ExpertHard1 markMultiple Choice
CPA · Question 38 · Area II: Entity Tax Compliance
A partnership has a §754 election in effect. Partner A sells their interest to Partner B. The partnership's assets have a basis of $100,000 and FMV of $80,000 (Built-in Loss of $20,000). Partner B pays $80,000 for the interest (assume 100% ownership for simplicity of math). What is the impact of the §743(b) adjustment?
A partnership has a §754 election in effect. Partner A sells their interest to Partner B. The partnership's assets have a basis of $100,000 and FMV of $80,000 (Built-in Loss of $20,000). Partner B pays $80,000 for the interest (assume 100% ownership for simplicity of math). What is the impact of the §743(b) adjustment?
Answer options:
A.
No adjustment is made for built-in losses.
B.
Partner B gets a $20,000 downward basis adjustment.
C.
The partnership reduces its common basis in the assets by $20,000.
D.
Partner B recognizes a $20,000 loss immediately.
How to approach this question
If you buy cheap (below inside basis), you get a negative basis adjustment. This ensures you don't get the benefit of the partnership's high basis that you didn't pay for.
Full Answer
B.Partner B gets a $20,000 downward basis adjustment.✓ Correct
IRC §743(b). The adjustment is the difference between the transferee's basis in the interest ($80,000) and their share of the adjusted basis of partnership property ($100,000). Result is -$20,000. This reduces B's share of depreciation or increases B's gain on sale of assets.
Common mistakes
Thinking §754 only helps with gains (step-ups) and ignores losses (step-downs). Note: Substantial built-in loss rules might mandate this even without an election.
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