Taxterity research

Section 754 election: what to decide before the partnership files

Reviewed 2026-09-15 · AI-assisted draft and editing; sources and limitations remain visible for independent review.

Answer: One election, two consequences, and no way to take only the half you want. A section 754 election switches on both a section 743(b) adjustment, which changes the basis of partnership property with respect to a transferee partner only following a sale, exchange or death, and a section 734(b) adjustment, which changes the basis of the property the partnership still holds after a distribution. The regulation is explicit that an election cannot be filed for one of those sections alone. It is made by a written statement attached to the partnership's timely filed return, including extensions, for the taxable year in which the distribution or transfer occurs, and it then applies to every distribution and every transfer in that year and in all later years until revoked. That permanence is the decision. The upside is familiar: a buyer or an estate gets a share of asset basis that reflects what the interest cost, with depreciation and gain following. The downside is less often modeled, and it is symmetrical. Where partnership property has fallen in value the same election produces a downward adjustment, and the partnership takes on per-transferee tracking, a reporting statement each year an adjustment arises, and an election it cannot quietly drop when the arithmetic turns. Two overrides operate without any election at all: a transfer where the partnership has a substantial built-in loss, and a distribution producing a substantial basis reduction, each measured against a 250,000 dollar threshold.

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Scope

Jurisdiction: United States — federal

Tax periods: Not period-specific; checked 2026-09-15, Transfers after 2017 for section 743(d), IRS FAQ reviewed 2026-06-15

Assumptions

Exclusions

1. What the election actually switches on

Section 754 permits a partnership to elect, in the manner prescribed by regulation, to adjust the basis of partnership property. Once filed the election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year for which it was filed and in all subsequent taxable years, and may be revoked only subject to limitations in the regulations.

The regulation removes any thought of splitting it: an election may not be filed to make the adjustments provided in either section 734(b) or section 743(b) alone, and must apply to both. A partnership that wants a step-up for an incoming buyer is also accepting the distribution-side consequences for as long as the election stands.

2. The transfer side: section 743(b)

On a transfer of an interest by sale or exchange, or on the death of a partner, the partnership with an election in effect increases the adjusted basis of partnership property by the excess of the transferee's basis for the transferred interest over that partner's proportionate share of the adjusted basis of partnership property, or decreases it by the excess running the other way. The adjustment has effect with respect to the transferee partner only, which is why it never shows up as a simple change to the partnership's balance sheet.

Measuring the transferee's share is the technical work. The regulation defines it as the transferee's interest in the partnership's previously taxed capital plus the transferee's share of partnership liabilities, where previously taxed capital is the cash the transferee would receive on a liquidation following a hypothetical fully taxable disposition of all partnership assets for cash equal to fair market value, increased by tax loss and decreased by tax gain that the hypothetical transaction would allocate to that transferee.

Two mechanics are easy to miss. The adjustment is allocated among individual properties under section 755, not pro rata. And where there have been successive transfers, a transferee's adjustment is determined without regard to any prior transferee's adjustment, while on a gift the donor is treated as transferring the portion of the adjustment attributable to the gifted interest.

3. The distribution side: section 734(b)

A partnership does not adjust the basis of its property because it made a distribution unless the section 754 election is in effect or a substantial basis reduction applies. Where it does adjust, the basis of the remaining partnership assets is increased by any gain the distributee recognizes under section 731(a)(1), and by the excess of the partnership's pre-distribution adjusted basis in distributed property over the basis the distributee takes in that property under section 732. The decreases are not a pure mirror image: the regulation applies them where a distribution is made in liquidation of a partner's entire interest, for loss recognized under section 731(a)(2) and for a section 732 basis in the distributed property that exceeds the partnership's basis in it.

This is the half that partnerships with active redemption activity underestimate. Every liquidating distribution that shifts basis between the distributee and the remaining assets becomes a computation, and it continues for as long as the election stands.

4. The adjustments you get whether you elect or not

Section 743(a) makes an adjustment on transfer mandatory where the partnership has a substantial built-in loss immediately after the transfer, even with no election on file. Section 743(d) defines that two ways: the partnership's adjusted basis in its property exceeds the fair market value of that property by more than 250,000 dollars, or the transferee would be allocated a loss of more than 250,000 dollars if partnership assets were sold for cash equal to fair market value immediately after the transfer. The second, transferee-level test came from the 2017 amendment and applies to transfers after that change.

The distribution side has its own mandatory rule. Section 734(a) requires an adjustment where there is a substantial basis reduction, which section 734(d) defines as a downward adjustment under section 734(b)(2) exceeding 250,000 dollars, with an exception for securitization partnerships.

The planning consequence is that a partnership holding depreciated property does not avoid a step-down by declining to elect. It avoids only the upside. Test both mandatory thresholds before treating a no-election position as a neutral one.

5. Where the election costs more than it returns

Declining asset values. The election is symmetrical. A partnership whose property has fallen below basis hands an incoming partner a downward adjustment, reducing depreciation and increasing gain for that partner.

Compliance weight relative to size. Each adjustment is tracked for one partner, allocated across assets under section 755, and carried for the life of that partner's interest. For a partnership with frequent small transfers, the recurring cost can exceed the benefit any single transferee receives.

Difficulty of exit. Revocation is not the partnership's to make unilaterally, and the regulation says an application will not be approved where its primary purpose is to avoid a downward adjustment. A partnership cannot elect during appreciation and revoke when values turn.

Timing mismatch. The election must be filed with the return for the year the transfer or distribution occurs, so it is often decided before the partnership knows how the asset values will develop. Where the adjustment is unlikely to be material, say so in the file and record the threshold you tested.

6. Making, reporting and revoking

The election is a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs, filed by the return due date including extensions. The statement must set out the name and address of the partnership making the election and a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b). The IRS states the same requirements in its published questions and answers on the election.

Reporting does not end with the statement. A partnership that must adjust the bases of partnership properties under section 743(b) attaches a statement to its return for the year of the transfer setting out the transferee's name and taxpayer identification number, the computation of the adjustment, and the properties to which it was allocated. Separately, a transferee who acquires an interest by sale or exchange in a partnership with an election in effect must notify the partnership in writing within 30 days, signed under penalties of perjury, identifying the parties and the transfer.

If the election was missed, the IRS points to the regulatory relief provisions: an automatic extension of 12 months under the section 301.9100-2 rules, and discretionary relief from the Commissioner beyond that under section 301.9100-3. Relief is a separate analysis with its own conditions, not a second chance available on request.

On revocation there is a live gap between the regulation's text and current practice, and a research file should note it. Reg. 1.754-1(c) describes an application filed with the district director within 30 days after the close of the taxable year, signed by a partner. The IRS's current questions and answers describe approval by the Commissioner on a request on Form 15254, Request for Section 754 Revocation, filed no later than 30 days after the close of the partnership year for which the revocation is to take effect, signed by one of the partners, stating the reasons, and mailed to the Ogden, Utah submission processing center; they also state that no application will be approved where the purpose of the revocation is primarily to avoid a reduction in the basis of partnership assets. File under the procedure the IRS publishes, and record in the file that the regulation's unamended text still names a district director.

7. The decision checklist

Identify the triggering event and its date, and confirm it is a transfer by sale, exchange or death, or a distribution of property. Compute the transferee's share of inside basis using previously taxed capital plus the share of liabilities, so the size of the potential adjustment is a number rather than an impression. Test both mandatory thresholds, substantial built-in loss on transfers and substantial basis reduction on distributions, because those can decide the question before the election does. Model the adjustment in both directions on the partnership's current asset mix, not only for this transferee. Project the distribution side for the redemption activity the partnership actually expects. Price the annual compliance, including the per-transferee statement and the section 755 allocation. Confirm the return for the year of the event has not yet been filed, or that relief under the 9100 rules is genuinely available. Then draft the statement with the two required elements and file it with that year's return.

The measurement step of this checklist is the subject of a companion page in this library, Outside basis and inside basis: reconciling a partner's two basis figures, which sets up the reconciliation this decision consumes.

To move from checklist to a documented position, ask Taxterity a research question about the specific transfer or distribution in front of you, or run a Federal Tax Memo on the election, and verify every authority it cites before the return is filed.

Related research

Official sources

  1. 26 U.S.C. 754 — Manner of electing optional adjustment to basis of partnership property — Full text; the election applies to all distributions and all transfers in the year filed and all subsequent years, and may be revoked subject to regulations; U.S. Code prelim, laws in effect on 2026-09-14
  2. 26 U.S.C. 743 — Special rules where section 754 election or substantial built-in loss — Section 743(a), (b), effect with respect to the transferee partner only; 743(d)(1) substantial built-in loss, both the 250,000 dollar entity test and the transferee-level test added in 2017; as in effect 2026-09-14
  3. 26 U.S.C. 734 — Adjustment to basis of undistributed partnership property — Section 734(a), (b)(1)-(2) method of adjustment; 734(d) substantial basis reduction over 250,000 dollars; 734(e) securitization partnerships; as in effect 2026-09-14
  4. 26 U.S.C. 731 — Extent of recognition of gain or loss on distribution — Section 731(a)(1) and (a)(2), the recognized gain and loss that feed the section 734(b) adjustment; as in effect 2026-09-14
  5. 26 CFR 1.754-1 — Time and manner of making election to adjust basis of partnership property — Paragraph (a), the election must apply to both section 734(b) and section 743(b); (b)(1), timely filed return and the two required contents of the statement; (c), revocation
  6. 26 CFR 1.743-1 — Optional adjustment to basis of partnership property — Paragraph (a)-(b), when and how the adjustment is made; (d)(1)-(2), previously taxed capital and the hypothetical transaction; (e), allocation under section 755; (f), successive transfers and gifts
  7. 26 CFR 1.743-1 — Optional adjustment to basis of partnership property — Paragraph (k)(1)(i), partnership statement attached to the return of the year of transfer; (k)(2)(i), transferee's written notice within 30 days; (l), applies to transfers on or after December 15, 1999
  8. 26 CFR 1.734-1 — Optional adjustment to basis of undistributed partnership property — Paragraph (a), no adjustment without a section 754 election; (b)(1)(i)-(ii), increases; (b)(2), decreases
  9. IRS: FAQs for Internal Revenue Code (IRC) Sec. 754 election and revocation — Q2, election statement contents and timely filed return; Q3, relief under 301.9100-2 and 301.9100-3; Q4, revocation on Form 15254 within 30 days after year end; Q6, filed at Ogden, UT; last reviewed 2026-06-15

Limitations