What is Section 754 depreciation adjustment?
Benefit of the Election An IRC Section 754 election allows a partnership to adjust the basis of the property within a partnership under IRC Sections 734(b) and 743(b) when one of two triggering events occur: 1) a distribution of partnership property or 2) certain transfers of a partnership interest.
What are 743 Adjustments?
743(b) basis adjustment under Sec. 755 are intended to reduce the difference between the fair market value (FMV) and the adjusted tax basis of the partnership’s assets on a property-by-property basis.
What is the difference between inside and outside tax basis?
Partnership tax law often refers to “outside” and “inside” basis. Outside basis refers to a partner’s interest in a partnership. Inside basis refers to a partnership’s basis in its assets.
👉 For more insights, check out this resource.
How is the basis reduction allocated in section 754?
Thus, the adjustment is first allocated to property held by the partnership of like character (capital gain property or ordinary income property), then the adjustment is allocated within the class of property according to unrealized appreciation or depreciation. However, an allocation of basis reduction cannot reduce a property’s basis below zero.
👉 Discover more in this in-depth guide.
When to deduct a SEC 754 depreciation adjustment?
Deducting a Sec. 754 Depreciation Adjustment. If a section 754 basis adjustment were associated with the partnership’s trade or business (versus rental real estate), then the taxpayer would report the deduction in the same place on Schedule E for reporting income or loss from a trade or business activity.
What do you need to know about section 754?
Certain transactions or events during the life of a partnership can result in divergence between the inside and outside basis, and this can result in incongruent tax treatment. At a high level, the purpose of the Section 754 election is to align inside and outside basis to avoid these scenarios.
Is the step up in basis a depreciation adjustment?
The portion of the step up in basis that is allocated to depreciable real property is depreciated as if it were new property at the time the taxpayer purchased the partnership interest. In this set of facts, the section 754 depreciation adjustment associated with a basis adjustment to…
