Chapter 13 Basis Adjustments to Partnership Property. Basis Adjustment to Partnership Property - §743(b).
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Under the general entity approach of §743(a), the price paid by the purchasing partner affects only the partner’s adjusted basis in his or her partnership interest, not the basis of his or her share of the partnership assets
Under §743(b), if the partnership makes a §754 election in the year of sale or has a substantial built-in loss immediately after the transfer, the transfer of a partnership interest will trigger a required adjustment to the basis of partnership assets
When property is held as community property and either the husband or wife dies, the decedent’s (but not the surviving spouse’s) share of the partnership interest is includable in his or her gross estate at its value on the applicable valuation date
Tax basis of both the decedent’s and the spouse’s interest in the partnership is increased to FMV
If the partnership has a §754 election in effect, the bases of both spouse’s shares of the partnership assets will be adjusted
The amount of the §743(b) adjustment to all the partnership properties is the difference between the incoming partner’s basis for his or her partnership interest and that partner’s share of the adjusted basis of the partnership property at the time of purchase
If the purchasing partner’s initial adjusted basis in the partnership interest is greater than his or her share of the adjusted basis of partnership assets, the total basis adjustment to the partnership assets is upward in an amount equal to the excess. And vice versa.
The total adjustment is then allocated among the partnership properties in accordance with § 755
If the partnership does not have a substantial built-in loss, no basis adjustment is required or allowed unless the partnership has a §754 election in effect or chooses to make one effective for the year of the transfer
The election is made by attaching a statement declaring a §754 election to the partnership’s “timely” (filed by due date, including extensions) Form 1065. The statement should include the partnership’s name, address and TIN and be signed by any partner.
The election applies to all sales, exchanges, transfers upon death, and the four distribution situations under §734(b), until the election is terminated
The portion of the basis adjustment allocated to ordinary income property would be equal to the total income, gain and loss that would be allocated to the transferee upon the sale of the partnership’s ordinary income property if the partnership sold all its assets in a fully taxable transaction
Generally, if the basis of a partnership’s recovery property is increased as a result of the transfer of a partnership interest, then the increased portion of the basis is taken into account as if it were newly-purchased recovery property placed in service when the transfer occurs and any applicable recovery period and method may be used to determine the recovery allowance with respect to the increased portion of the basis
When the interest of a partner to whom a basis adjustment is in effect is completely liquidated, the partner’s entire remaining adjustments in all partnership property must be allocated to the distributed property
The partner will have a total adjusted basis in the distributed property equal to the adjusted basis of his or her partnership interest
Transfers by sale: A new partner who acquires a partnership interest from an outgoing partner, in respect of whom a §743(b) adjustment was in effect, does not succeed to the selling partner’s basis adjustment
With a §754 election, a new basis adjustment is calculated
If a distribution of money is greater than the partner’s outside basis, the partnership will increase the adjusted basis of its assets by the amount of gain recognized by the distributee partner
If a distribution to a partner consists solely of money, unrealized receivables, and/or inventory in complete liquidation of his or her partnership interest and the distributee partner recognizes a loss, the partnership will reduce the adjusted basis of its undistributed assets by the amount of the loss
In a distribution of property in which the partner takes a lower basis in the property than the partnership had, the partnership will increase its basis in remaining properties by a like amount
If upon complete liquidation of a partner’s interest the total adjusted basis of the assets in the distributee partner’s hands is greater than it was in the hands of the partnership, the partnership must decrease the adjusted basis of retained partnership property by the amount of this difference
If a positive or negative §734(b) adjustment arises when the distributee partner recognizes gain or loss, respectively, then the upward or downward adjustment is to be allocated only to “capital gains assets”
If the adjustment is caused by the partner’s adjusted basis in the distributed property being less than or greater than the partnership’s adjusted basis, then the increase or decrease is allocated to the partnership assets that are of a character similar to that of the distributed property
If there is an increase in basis to be allocated to a group of properties within a class, the increase must be allocated first to properties with unrealized appreciation in proportion to their respective amounts of unrealized appreciation before such increase
Any remaining increase must be allocated among the properties within the class in proportion to their FMV
If there is a decrease in basis to be allocated to a group of properties within a class, the decrease must be allocated first to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation before such decrease
Any remaining decrease must be allocated among the properties within the class in proportion to their adjusted bases
§734(a) requires the partnership to adjust its basis in remaining assets following a distribution that results in a “substantial basis reduction” regardless of whether a §754 election is made or not
The partnership is required to decrease its tax basis in its remaining properties in order to ensure that remaining partners are not allowed to artificially inflate their shares of subsequent partnership losses