I went from a SMLLC to partnership mid-year and filed 8832. I gifted half the business and went from 100% to 50%. Do I need to also make a section 754 election on the return?

[AliciaP1]

Yes, you do need to make the 754 election since you transferred ownership interest.

[abholcomb]

Hi Alicia,

Here's the point of  my confusion. The IRS FAQs for section 754 states "An IRC Section 754 election allows a partnership to adjust the basis of the property within a partnership under IRC Sections 734(b) and 743(b) when one of two triggering events occur: 1) a distribution of partnership property or 2) certain transfers of a partnership interest. These adjustments can only be made if the partnership has made an election under IRC Section 754.". My single member LLC became a partnership mid-year and the basis was adjusted in the transition from SMLLC to partnership. The basis was not adjusted within the partnership. Once the partnership was established (via the gift), there was no adjustment in the basis from that point forward. That's why I figured no need for a Section 754 election.

[AliciaP1 · Accepted solution]

@abholcomb My apologies - I read right over that and therefore misspoke.

You do NOT need to claim the 754 election in this situation. You can establish basis in a new partnership by whatever means the partners agree to. 

[abholcomb]

Thanks Alicia,

That's how I read it but I wanted confirmation from someone who speaks IRS language 🙂