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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.

One-page cheat sheet for this exact situation, plus a live Zoom walkthrough Saturday, October 10, 2026 at 10:30 AM PT / 1:30 PM ET. Nothing is sold.

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What this sale costs if nothing is planned

Industrial building bought for $2,000,000, depreciated $1,100,000, sold for $6,500,000, California LLC, 2026

Layer	Rate (source below)	Amount
Depreciation recapture	up to 25%	about $275,000
Long-term capital gain (about $3.4M)	20%	about $680,000
Net investment income tax	3.8%	about $170,000
California (whole gain)	12.3% to 13.3%	about $560,000
Total		about $1,685,000 (37% of gain)

Rounded, illustrative, assumes no other income in the year of sale. See Sources and review at the bottom of the page.

The options, in plain language

Five ways this tax gets paid, spread or shrunk

1031 exchange. Full deferral including recapture. Reverse and improvement exchanges exist for tight timelines. Debt must be replaced or boot is taxed.
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).
Structured installment sale. Buyer pays cash; an assignment company routes it to a life insurer that pays 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).
Charitable remainder trust. For part of the building, before the contract. Removes that share from the gain; income for life; deduction now.
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

Recapture vs capital gain split, and cost-segregation history?
Debt on the property: what boot does a 1031 create?
Installment note size vs the $5M 453A threshold, and the interest cost?
Partnership or LLC: can partners choose different exits (drop-and-swap risk)?
California clawback if we exchange out of state?
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, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h)
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-54 and later); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

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

What this sale costs if nothing is planned

Five ways this tax gets paid, spread or shrunk

Six questions to bring to your CPA

The deadlines that decide it

Straight answers

What is the 453A interest charge?

Can partners go separate ways in a 1031?

Do Delaware statutory trust distributions count as income?

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

Sources and review

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