Learn legal, financial, and tax steps to sell your limited partnership interest in commercial real estate and help avoid costly surprises.
If you are a limited partner (LP) in commercial real estate, you know these investments are typically structured for long-term holds.
Liquidity is intentionally limited, with most LPs remaining until the general partner (GP) sells the underlying asset. But what if you need to exit early?
The secondary market offers a potential, though complex, path to liquidity. The following outlines the legal, financial, and market dynamics you should understand before selling your LP interest.
Compliance first: Are you even allowed to sell?
The first step is confirming whether you are permitted to sell your partnership interest. Your limited partnership agreement (LPA) or operating agreement governs this entirely and often includes strict provisions that restrict transfers to third parties.
Most LPAs include a right of first refusal, allowing the GP or other LPs to match any offer you receive. You will need to find a buyer first, then offer the deal to existing partners. GP consent is typically required and may be withheld based on the buyer’s qualifications, potential tax consequences, or other partnership concerns.
Some agreements also require the buyer to be a “qualified transferee,” such as an accredited investor, and assume all obligations of the original LP.
Before engaging any buyer, review your agreement carefully, consult with your attorney, and understand the transfer process.
Valuation reality: Expect a discount
Even if you are allowed to sell, pricing your interest presents another challenge. Unlike publicly traded securities, there is no open market for private CRE partnership interests. Buyers in the secondary market apply significant discounts to account for two key risks: lack of control and lack of marketability.
As an LP, you hold a passive stake — you can’t influence decisions about property sales, refinancing, or distributions. Buyers recognize this and may reduce their offer accordingly. They also understand that reselling the interest later will be just as difficult, which further depresses the price.
These discounts can result in a sale price well below the net asset value reported by the GP. Final pricing will depend on asset quality, remaining hold period, GP performance, and current market demand.
Tax and financial preparation: Avoid surprises
Tax implications can be significant. Your gain is measured against your outside basis, which includes your initial investment, contributions, distributions, and income/loss allocations throughout the lifetime of your investment. Miscalculations here can lead to unexpected tax liability.
Selling your interest typically relieves you of your share of the partnership’s liabilities. This debt relief is treated as part of your amount realized and can result in unanticipated tax consequences, including the potential for taxable gain to exceed the cash received.
If the partnership has made a Section 754 election, the buyer may be entitled to a Section 743(b) basis adjustment, aligning their share of the partnership’s inside basis of partnership assets with the purchase price. While this doesn’t affect the seller directly, it can influence negotiations around purchase price allocation.
State and local tax treatment also varies, especially for partnerships operating across multiple jurisdictions. Some states may tax the full gain, while others apportion it based on business activity. Overlooking these differences can lead to compliance issues and unexpected liabilities.
Finally, the character of the gain matters. If the interest was held for more than one year, the gain is generally taxed as long-term capital. However, depending on the purchase price allocation to the underlying partnership assets depreciation recapture, such as unrecaptured Section 1250 gain and Section 1245 depreciation recapture, it may reclassify portions of the gain and subject them to higher tax rates.
Before engaging buyers, make sure your investment documentation is complete. This includes a copy of the partnership agreement and any amendments, at least the last three years of K-1s and partnership tax returns, quarterly and annual GP reports, and the most recent valuation and property-level financials. These materials help buyers assess the health of your investment and support a smoother due diligence process.
How CLA can help
Selling a commercial real estate limited partnership interest involves more than finding a buyer. It requires navigating legal restrictions, valuation complexities, and tax implications. We can help interpret your LPA to confirm transfer eligibility and manage consent requirements. Our team supports the preparation of investment documentation, making sure buyers have the materials needed for due diligence.
On valuation, we can clarify how discounts for lack of control and marketability affect pricing — factoring in asset quality, GP performance, and market trends. On the tax side, we can help with basis calculations, gain characterization, depreciation recapture, debt relief, and state-level exposure.