Section 754 Election: Why Would a Partnership Adjust Asset Basis for One Partner?
Section 754 helps align inside and outside tax basis after specified partnership ownership events.
Outside basis
The partner's tax basis in the partnership interest.
Inside basis
The partnership's tax basis in its underlying assets.
Transfer of interest
When an interest is purchased from another partner, the buyer's outside basis can differ substantially from the buyer's share of inside basis.
Section 754 election
A qualifying election can allow or require applicable basis adjustments associated with transfers and certain distributions, including a Section 743(b) adjustment for a transferee partner.
Why it matters
Without adjustment, a new partner could effectively be taxed on appreciation economically attributable to the seller.
The takeaway
Section 754 can align tax basis when partnership ownership changes.
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FAQ
Is Section 754 just the partner's outside basis calculation?
No.
Can it affect a transferee partner's share of asset basis?
Yes.
Is partnership basis one single number?
No. Inside and outside basis are distinct.