbers and whether the entity will exchange or sell for cash. See the worked example above, and note that the ordinary-income piece is taxed in year one either way.
A real estate syndication is a deal where a sponsor pools money from investors (limited partners) to buy property. The sponsor manages it, and you get a share of cash flow and sale proceeds through an LLC or limited partnership. Your usual exit is the sponsor's sale or refinance of the property, because you have little say and units rarely trade.
If you want out earlier, your options are asking the sponsor for a buyout or redemption, selling your units to another investor (the operating agreement may need sponsor approval), or waiting for the sale. You cannot force a sale as a minority investor unless the agreement gives you that right. See the options table above.
To sell your LLC interest, read the operating agreement for transfer limits, a right of first refusal and manager consent, then find a buyer (other members, the company or an outside buyer), agree on a price, and sign an assignment of membership interest. Notify the lender if the loan has a change-of-control clause. The sale is taxed in your name.
If the LLC has one owner and is ignored for tax, the sale is treated as a sale of the underlying property.
If it has two or more owners, the sale is a sale of a partnership interest: capital gain on the interest, with ordinary income on hot assets and up to 25% on the unrecaptured §1250 part. Price it as your percentage of the property's value minus debt, then expect a discount for lack of control. See the worked example above.
You report the sale on your own return, usually on Form 8949 and Schedule D, with any ordinary-income part from the hot-asset rules shown separately. Your final K-1 from the partnership reports your share of income through the sale date, and the partnership checks the box for a sale or exchange of interest on Form 1065 and may need to file Form 8308 for the hot-asset exchange.
Tell the partnership in writing when you sell. You need your outside basis from your K-1 capital account history to compute the gain. Ask your preparer to reconcile the K-1 capital account with the tax basis, because they often differ. Forms and lines change, so check the current instructions.
When you sell a partnership interest, the gain is your amount realized (cash, plus your share of the partnership's debt that the buyer takes over) minus your tax basis in the interest.
Most of it is capital gain, but part is ordinary income to the extent of "hot assets" such as depreciation recapture on equipment and unrealized receivables (IRC §751), and the unrecaptured §1250 part is taxed at up to 25%.
A simple illustration: $1,000,000 in cash plus $500,000 of debt you are relieved of is $1,500,000 realized; with a $400,000 basis, the gain is $1,100,000. The hot-asset part is ordinary and the rest splits between 25% and the long-term rates. Sales of interests are reported on Form 8949 and Schedule D, and Form 8308 may be filed by the partnership.
If your partner buys your interest, you are taxed as for any sale of a partnership interest: capital gain mostly, ordinary income on hot assets, and up to 25% on the recapture part. If the partnership itself buys you out and pays you in liquidation, the payments are treated under IRC §736, where part may be ordinary income depending on how they are labeled.
Terms that matter beyond tax: the price and how it is valued, whether you are paid in full at closing or over time (if over time and you are the lender, you carry the risk, so ask for security and a guarantee), release from any loan guarantee, and what you keep rights to.
If you want the gain spread over years, that has to be arranged before closing in a structure where the buyer pays in full at closing and you are not the bank. Have your CPA price each version before you sign.
To dissolve a real estate partnership, follow the agreement: vote to dissolve, sell or distribute the property, pay debts, then distribute what remains to the partners by their shares. Then file the final Form 1065 and mark it as the final return, and give each partner a final K-1. File the state dissolution or cancellation paperwork and close the accounts.
If the property is distributed instead of sold, the tax result depends on the partners' basis and the character of assets, so ask a CPA before a deed moves. A distribution of property to partners is where drop and swap starts.
To exit a real estate partnership, work down this ladder: read the agreement for buy-sell, put and call, or transfer terms; offer your interest to the partners; sell to an outside buyer if the agreement allows it; ask the sponsor for a redemption; and, as a last step, seek a court-ordered dissolution if state law and the agreement permit.
An LLC member usually cannot force a sale of the property the way a deeded co-owner can.
Money decides the rest. A partner buyout is taxed as a sale of an interest. A sale of the property flows through on K-1s. Ask a CPA to price each route, and an attorney to read the agreement. selling a TIC, LLC or partnership stake lists the exits side by side, as of October 2026.
Yes, a minority interest in commercial property can be sold, but it usually sells at a discount to your percentage of the property's value, because the buyer gets no control and no right to force a sale. How big the discount is depends on the deal and the buyer pool, so get an independent valuation rather than assuming one.
Likely buyers are the other owners, the sponsor, or investors who buy minority stakes at a price. Price it as your percentage of property value minus debt, then adjust. Check the agreement for transfer limits and a right of first refusal first. A written offer to the other owners at a fair price is often accepted because they would rather buy you out than meet a stranger.
Usually not. An LLC or partnership member owns an interest in the entity, not the building itself, so a deeded co-owner's partition suit is not available.
A member's options are in the operating agreement (buy-sell, put or call rights, a vote), and in some states a request to a court to dissolve the entity if it cannot operate as intended. Many agreements also let a majority drag you along in a sale.
A deeded tenancy-in-common owner has the stronger tool: a partition action, unless waived. Co-ownership agreements often include a waiver of partition, which courts usually enforce if reasonable. If you hold a deeded share and want out, see the partition guide linked below.
A real estate partnership (or an LLC taxed as one) is a group of owners who hold property through an entity. The partnership agreement or operating agreement controls almost everything about an exit: who can sell, who must consent, whether partners have a right of first refusal, buy-sell terms, and how a dispute is resolved.
Read yours for six things: transfer restrictions, consent, buy-sell or put and call clauses, drag-along and tag-along, valuation methods, and any waiver of court rights. If you cannot find them, ask the manager in writing for a current copy. Types and examples vary, but the exit questions are always the same. See the sections below on selling your interest.
Related reading: 1031 boot tax, partnership buyouts, the Delaware statutory trust, the depreciation recapture rates, and on Big Sale Tax, tenancy in common and 1031. If your stake carries suspended passive losses, see The Waterfall Strategy.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
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No. IRC §1031(a)(1) limits exchanges to real property, which excludes partnership interests. A TIC share, which is a direct interest in real property, can be exchanged. Partners who want to exchange sometimes use a drop and swap, where the entity distributes tenancy-in-common shares before the sale.
Mostly as capital gain on the interest. But the part that reflects depreciation recapture and other hot assets is ordinary income under IRC §751, and unrecaptured §1250 gain is taxed at up to 25%. Add the 3.8% net investment income tax and state tax.
Before a sale, a partnership or LLC distributes undivided shares of the property to its partners (the drop). Each partner then does their own 1031 exchange (the swap) or sells their share for cash. It lets partners go different ways, but the IRS can challenge it if the timing looks like a sham, so it needs an exchange attorney.
Usually not under an operating agreement, which may require the manager's consent. Co-owners of a TIC may be able to file a partition action in court. Review the agreement with an attorney.
Usually not. The sponsor decides how the buyer pays. You get a K-1 with your share of the gain. You can ask the sponsor for a payout structure at the entity level, or sell your own units to a buyer and write a structure into that sale.
They are released when you fully dispose of the interest in a taxable sale (IRC §469(g)). In an installment sale the release is spread with the gain. That is the Waterfall idea.
Before the sale closes. It goes into the purchase contract. After closing it is too late.
The first 15-minute scope call is free. A written analysis is $5,000.
Read the operating or partnership agreement first: transfer limits, consent, buy-sell and right-of-first-refusal clauses control everything. Then the exits are selling your interest to a partner or outside buyer, a negotiated buyout, waiting for the sponsor's sale, or, for a TIC, a partition suit. The sale is taxed as capital gain with ordinary-income pieces under IRC §751.
If your partner buys your interest, it is a sale of a partnership interest: capital gain plus ordinary income on hot assets such as depreciation recapture (IRC §751). If the LLC redeems you instead, parts of the payments can be taxed differently (IRC §736). Get your K-1 capital account and your share of liabilities before you agree to a price.
Yes, subject to the agreement and the lender. Buyers usually discount a minority interest because you cannot control the sale. A TIC share can be exchanged under §1031; an LLC or partnership interest cannot.
Ask for a drop and swap before the contract so each owner takes their own path, or sell your share to the others or an outside buyer. If you take cash, the gain is taxed to you alone; a payout structure written into your share of the sale can spread it.
A drop and swap is when a partnership distributes tenancy-in-common shares of its real estate to the partners before a sale, so that each partner can sell or exchange their own share. Partners who want to stay in real estate swap into new property through a qualified intermediary; a partner who wants cash sells and keeps the proceeds.
It is not banned or approved by the Code. It is judged on the facts under the step transaction doctrine. Taxpayers have won and lost, and states differ, so use a tax attorney and keep the documents clean.
Exchange-industry articles say the distribution questions on Form 1065 Schedule B can draw attention, so they can be audited. Written intent before the contract, a distribution before a binding sale agreement and recorded deeds all help.
In a drop and swap the partnership distributes the property first and the partners sell or exchange as individuals. In a swap and drop the partnership exchanges first and distributes the replacement property afterward.
The Code sets no minimum. It is a facts question about whether the partners held the property for investment after the distribution. See the hold period section above.
Yes. A drop and swap is the usual way. The partnership distributes tenancy-in-common shares, the others exchange their shares through a qualified intermediary, and the cash partner sells their share at the same closing and keeps the money.
Generally no. The cash partner pays tax on their share of the gain in the year of sale, with the depreciation part at up to 25% and the 3.8% net investment income tax where it applies. The risk is process: if the IRS challenges the distribution, ask for a hold-harmless in the agreement.
The person who sells must be the person who buys, and a partner's interest in a partnership is not real property. The partnership can exchange its own property, but individual partners cannot split off and exchange their own shares unless the property is first distributed to them.
A buyout of the partner who wants out, selling your interest to a partner or outside buyer, a structured installment sale for the cash partner, rolling into a larger fund under §721, or holding. See the options table on this page and alternatives to a 1031 exchange.
Often yes, subject to the co-ownership agreement and any lender. Buyers discount a single TIC share because they cannot control the sale. If the agreement has a right of first refusal, the other owners get the first chance to buy.
These are estimates. Have a qualified tax professional run your real numbers in a 15-minute scope call.
Book my 15-minute callThis is an estimate. Getting it right down to the tee takes your actual tax forms (returns, K-1s, depreciation schedules), a consult and a paid analysis. The first 15-minute scope call is free; the written analysis is $5,000. On a funded structure the insurer pays a one-time commission to the brokerage firm that places it; it is built into the annuity pricing, not a separate fee.
A plain-English guide for sellers on how a structured installment sale can help you net more after tax when you sell a business, practice, or property. It covers the math, the alternatives, and how to tell if your deal fits.
Leave your details and the PDF downloads right away. Within one business day Hans will email a preliminary read on which structure fits your deal. No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. General education, not tax or legal advice for your situation.
