What Is Section 754

Manner of electing optional adjustment to basis of partnership property.

What is section 754. Every general partner of a partnership should be aware of these rules and their implications. Section 754 requires each partner to determine their adjusted basis in order to determine the exact tax liability of the partner. Inside and outside tax basis.

A section 754 depreciation adjustment reported on the supplemental information page of a k 1 does not usually need to be reported anywhere on the individual tax return. Section 754 of the us internal revenue code provides a set of rules that govern the tax allotted for a partner. 734 b and 743 b shall be made in a written statement filed with the partnership return for the tax year during which the distribution or transfer occurs.

Under section 754 a partnership may elect to adjust the basis of partnership property when property is distributed or when a partnership interest is transferred. This step up in basis is used to make the outside basis basis of the partnership in the hands of the owner equal to the inside basis the basis of the assets in partnership for tax purposes. Distribution of partnership property or transfer of an interest by a partner.

If a partnership files an election in accordance with regulations prescribed by the secretary the basis of partnership property shall be adjusted in the case of a distribution of property in the manner provided in section 734 and in the case of a transfer of a partnership interest in the manner provided in section 743. Section 754 in general the crux of section 754 is the marrying of two concepts that often befuddle tax advisors. A section 754 election can be a favorable tax efficiency tool that is unique to partnerships as compared to corporations.

The purpose of a section 754 election is to reconcile a new partner s outside and inside basis in the partnership. 754 election applies to all transfers and property distributions made during and after the year that the election is made the practitioner must also consider potential future appreciation and depreciation and future transfers and distributions. However the complexity administrative burden and changing economic environment should always be considered carefully.

This election allows the new partner to receive the benefits of depreciation or amortization that he or she may not have received if the election was not made. 1 754 1 b 1 provides that an election under sec. 754 to adjust the basis of partnership property under secs.