Section 754 Election: Step-Up Basis for Partnerships (and Why S-Corps Can't)
Written by Aparna Devalla, CPA
Curated by Rubric Financial
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What §754 Actually Does
- Section 754 is an *election* made by a partnership (or LLC taxed as a partnership) on a timely-filed tax return. It doesn't adjust anything on its own; it's the switch that turns on two specific basis adjustments when triggering events occur.
- Once the §754 election is made, it's effectively permanent: revocation requires IRS consent, and it's almost never granted. The election applies to all future qualifying §743(b) and §734(b) events.
- The two adjustments §754 enables: §743(b) handles transfers of partnership interests (sale, gift, inheritance), while §734(b) handles distributions that create basis mismatches.
- Why this matters: without the election, the inside basis of partnership assets stays the same when ownership changes hands, even if the new owner paid full FMV. That mismatch creates phantom gain on subsequent sales and lost depreciation deductions for the new partner.
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