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However, the partner can make an election to prorate the basis, if desired.If the partner makes this election, gain will be recognized proportionately as in the purchase scenario.Likewise, if there is a stepdown, the book deduction will be reduced.In theory, if all the assets were disposed of, the acquiring partner's interest would end up back at book basis. 754 election, the incremental value of the partnership interest purchased will stay on the acquiring partners' books until the partnership interest is terminated. 754 election will create additional accounting work to maintain the two sets of books necessary to track the adjusted assets and their disposal. 754 election, the partnership must attach a statement to Form 1065, U. Return of Partnership Income, for the year of the sale, which should include the partnership name, address, and tax year in effect.Unrealized receivables and substantially appreciated inventory are considered "hot assets" under Sec. If the partnership holds hot assets at the time of sale or liquidation, the portion of the gain attributable to these assets will be considered ordinary income.Note that if the sale is treated as an installment sale, the ordinary income due to the sale of hot assets will have to be recognized at the time of the sale and will not be allowed installment sale treatment (CCA 200722027).The partnership may use its assets to liquidate the partner's interest, or it can take on debt to liquidate the partner's interest.
The acquiring partners' incremental change in ownership now has a basis equal to FMV. 754 election must be applied to each asset of the partnership.
Also, if a subsequent buyout of a partnership interest is below FMV, then the step-down rules must also apply under this election.
The benefit of this election is that the acquiring partners are allowed to take additional deductions as the assets that generated the step-up are disposed of or depreciated.
Under the purchase scenario, the terminating partner is treated as having sold his or her partnership interest, usually receiving capital gain treatment.
If the proceeds of the sale include property other than cash, the difference between the FMV and the tax basis of this property is realized as gain at the time of the sale.