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Partnership step-up basis


Kea

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Hi everyone.  I haven't been around much lately since I stopped taking new clients (& new tax situations).  I'm now to the point that the only returns I do are for family.

I'm currently working on my only partnership return which I picked up around 2011.  Partner "A" died in 2009 and his 50% share passed to his daughter "D".  Partner "B" continued preparing 1065 return for another year or so.  "B" did not make any adjustments to the inside basis.  I've prepared individual returns for "D" taking stepped-up depreciation as unreimbursed partnership expense (UPE) the whole time.  [Thanks for all the advice I received on this board!]

Fast forward to 2017 and Partner "B" passes away.  This 50% share is still held by "B's" estate.  When the estate is settled, that portion will be held by "B's" 3 children.  I would like to do the step-up basis inside the partnership now -- to make things easier in the long run.

Is doing a Section 754 election the best way to go at this point?  If so, does anyone have any suggestions for references on how to do this?

If I do the 754 election, does that only affect "B's" share of the partnership?  Or, is there a way I can now move "D's" outside basis back inside?  I don't mind continuing to track the depreciation for "D" separately - it's already set-up.  However, I don't want to do that to "B's" children.  I don't prepare their returns and I just want to make everything as simple as possible for them.

Thanks so much,

Kea

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I'm not a pro at partnerships, but I did handle this situation for a partnership with 8 partners, who kept dying off until only one original was left and the rest were inheriting spouses/estates, and one trust with 15 beneficiaries.  The distinction between outside and inside basis is just that--the partnership maintains its original basis in its assets (inside), and the new partners get a different basis that is calculated off (outside) the partnership's books.  The partnership should have made the 754 election when the first partner died.  It is too late for that one, but you can do it for the most recent one if the dates are right.  The election doesn't affect the partner's basis in their partnership interest--the first one gets stepped-up basis at the time of inheritance, the new ones will get a different stepped-up basis.  The election allows them to claim more depreciation since their basis in the assets is greater than that on the partnership books--typically reported in Box 13 code w.

In my master's in tax program the professor told us about how much $ can be made maintaining these separate off-books depreciation schedules for incoming partners.  There are a lot of caveats in case property (not cash) is distributed, built-in losses, etc.  The basics of the election are explained here https://www.forbes.com/sites/anthonynitti/2014/03/11/tax-geek-tuesday-tackling-the-dreaded-section-754-adjustment/2/#7ee2e40442c7

What do do about a missed election: https://www.thetaxadviser.com/issues/2015/may/tax-clinic-07.html

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1 hour ago, Abby Normal said:

but the end result looked reasonable?:blink:

Sometimes that's the best we can do.  On another forum, a long-time practitioner said something about always trying to present the "most-defensible" tax return he could.  There are times when that is all we can come up with, when the situation is convoluted and especially when prior (well-intentioned but in over their heads) practitioners have made a hash of returns and supporting documentation - or supplied NO supporting documentation, so we've no idea where the numbers came from.

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In my opinion, any tax preparer who does not understand the concept and importance of maintaining both inside and outside partnership basis should stay clear of preparing 1065's.  A missed 754 election can be costly to the client and leave the door of litigation open to the preparer.

However, there is relief.  First  automatic relief may be available under Regs. Sec. 301.9100-2. Under this regulation, a taxpayer is granted an automatic extension of 12 months.

If that time period has passed then the only recourse is to seek relief under Regs. Sec. 301.9100-3 as a PLR.  In that case, the tax payer must have reasonably relied on a qualified tax professional and the tax professional failed to make, or advise the taxpayer to make, the election.

A taxpayer will not be considered to have reasonably relied on a qualified tax professional if the taxpayer knew, or should have known, that (1) the professional was not competent to render advice on the regulatory election, or (2) the professional was not aware of all relevant facts.

 

 

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The preparer of the partnership does not determine the  754 step up, that comes from the preparer of the 706.  It is the executor's responsibility to inform the partnership of the election amount.  Remember a 754 can go up or down and also if real estate part of the step up needs to be allocated to land.

I haven't used ATX since the 2012 issues but i recall at that time it sucked at keeping track of the step up and getting the program to just allocate that depreciation to the applicable partners.  I strongly suggest an excel spreadsheet, especially if there are multiple 754's.

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While the partnership does not determine the step-up basis, only the partnership can make the 754 election,  which triggers the 743(b) adjustment.  Apparently in this case that did not happen.  If within the time frame, the election can still be made for the recently deceased partner.  I don't know if the other partner for whom the election was not in effect is out of luck.

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I've put the question to the new heirs to see if they want the election.  I told them to consult their own tax preparers.  First years depreciation will be in the $3000 range diminishing to around $1500 in later years.  Then this gets divided by the 3 siblings.  The other partner is OK with either decision.

Thanks for all the help.  I may have more questions later.

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On ‎02‎/‎13‎/‎2018 at 2:05 PM, michaelmars said:

The preparer of the partnership does not determine the  754 step up, that comes from the preparer of the 706.  It is the executor's responsibility to inform the partnership of the election amount.  Remember a 754 can go up or down and also if real estate part of the step up needs to be allocated to land.

I haven't used ATX since the 2012 issues but i recall at that time it sucked at keeping track of the step up and getting the program to just allocate that depreciation to the applicable partners.  I strongly suggest an excel spreadsheet, especially if there are multiple 754's.

In some cases, I have prepared both the 1065 and 706. In other cases there was no 706 to file.  In any case, the preparer needs to ensure that the estate is informed of the election and how it works.

In regards to the depreciation aspect,  I would never trust ATX.  I use a separate depreciation program and input back into tax program.

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  • 1 year later...

Follow-up to this topic from last year.  I took y'all's advise and passed this off to a much more skilled preparer.  The partners opted to do the Section 754 election for the 2nd deceased partner.  I've reviewed the completed return and now have a better understanding of how this was done.

I would like to prepare the future returns.  At this point, I'm trying to recreate the 2017 return in my software, so that I can roll it over to 2018.  I've been using TaxAct for the last few years.  I have not been able to determine how to enter the 754 assets so that the depreciation flows to the estate K-1 (only) and does not affect the ordinary income or anything else on the return.  I've called tech support, and no luck, (yet - I'm sure they are busy).  At this point I am trying it in an ATX demo.  While ATX gives me more options for assigning assets, I've not found how to make them flow to Sch K1 Line 13w.  After re-reading this thread, I'm wondering if the best way to handle is to just enter all the assets as "unassigned" and then manually put the total on 13w?

Any suggestions?
Thanks!

 

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Thanks.  That sounds like it should work.  I've had no trouble using ATX to track separate depreciation schedules for clients that have Schedules C & E

It seems the Section 754 depreciation would / should flow to a separate Form 4562.  The one that was prepared last year has everything on one Form 4562.  Is there any requirement for them to be remain combined for 2018?  I think it's cleaner to keep it all separate.

 

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754 adjustment should not be reported on 4562 for 1065.  Offhand, I don't see how or why that would have been done.  I do not put 754 on a 4562 at all, it is only reported on K-1  13-w.  It is a partner item only.   I keep a separate depreciation schedule for 754 and input manually on K-1.

Since you are using ATX for depreciation,  you might have to set up a dummy file for 754 and input manually to K-1.

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Thanks DANRVAN.  That works for me.  I setup the 754 assets as “unassigned.”  Then I can manually input to K1 line 13 w.  

For 2018, 2 of these assets were sold.  There was $0 basis at the partnership level.  So when I recalculate the adjusted gain/ loss,  I assume that justs adjusts the amount on 13 w.

I’m feeling more comfortable with the Section 754 election.  Now I just have to better understand what the software wants.  

Thanks again.

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10 hours ago, Kea said:

 

For 2018, 2 of these assets were sold.  There was $0 basis at the partnership level.  So when I recalculate the adjusted gain/ loss,  I assume that justs adjusts the amount on 13 w.

So if partner had outside basis 754 adjustment should reduce gain.  Also should reclassify a portion of it as capital gain from ordinary gain.  

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That makes sense.  I was just thinking of the 13w as a "catch-all" for the impacts of the 754 election. 

Since the 754 asset is only a partner sale, should it show up on the Form 4797 for the 1065?  Or just the manual inputs on the K1?

I really appreciate all your help on this!!

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On 3/2/2019 at 7:09 PM, Kea said:

It only applies to the one partner (the estate), not to the partnership as a whole.

Similar to the 754 asset depreciation not being on the 4562.

(I hope that makes more sense)

Sounds like you have a good grasp of the 754 adjustment which is intended to give the partner the benefit of the stepped up basis of the assets.

So in the year the assets are sold by the partnership, the adjustment will include increase in depreciation and decrease in gain.

754 adjustment can also effect SE income.

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