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Selling commercial property: the tax at $2M to $25M, and what actually defers it

Bigger numbers, same four layers, plus two things that only show up at this size: the Section 453A interest charge above $5 million of installment notes, and California's 1031 clawback.

By , founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.

Short answerIn this page's 2026 example, a married couple owning through a California LLC sells an industrial building for $6,500,000 (bought for $2,000,000, with $1,100,000 depreciated) and owes about $2,034,500, 36% of the $5.6 million gain. At this size the Section 453A interest charge above $5 million of installment notes and California's 1031 clawback also matter (last reviewed October 10, 2026).

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The number

What does selling commercial property cost in tax?

Industrial building bought for $2,000,000, depreciated $1,100,000, sold for $6,500,000, married couple owning through a California LLC, 2026

LayerRate (source below)Amount
Depreciation recapture ($1.1M)ordinary rates, capped at 25%about $248,100
Long-term capital gain (about $4.5M)15% / 20%about $889,500
Net investment income tax3.8% of income over $250,000about $203,300
California (whole gain)1% to 13.3%about $693,600
Totalabout $2,034,500 (36% of the $5.6M gain)

Rounded, illustrative. The gain is $5,600,000: the price less the $900,000 adjusted basis ($2,000,000 cost minus $1,100,000 depreciation). Assumes no other income and no selling costs in the year of sale. Federal: 2026 brackets and $32,200 standard deduction (IRS Rev. Proc. 2025-32); California: 2026 FTB rate schedules (FTB Tax News, October 2026). See Sources and review at the bottom of the page.

The options, in plain language

How can you pay less tax or spread it out?

  1. 1031 exchange. Full deferral including recapture. Reverse and improvement exchanges exist for tight timelines. Debt must be replaced or boot is taxed.
  2. Delaware Statutory Trust. Passive 1031 replacement; common for owners exiting management. Fees, illiquidity, sponsor risk. Can be combined with a partial cash-out (boot taxed).
  3. Structured installment sale. Buyer pays cash; an assignment company arranges for a third party to pay you on schedule; gain taxed as received. Above $5M of deferred notes the 453A interest charge applies (roughly the deferred tax x the IRS underpayment rate).
  4. Charitable remainder trust. For part of the building, before the contract. Removes that share from the gain; income for life; deduction now.
  5. Sell and pay, staged. Two closings across a year boundary, or a partial 1031 with the rest paid. Sometimes cheapest once Delaware statutory trust fees and lock-ups are priced.
Who this is written for: people who have owned the asset for years, often decades, and are selling once, usually around retirement. If you are buying and selling frequently, different rules (dealer status, ordinary income) apply and this page is not for you.

Six questions to bring to your CPA

  1. Recapture vs capital gain split, and cost-segregation history?
  2. Debt on the property: what boot does a 1031 create?
  3. Installment note size vs the $5M 453A threshold, and the interest cost?
  4. Partnership or LLC: can partners choose different exits (drop-and-swap risk)?
  5. California clawback if we exchange out of state?
  6. Does a two-stage closing keep either year under 20% or NIIT?

The deadlines that decide it

  • 1031: 45 / 180 days from closing; reverse exchange needs the EAT before you buy.
  • 453A: interest accrues from the year the notes exceed $5M.
  • CRT: funded before contract.
  • Drop-and-swap: restructure the LLC well before listing.

Common questions

Straight answers

What is the 453A interest charge?

When installment obligations outstanding at year end exceed $5 million, you pay interest on the deferred tax. It reduces but rarely eliminates the benefit.

Can partners go separate ways in a 1031?

Only with careful drop-and-swap planning done early; the IRS challenges last-minute versions.

Do Delaware statutory trust distributions count as income?

Yes, taxed like rent, with depreciation passed through.

Is a Delaware Statutory Trust the same as a deferred sales trust?

No. The Delaware statutory trust is a 1031 vehicle; the deferred sales trust is a promoted installment arrangement the IRS scrutinizes.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.

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