Frequently Asked Questions
Who is eligible for the Section 732(d) Basis Election?
Partners who purchased or inherited a partnership interest within the last 2 years where the partnership did not have a 754 election.
How does the Section 732(d) Basis Election work?
A partner who acquired their interest via transfer (without a Section 754 election in place) can elect to treat distributed property as having a stepped-up basis if the distribution occurs within 2 years of the acquisition.
What law authorizes the Section 732(d) Basis Election?
The Section 732(d) Basis Election is authorized under IRC §732(d) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §732
Source: Internal Revenue Code, Title 26, United States Code
§ 732. Basis of distributed property other than money(a) Distributions other than in liquidation of a partner’s interest(1) General ruleThe basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner’s interest shall, except as provided in paragraph (2), be its adjusted basis to the partnership immediately before such distribution.
(2) LimitationThe basis to the distributee partner of property to which paragraph (1) is applicable shall not exceed the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.
(b) Distributions in liquidationThe basis of property (other than money) distributed by a partnership to a partner in liquidation of the partner’s interest shall be an amount equal to the adjusted basis of such partner’s interest in the partnership reduced by any money distributed in the same transaction.
(c) Allocation of basis(1) In generalThe basis of distributed properties to which subsection (a)(2) or (b) is applicable shall be allocated—(A)(i) first to any unrealized receivables (as defined in section 751(c)) and inventory items (as defined in section 751(d)) in an amount equal to the adjusted basis of each such property to the partnership, and
(ii) if the basis to be allocated is less than the sum of the adjusted bases of such properties to the partnership, then, to the extent any decrease is required in order to have the adjusted bases of such properties equal the basis to be allocated, in the manner provided in paragraph (3), and
(B) to the extent of any basis remaining after the allocation under subparagraph (A), to other distributed properties—(i) first by assigning to each such other property such other property’s adjusted basis to the partnership, and
(ii) then, to the extent any increase or decrease in basis is required in order to have the adjusted bases of such other distributed properties equal such remaining basis, in the manner provided in paragraph (2) or (3), whichever is appropriate.
(2) Method of allocating increaseAny increase required under paragraph (1)(B) shall be allocated among the properties—(A) first to properties with unrealized appreciation in proportion to their respective amounts of unrealized appreciation before such increase (but only to the extent of each property’s unrealized appreciation), and
(B) then, to the extent such increase is not allocated under subparagraph (A), in proportion to their respective fair market values.
(3) Method of allocating decreaseAny decrease required under paragraph (1)(A) or (1)(B) shall be allocated—(A) first to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation before such decrease (but only to the extent of each property’s unrealized depreciation), and
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