Deducting a Sec. 754 Depreciation Adjustment

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

A taxpayer receives a K-1 from a partnership with an amount on Line 13 "Other Deductions" identified as a section 754 depreciation (or basis) adjustment. A deduction will be reported in the same place on the taxpayer's return as the income (or loss) associated with the partnership property that gave rise to section 754 basis adjustment would be reported.

For example, let's assume that a taxpayer buys an existing interest in a partnership that owns and leases real property. The partnership makes an election to step up the basis of the partnership's assets to reflect the difference in the value of the assets (including the real property) reflected on the partnership's books and what the taxpayer actually paid for the interest. The step up in basis is allocated to the partnership's different classes of assets, including real property. The portion of the step up in basis that is allocated to depreciable real property is depreciated as if it were new property at the time the taxpayer purchased the partnership interest. In this set of facts, the section 754 depreciation adjustment associated with a basis adjustment to the partnership's rental real estate would be reported by the taxpayer on Schedule E, subject to any passive loss limitations on the taxpayer's individual return. If a section 754 basis adjustment were associated with the partnership's trade or business (versus rental real estate), then the taxpayer would report the deduction in the same place on Schedule E for reporting income or loss from a trade or business activity.

Personal tools