Section 754 Election

What is a Section 754 election?

A Section 754 election allows a partnership to adjust the tax basis of its assets when a partnership interest is sold or a partner dies, so the new owner is not taxed on gain they already paid for. Without the election, the firm's asset basis stays frozen while the incoming partner's basis reflects the purchase price. The election closes that gap for that partner only.

What the adjustment actually does

The partnership creates a special basis adjustment that belongs to the incoming partner. If the firm later sells an appreciated asset, that partner's share of the gain is reduced by their adjustment. For amortizable or depreciable property, the adjustment generates extra deductions allocated only to them. Other partners see no change. It is a partner-specific fix layered on top of the firm's normal accounting.

The long-term commitment

Once made, the election applies to all future transfers and distributions, not just the one that prompted it. Revoking it requires IRS consent. That means ongoing tracking of separate basis schedules for every affected partner, which adds real cost to tax preparation each year. Firms with meaningful appreciated assets usually find it worth the complexity. Firms with little more than receivables and computers often do not.