We Bought a Real Estate Partnership Interest, but the Section 754 Election Was Missed. Can We Still Fix It?

Yes, sometimes—but the buyer cannot fix the partnership's missed election alone. First confirm whether a Section 754 election was already in effect. If not, determine the transfer year, the Form 1065 due date including a valid extension, and how long ago that deadline passed. The IRS describes an automatic 12-month late-election extension under Treasury Regulation § 301.9100-2; after that period, discretionary relief under § 301.9100-3 may be possible, but it is not guaranteed. A late election is not automatically a permanent loss, and neither an amended K-1 nor a cost-segregation study by itself creates the election. The IRS Section 754 election FAQ sets out the election and relief routes.

Which deadline applies to the year of the purchase?

A partnership normally makes a Section 754 election by attaching a statement to its timely filed Form 1065, including a valid extension, for the tax year in which the interest transfer occurs. The election then applies to qualifying transfers and distributions in that year and later years until revoked with IRS permission. A statement attached only to a later year's return does not by itself establish an election for an earlier purchase. Verify the actual filed return and attachments rather than relying on the general ledger's “step-up” account or a buyer's K-1 notation. IRS election guidance distinguishes making, late filing, and revocation.

If the original election deadline has passed, examine automatic relief under Treasury Regulation § 301.9100-2 while its 12-month window is open. The IRS says a partnership beyond that window may request discretionary § 301.9100-3 relief; that is a separate application, with facts and cost that should be evaluated before promising the buyer any deduction. Section 754(d) addresses revocation of an existing election, not an “extraordinary circumstance” shortcut for a missed one.

Does the buyer get depreciation from a Section 743(b) adjustment?

Potentially. With an effective Section 754 election, a qualifying interest transfer may produce a Section 743(b) adjustment measured using the transferee's outside basis and share of the partnership's adjusted inside basis. Debt allocations, purchase-price terms, liabilities, and other tax attributes can change the calculation. The adjustment is with respect to the transferee partner only; it does not increase every partner's depreciation. The partnership must allocate the adjustment among its assets under Section 755, then determine whether any allocated amount is depreciable, when recovery begins, and how to report the buyer-specific effect on Schedule K-1. See the IRS Form 1065 instructions and our Section 743(b) transfer guide.

Illustration, not a return calculation: Suppose a buyer pays $600,000 for a 20% interest and, after liabilities and all required adjustments, the buyer's share of the partnership's adjusted inside basis is $400,000. A potential positive $200,000 Section 743(b) adjustment is analyzed only for that buyer. It is not automatically $200,000 of current-year depreciation: Section 755 may allocate some of it to land or other nondepreciable assets, and recovery of a depreciable portion follows separate rules. If the partnership never had an effective election and no mandatory-adjustment exception applies, the buyer generally cannot simply claim that hypothetical adjustment on an individual return.

Decision path before amending a return

1. Confirm the event. Was there a purchase of a partnership interest, rather than a direct purchase of real estate, a contribution, or a distribution? These transactions have different basis rules.
2. Check the election record. Obtain the transfer-year Form 1065, all extensions, election attachments, prior-year returns, and any IRS correspondence. An older valid election may already cover the purchase.
3. Calendar the relief window. Measure from the original election deadline and check eligibility and filing mechanics for § 301.9100-2. If outside it, evaluate § 301.9100-3 relief before assuming an amended return will work.
4. Model both outcomes. Reconcile buyer outside basis, the partnership's inside basis, asset fair values, debt shares, Section 755 allocation, and any existing or mandatory basis adjustments. Compare estimated tax benefit against compliance work and future-year tracking.
5. Coordinate affected filings. If relief is secured, the partnership—not just the buyer—must reconcile its basis schedules and determine the proper return, K-1, partner-return, and partnership-audit-regime correction procedures for the years involved.

What if the partnership distributed property instead?

Section 734(b) addresses an adjustment to the basis of remaining partnership property after certain distributions. It is not an elective increase in the departing partner's basis in the distributed property; the distributee's basis is generally determined under Section 732. Some mandatory basis adjustments can arise even without a Section 754 election, so “no election” is not the end of every analysis. Our Section 734(b) and partnership step-up guide explains the separate distribution path. The IRS basis-adjustment discussion distinguishes the transferee-specific Section 743(b) rule from partnership-property Section 734(b).

Documents to bring—and common ways the fix fails

• Signed interest-purchase agreement, closing statement, transfer date, valuation, and any Section 751 allocation or liability schedule.
• Transfer-year and preceding Forms 1065 with election statements, extension proof, Schedules K-1, fixed-asset registers, and depreciation schedules.
• Partnership agreement, ownership ledger, asset-level tax bases and values, prior Section 743(b) schedules, and distributions after the transfer.

Common failures are treating the buyer's outside basis as a direct step-up in every partnership asset; allocating the adjustment only to the building without a Section 755 analysis; assuming all partners share the buyer's extra depreciation; claiming relief after the automatic window without a discretionary request; and amending only the buyer's return while leaving the partnership's records inconsistent. An effective election may also create negative adjustments and ongoing tracking burdens, so the partnership should weigh both sides before filing.

Bottom line for a buyer who found the omission

Preserve the filing dates and transaction records now. A timely existing election, available late-election relief, or a mandatory adjustment can change the result; none should be assumed from a study proposal or an informal “step-up” spreadsheet. AE can review the transfer-year return, relief window, basis model, and correction route before the partnership or its owners file inconsistent amendments.