What is Section 743(b) adjustment?
In short
When a partnership interest is sold or inherited and the partnership has a section 754 election in effect, the partnership adjusts the basis of its assets for the new partner only, by the difference between that partner's outside basis and their share of inside basis.
Key takeaways
- The adjustment is mandatory if the partnership has a substantial built-in loss, even without an election.
- It lets the new partner benefit from the price paid, for example through extra depreciation.
- Other partners' shares of inside basis don't change.
Where it's tested
TCP: Partnership Compliance & Planning — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A partner contributes land with a basis of $40,000 and a fair market value of $100,000. Three years later the partnership sells the land for $110,000. How is the gain allocated?