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 14, 2026
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 (§1031(a)(2)(D)f); 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.
| 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.
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.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
No. IRC §1031(a)(2)(D) 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.
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 defers the 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.
