Understanding the §754 election: a deep dive into asset basis and tax implications

Understanding the §754 election is crucial for tax pros due to the complex tax implications arising in the transfer of partnership interests. The election allows a partnership to adjust the basis of its assets when a partnership interest is transferred or its property is distributed. It will also have an impact on future depreciation, and gains and losses for partners.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: For a §743(b) basis adjustment when death occurs, in which year is the §754 election made? Is it the year of death or when the estate closes?

A: The timing is the year the partnership interest is transferred.

Q: If you’ve got dozens of assets (equipment), do you have to allocate the §754 step-up to the basis of each asset and record separate depreciation for each based on 5 year, 7 year, etc., or can you do it in a lump?

A: Because the properties could be individually sold, it’s best to make the election separately for each.

Q: In a partnership composed of two people, what happens if one partner abandons their interest? Can the partnership still make a §754 election?

A: When a partnership has only one partner, it is no longer a partnership and the §754 election is not available.

Q: Is a §754 election required for gifting of a partnership interest?

A: No, it does not apply when gifting a partnership interest.