It more than likely has a cracked piston which is very common on the 118TSI engines. Personally i would fix it and sell it, but if you want to fix and keep then try and get the newest year model engine you can find as 2012-2013 onwards models apparently have updated pistons and a few other little things.
There are huge amounts of 118TSI's on the roads, so i wouldnt think that finding a replacement engine would be too hard, but finding an engine thats not about to crack a piston might be the hard task.
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