The “Mandatory” Step-Down: Why You Can’t Ignore Section 743(b) Just Because You Didn’t Check the Box
We all love a Step-Up. When a partner buys an interest and the assets have appreciated, we race to file a Section 754 Election to get that sweet extra depreciation.
But what happens when the assets have lost value?
The natural instinct is to be an ostrich: "Let's just NOT file the 754 election. No election, no step-down, no lost basis. Right?"
The Trap (Substantial Built-in Loss): Wrong. Since the TCJA passed, you no longer have a choice. Under IRC § 743(d), if a partnership has a "Substantial Built-in Loss" (defined as the partnership's adjusted basis exceeding fair market value by more than $250,000), the basis adjustment is MANDATORY.
It doesn't matter if you checked the box or not. You are legally required to calculate the negative adjustment and reduce the inside basis of the partnership assets for that transferee partner.
The "Math" Nightmare: Calculating a negative 743(b) adjustment is significantly harder than a positive one.
You can't just reduce every asset pro-rata.
You still have to follow the Section 755 rules, which might require you to allocate positive adjustments to some assets (like appreciated inventory) and massive negative adjustments to others (like depreciated equipment).
If you get this wrong, your depreciation schedules are overstated, and your client is underpaying tax every single year.
The Solution: Stop avoiding the math. If you have a transfer with a significant loss, you need to run the numbers immediately to see if you hit the $250k threshold. If you do, you need a calculator that can handle negative allocations without breaking.
Handle the Step-Down without the breakdown. The Section 743(b) Calculator doesn't just do step-ups. It automatically handles Substantial Built-in Losses, allocating negative adjustments across all 7 asset classes in strict compliance with Reg. § 1.755-1.
