without the 754 election there is inside and outside tax basis that are different. all the years since death didn't the heirs report the income/loss based on the k-1 without the benefit of any step up. This is continued to do this in the final year.
however, don't think you'll be over reporting income because of no Section 754 election. what can't be done because of the lack of the election is to change the k-1 numbers unless you like corresponding with the IRS and a tax bill to boot.
you have outside basis. it is unclear whether that's $1.5 million or 1/8 of that.
anyway, you start with your outside basis on the date of death add partnership income or subtract partnership loss for all the intervening years per the k-1 subtract distributions for those intervening years except 2022.
you now have a tax basis which should be higher than the cash distributions during 2022. report the disposition of the partnership interest using the 2022 distributions as the selling price and the calculated tax basis which should produce a capital loss to offset the pre inheritance depreciation.
an over simplified example descendant's and heirs allocable shars
original cost $2.75 million.
deprecation taken through date of death $2 million.
leaving inside basis of $.75 million.
property sold for $1.5 million on date of death.
inside1250 gain $.75 million (k-1) treated as capital gain.
outside basis $1.5 million = FMV DOD.
k-1 gain $.75 million.
outside basis now $2.25 million.
distribution $1.5 million (sales price of interest)
outside capital loss $.75 million.
the outside capital loss offsets the inside capital gain.
