Section 754 Election Buying Into an LLC: The Step-Up You Paid For.

A general contractor buys 25% of a self-storage LLC from a retiring member for $1,000,000. The LLC built the facility in 2004 and has depreciated the building down to almost nothing. His first K-1 shows a depreciation number that looks like a typo, because it runs on a 2004 basis, not on the $1,000,000 he just wired. A section 754 election buying into an LLC is the only thing that fixes that, and it is the LLC's election to make, not his.

Every LLC taxed as a partnership carries two basis numbers. Outside basis is your basis in the membership interest: what you paid plus your share of the LLC's debt under §752. Inside basis is the LLC's own basis in the building and everything else it owns. Buying an interest moves the first number and, by default, does nothing to the second. Section 743(a) says exactly that: partnership property is not adjusted on the transfer of an interest unless a §754 election is in effect or the partnership has a substantial built-in loss.

So depreciation, gain on a later sale, and §1231 income all keep running on numbers set by a member who has already left. You paid $1,000,000 for appreciation the LLC will report again when it sells, and you'll be allocated your slice of it. That is a second tax on the same dollars, not a timing difference.

The mechanics are lighter than the reputation. Under Treas. Reg. §1.754-1(b)(1) the partnership attaches a statement to its timely filed Form 1065, extensions included, for the tax year of the transfer. The statement needs two things: the name and address of the partnership, and a declaration that it elects under §754 to apply §734(b) and §743(b). No partner has to sign it, a requirement Treasury dropped in T.D. 9963 effective August 5, 2022.

The buyer has a job too, and it gets missed. Treas. Reg. §1.743-1(k)(2) makes the transferee notify the partnership in writing within 30 days of the sale, with both parties' names, addresses, and taxpayer identification numbers. On a transfer at death the window is one year. Until the LLC has that notice it isn't required to compute the adjustment, and it can report a late catch-up under §1.743-1(k)(5) rather than amending.

Because it is the partnership's election, the place to win it is the purchase agreement. The seller has no tax stake either way, and the ask costs the LLC nothing but preparation fees. Raise it before closing, not in March.

The §743(b) adjustment is your outside basis minus your share of inside basis. Treas. Reg. §1.743-1(d) defines that second number as your interest in the partnership's previously taxed capital plus your share of its liabilities. Previously taxed capital is the cash you would receive if the LLC sold everything at fair market value and liquidated, less the gain that sale would allocate to you.

Section 755 then spreads the adjustment across the assets using the same hypothetical sale, first between ordinary income property and capital gain property, then asset by asset in proportion to built-in gain. The share landing on depreciable property is recovered under Treas. Reg. §1.743-1(j)(4)(i)(B) as if it were newly purchased property placed in service on the transfer date. A fresh 39-year clock on the building share, not whatever is left of the LLC's.

The short-life piece is the fast money. A §743(b) increase qualifies for bonus depreciation under Treas. Reg. §1.168(k)-2(b)(3)(iv)(D) when the buyer is unrelated to the seller under §179(d)(2) and had no prior depreciable interest in that property, and 100% bonus depreciation is permanent for property acquired after January 19, 2025 under §70301 of the One Big Beautiful Bill Act. Below, that is $75,000 deducted in the closing year.

The election rides on the return for the year the transfer happened, so a calendar-year LLC with a 2025 transfer and a valid extension has until September 15, 2026. It isn't retroactive: a 2026 election does nothing for a member who bought in during 2025. Miss the date and that adjustment is gone.

There is one automatic backstop. Section 754 sits on the list at Treas. Reg. §301.9100-2(a)(2)(iii), which grants an automatic 12-month extension from the return's due date including extensions actually obtained. The corrective action is an amended return for that year with the election statement attached and "FILED PURSUANT TO § 301.9100-2" typed at the top. Past 12 months you are into §301.9100-3: a private letter ruling, a user fee, and months of waiting.

One wrinkle before you rely on that. A partnership under the centralized audit regime files an administrative adjustment request under §6227 instead of an amended return. Whether an AAR satisfies what §301.9100-2(c) asks for has no published answer I've found, so get the election on the original return.

The election is permanent in practice. Once made it applies to every later transfer and every distribution, and revoking it takes the Commissioner's consent on Form 15254, filed within 30 days after the close of the partnership year the revocation is to take effect. Turning on §743(b) also turns on §734(b), which reaches distributions the LLC hasn't made yet.

It cuts both ways. If the LLC's assets are worth less than their basis, a new member gets a downward adjustment, and that one isn't optional. Under §743(d) a mandatory adjustment applies with no election when the LLC's basis in its property exceeds fair market value by more than $250,000, or when the buyer would be allocated more than $250,000 of loss on a hypothetical sale, a second test added for transfers after December 31, 2017.

The rest is bookkeeping, and it is real work. Every transferee needs a separate schedule for every asset, running for the life of the property, and the results surface on Schedule K-1 in box 11 code F for net positive income adjustments and box 13 code V for negative ones. Call it a few hundred to a couple thousand dollars a year. Against $800,000 of basis that isn't close. The seller's side of the same deal, where §751 turns part of a clean capital gain into ordinary income, is in hot assets on an LLC interest sale.