What Is a 754 Election?
A 754 election refers to Section 754 of the Internal Revenue Code, which lets a partnership adjust the tax basis of its assets when a partnership interest changes hands — by sale or on the death of a partner. The election is designed to align the new partner's "inside" basis in the partnership's assets with the "outside" basis they have in the partnership interest, preventing distortions in future tax.
What the Election Does
- Once made, it triggers basis adjustments under § 743(b) (on a transfer or death) and § 734(b) (on certain distributions)
- It can give an incoming partner a stepped-up basis in their share of partnership assets
- The election generally applies to the current and all future years once made
Why It Matters
A 754 election is especially valuable when a partner dies or buys in and the partnership's assets — often real estate — have appreciated. Without it, the new partner could be taxed on gain that economically belongs to someone else. Because the election is permanent and the calculations are complex, it should be evaluated with a tax professional, ideally as part of broader Florida estate and real-estate planning. This is a federal tax matter; Florida imposes no state income tax.
Related Terms
- Title 26 U.S.C. — The Internal Revenue Code, home of § 754
- 721 Contribution — Another partnership tax provision
- Estate Planning — Where the election is often considered
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Federal Law Reference
26 U.S.C. § 754
Permits a partnership to elect to adjust the basis of partnership property on transfers of an interest (§ 743(b)) and certain distributions (§ 734(b)); the election applies to that year and all later years.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC