Business & farm

@KevinP1 

This becomes somewhat complicated and I can't tell you how to do that in TT since I am not in a Windows environment.

A number of things that occurred here:

• What has happened here is that the spouse inherited her husband's inside basis in the partnership.
• The spouse also received a step-up in the partnership basis to the FMV at the date of death.
• This creates a discrepancy between inside and outside basis.
• The partnership needs to make a Section 754 election
• There also needs to be information reporting (statements) for the requirements of Section 743
• Using your example, the partnership will need to step-up the trees and the land accordingly
  • The land step-up will most likely just sit on the books until you eventually sell it.  At this time the spouse will receive a normal allocation of the capital gain, and then, a capital loss for the step-up component.  This will need to be specially allocated on her K-1 currently box 13 code V (along with some notes indicating that this is a Section 754 step-up allocation).
  • The trees step-up will be handled the same way, although this will be more complicated.  You know the total step-up, but you will then need to determine the step-up portion of the trees that are sold.  Once this is determined, the special allocation is handled just as noted in the land bullet.
• Since the taxpayer always has the initial burden of proof, you will need to make sure that you have documentation as to how the step-up was computed and then the methodology of the split between land and trees.
• You may need to assistance from a tax professional to get you aligned on the right path for the current year and going forward.