Can I roll part of my sale price into the buyer's equity without paying tax on it now?
Generally available when the structure qualifies
Often, yes. Rolled equity can be received tax-deferred under IRC §351 when you contribute property to a corporation controlled by the transferors, or under IRC §721 when you contribute property to a partnership or LLC taxed as one. Cash you receive is taxable now. The deferral is not forgiveness: your basis carries over, so the deferred gain is taxed when you later sell the rolled equity.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- Corporate buyer vehicle: §351 requires the transferors, as a group, to have §368(c) control immediately after the exchange.
- Partnership or LLC buyer vehicle: §721 generally applies without a control test, but disguised sale rules can apply.
- Cash and other property received are taxable up to your gain (§351(b)); the rest of the gain is deferred.
- Your basis carries into the rolled equity, so the deferred gain is taxed on a later sale.
- How the deal is papered (one exchange or a sale plus a contribution) changes how much basis carries over.
What it is
In many private-equity and strategic acquisitions, the buyer asks the seller to keep a stake in the business. Instead of taking the whole price in cash, the seller exchanges part of the ownership for equity in the buyer's acquisition vehicle. That is rollover equity.
If the rollover is structured correctly, the seller recognizes gain only on the cash received and defers the gain on the rolled portion until the new equity is sold. That keeps more money invested without paying tax up front on value the seller never took out.
What the law says
IRC §351(a) provides that no gain or loss is recognized when property is transferred to a corporation solely in exchange for its stock and the transferors are in control immediately after the exchange. Control is defined in §368(c) as at least 80% of the total combined voting power of all voting stock and at least 80% of the total number of shares of each other class of stock. The control test counts all transferors in the same transaction, including investors who contribute cash at the same time.
If a transferor also receives money or other property, §351(b) requires gain to be recognized, but not more than the money plus the fair market value of the other property received. Section 358 gives the transferor a basis in the new stock equal to the old basis, decreased by money received and increased by gain recognized.
IRC §721(a) provides that no gain or loss is recognized to a partnership or its partners on a contribution of property in exchange for a partnership interest. Many private-equity buyers use an LLC taxed as a partnership for this reason. Contributions paired with distributions or other payments can be recharacterized as disguised sales under §707(a)(2)(B) and Treas. Reg. §1.707-3.
Requirements and tests
Confirm these points before you sign:
- Entity type of the vehicle issuing the rolled equity: a corporation (§351) or a partnership or LLC taxed as a partnership (§721).
- For §351: the transferors, as a group, meet the §368(c) 80% control test immediately after the exchange.
- What you contribute: shares of a corporation, LLC interests, or assets; S corporation targets often need a pre-closing reorganization so the rollover works.
- How much cash or other property you receive, and whether any of it is received in the same exchange.
- Whether any payment to you could be a disguised sale under §707 in a partnership rollover.
- Your holding period and whether the rolled equity is preferred, common, or a profits interest.
- Any qualified small business stock history (§1202 or §1045) that might be affected.
How it works
There are two common ways to document a partial rollover, and they produce different basis results. In a single exchange, you contribute all of your shares to the buyer's vehicle for a mix of cash and equity. Your gain is recognized up to the cash received, and all of your old basis, adjusted under §358, carries into the new equity.
In a sale-plus-contribution structure, you sell part of your shares for cash in a taxable sale and contribute the rest for equity. Your basis is split between the two blocks, so only the basis in the contributed shares carries over.
Either way, the deferred gain is the value of the rolled equity minus the basis that carried into it. That gain is taxed when you later sell the rolled equity, usually at the buyer's exit.
Your attorney will address governance, drag-along and tag-along rights, and the terms of the rolled equity, which affect both its value and its tax treatment.
Assumptions: Tax year 2026; the seller is married filing jointly, lives in Texas, and owns C corporation stock with a $1,000,000 basis held for more than one year.; Price $10,000,000: $7,000,000 cash and $3,000,000 of rolled equity in a corporate buyer vehicle that meets the §368(c) control test with the other transferors.; The seller's other income already exceeds the $613,700 top of the 2026 joint 15% capital gain band and the $250,000 NIIT threshold, so gain is taxed at 20% plus the 3.8% net investment income tax (23.8%). QSBS is not available.
| All cash: gain ($10,000,000 − $1,000,000) | $9,000,000 |
|---|---|
| All cash: tax at 23.8% | $2,142,000 |
| Single exchange: gain recognized (limited to $7,000,000 of cash) | $7,000,000 |
| Single exchange: tax at 23.8% | $1,666,000 |
| Single exchange: basis in rolled equity ($1,000,000 − $7,000,000 + $7,000,000) | $1,000,000 |
| Single exchange: deferred gain ($3,000,000 − $1,000,000) | $2,000,000 |
| Sale plus contribution: gain on 70% sold ($7,000,000 − $700,000) | $6,300,000 |
| Sale plus contribution: tax at 23.8% | $1,499,400 |
| Sale plus contribution: deferred gain ($3,000,000 − $300,000) | $2,700,000 |
Both rollover structures defer tax on part of the gain, but they differ in how much is taxed now and how much is deferred, so the paperwork should match the result you want.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The main risks are failing the §368(c) control test in a corporate rollover, receiving extra payments that count as boot, disguised sale treatment in a partnership rollover, and state tax rules that differ from federal. The rolled equity may also be subordinated to the sponsor's preferred return, so its value at exit is uncertain. Report the exchange accurately, including any statements the regulations require with your return.
Who it is not for
This is not for sellers who need all of the proceeds in cash; cash is taxable when received. It is not for a seller who assumes that any equity received from any buyer is automatically tax-deferred; the vehicle and the paperwork decide that. And it is not for anyone who treats deferral as forgiveness, because the deferred gain is taxed when the rolled equity is sold.
How ebotCPA helps
We identify the right code section for the buyer's structure, test the control and disguised sale rules, compare single-exchange and sale-plus-contribution structures, and compute your basis in the rolled equity. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Does rollover equity only work if the buyer is a corporation?
No. A rollover into a corporation uses IRC §351, and a rollover into a partnership or an LLC taxed as a partnership generally uses IRC §721. Each has its own requirements.
What is the 80% control test?
Under IRC §368(c), the transferors as a group must own at least 80% of the voting power and at least 80% of the shares of each other class of stock immediately after the exchange. Value is not the test.
Is the cash part of a rollover deal taxable?
Yes. Under §351(b), gain is recognized up to the money and fair market value of other property received. In a partnership rollover, payments can be treated as a disguised sale.
When is the deferred gain taxed?
When you sell or otherwise dispose of the rolled equity in a taxable transaction, because your old basis carries into it.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.