The short answer
Yes, but not in the way most people expect. A like-kind exchange by the partnership is neither a transfer of a partnership interest nor a distribution, so it does not itself create a section 743(b) or 734(b) adjustment. The interaction runs the other way: a partner who bought or inherited an interest while a 754 election was in effect may already have a personal basis step-up in the property being sold, which reduces that partner's share of gain, changes what deferral is worth to them and adds depreciation that belongs to them alone.
At a glance
| What the election does | Lets the partnership adjust inside basis on transfers of interests and on distributions |
|---|---|
| Triggering events | Sale or exchange of an interest, death of a partner, distributions of property |
| Not a trigger | The partnership's own like-kind exchange of its property |
| Who benefits | Only the transferee partner, under section 743(b) |
| Mandatory adjustment | Substantial built-in loss over $250,000, even without an election |
| How to elect | Written statement with a timely filed Form 1065 for the year of the transfer |
| Revoking | Requires IRS approval once made |
The election follows transfers and distributions, not the partnership's own exchange
Under section 754, an electing partnership adjusts the basis of its property 'in the case of a distribution of property' under section 734 and 'in the case of a transfer of a partnership interest' under section 743. Once made, the election covers that year and all later years.
Section 743(b) applies on a 'transfer of an interest in a partnership by sale or exchange or upon the death of a partner'. The adjustment is 'with respect to the transferee partner only'. A partnership trading its building for another building is none of those events.
So the election matters to an exchange only when some partner already carries a 743(b) adjustment, or when the exchange is paired with a buyout or distribution, as in a partnership interest buyout.
A 743(b) step-up changes the arithmetic for one partner
Under Reg. section 1.743-1(j)(3), a transferee's gain on a sale of partnership property is the transferee's share of the partnership's gain 'minus the amount of the transferee's positive basis adjustment'. A partner who inherited an interest after a step-up may have little or no gain of their own on the building.
The same regulation treats an increase in the basis of recovery property 'as if it were newly-purchased recovery property placed in service when the transfer occurs'. That partner depreciates the adjustment on a fresh schedule, and the partnership may claim bonus depreciation on an adjustment allocated to qualifying property.
What the regulations do not do is address a like-kind exchange by name. Reg. section 1.743-1(h) carries an adjustment into property received in a section 721 contribution or a section 351 transfer, but not into replacement property. How the adjustment follows the replacement is a point to settle with the preparer before the sale.
Worked example: one heir, one stepped-up quarter
Hypothetical, round numbers; run your own numbers with your CPA. A partnership's building has a $400,000 basis and a $2,000,000 value. Partner D inherited a 25% interest when it was worth $500,000, and the partnership has a 754 election, so D has a $400,000 positive adjustment: D's $500,000 outside basis less D's $100,000 share of inside basis.
If the partnership sells for $2,000,000 cash, the other partners share $1,200,000 of gain. D's $400,000 share is offset by the $400,000 adjustment, so D owes little or nothing. If the partnership exchanges instead, the other partners defer $1,200,000, but D defers almost nothing, because D had almost nothing to defer.
That is why heirs and recent buyers often prefer cash, and why the step-up versus 1031 comparison and the one partner wants cash routes come up in the same meeting.
Making, checking and living with the election
Reg. section 1.754-1(b) requires a written statement 'filed with the partnership return for the taxable year during which the distribution or transfer occurs', on a return filed by the due date including extensions. A partnership that missed it may seek relief under Reg. section 301.9100.
The election is sticky. It applies to every later transfer and distribution, including ones that reduce basis, and revoking it requires approval under Reg. section 1.754-1(c). Some adjustments are required anyway: section 743(d) mandates them when the partnership has a substantial built-in loss of more than $250,000.
A transferee of an interest in an electing partnership must notify the partnership in writing within 30 days of the transfer under Reg. section 1.743-1(k)(2). Heirs should send that notice early, so the adjustment is booked before any exchange.
Distributions after the exchange bring section 734 into play
If the partnership later redeems a partner with cash, or splits up, section 734(b) adjusts the basis of property the partnership keeps, increasing it by any gain the distributee recognizes under section 731(a)(1). That can restore depreciation to the remaining partners after a cash buyout.
Trust interests change the picture for the next generation. A partnership that exchanged into Delaware Statutory Trusts still needs the election for its partners' heirs to benefit; an individual who holds trust interests directly has no partnership election to worry about. See DSTs in estate planning.
The reporting side, including how a 743(b) adjustment shows up as a separate item on the K-1, is in how a partnership exchange is reported on the K-1.
Related questions
Does the partnership need a 754 election to do a 1031 exchange?
No. The election has nothing to do with whether the partnership's exchange qualifies; it only governs basis adjustments when interests change hands or property is distributed.
Does the exchange erase my 743(b) adjustment?
The regulations do not address that by name, so the treatment of the adjustment in the replacement property should be settled with your CPA before the partnership closes.
My parent died owning a partnership interest. Should the partnership elect?
Often, if the inside basis is well below value, because without the election the heir's share of partnership gain and depreciation stays tied to the old basis. The election also applies to later transfers, including ones that reduce basis.
Is the election made with Form 8824?
No. It is a separate written statement attached to Form 1065 for the year of the transfer or distribution.
Can a 743(b) adjustment qualify for bonus depreciation?
Yes, to the extent it is allocated to qualified property that meets the section 168(k) rules, under Reg. section 1.743-1(j)(4).
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.