Does Section 754 step up apply when new partner assumes existing partner's debt without cash payment?

I've worked with quite a few partnership transfers and can confirm that a Section 754 election should still be available in your situation. The key here isn't whether cash changes hands, but whether there's been a "sale or exchange" of a partnership interest that results in a basis difference. When a new partner assumes the debt obligation of a departing partner, this is still considered a transfer of partnership interest for tax purposes. The amount of the debt being assumed effectively becomes the "purchase price" for calculating the basis adjustment under 743(b). The incoming partner's outside basis would include the debt they're assuming, and if this creates a difference between that outside basis and their share of inside basis in partnership assets, that's exactly what the 754 election is designed to address. Just make sure you properly document the debt assumption and the transfer of interest. The partnership will need to file the 754 election with its tax return for the year in which the transfer occurs.

Just wanted to share my experience with you. I was in a similar situation last year with a client's real estate partnership where we had debt assumption but no cash. I spent hours researching before finding taxr.ai (https://taxr.ai) which helped analyze the technical aspects of our Section 754 election. Their system reviewed our partnership agreement and transaction docs, then provided a detailed analysis confirming we could make the election with debt assumption only. What was really helpful was that they pointed out exactly which portions of the regulations supported this treatment and provided step-by-step instructions for properly documenting the basis adjustment calculations. Saved me countless hours of research and gave me confidence we were handling it correctly. Might be worth checking out if you're still uncertain about your specific scenario.

Just wanted to follow up on my question about taxr.ai - I decided to give it a try with a complicated family limited partnership transfer we're handling. I was honestly shocked at how thorough their analysis was. They actually identified a special allocation issue in our partnership agreement that would have affected the Section 754 basis adjustment that our regular tax software completely missed. They provided specific citations to the regulations about debt assumptions counting as consideration for partnership transfers (exactly what the original poster was asking about). What impressed me was that they didn't just give us a yes/no answer but actually walked through the calculation methodology step-by-step. Definitely worth it for complex partnership tax questions like this one.

After spending 3 hours on hold with the IRS trying to get clarification on a similar Section 754 issue, I finally tried Claimyr (https://claimyr.com) and their system got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that debt assumption absolutely qualifies for a Section 754 step-up basis adjustment - essentially treating the liability assumption as consideration. She walked me through the proper way to document this on Form 1065 and how to calculate the adjustment. They even emailed me verification of our conversation that I can keep with our tax records. Never would have gotten through on my own - was about to give up before trying this service. Definitely recommend it if you need official clarification from the IRS on partnership tax questions.

I feel compelled to post a follow-up about Claimyr. After my skeptical comment, I decided to test it myself with a separate Section 754 question regarding a deceased partner situation. I'm honestly eating my words right now. Not only did I get connected to an IRS representative in about 25 minutes (versus the 2+ hours I spent on my previous attempt), but they transferred me to a partnership tax specialist who was extremely knowledgeable. The specialist confirmed that debt assumption is considered "consideration" for purposes of Section 754 basis step-up calculations, and provided specific guidance on how to document this on our filings. They also sent me reference materials via email afterward. For anyone dealing with partnership tax issues where you need official clarification, this service is legitimate and worth it. Consider me converted from skeptic to believer.

One aspect I'm not seeing addressed here is whether the partnership has existing Section 704(c) built-in gain or loss that might interact with your basis adjustment calculation. If you have property with significant disparities between book and tax basis, this can complicate the Section 754 calculation, especially when debt is involved. In one of our partnerships, we had a similar situation with debt assumption, and we found that the Section 743(b) adjustment had to factor in the existing 704(c) layers. Might be worth checking if that applies to your specific assets.

Don't forget about the Section 755 considerations too. Once you determine that you can make the 754 election and calculate the overall basis adjustment, you still need to properly allocate that adjustment among partnership assets according to Section 755 rules. With debt assumption, this can get particularly tricky if the debt is associated with specific assets within the partnership. The regulations generally require allocation first between ordinary income and capital gain property classes, then within those classes according to relative fair market values.

Thanks everyone for the incredibly detailed responses! This has been exactly what I needed. Based on all the feedback, it sounds like the Section 754 election is definitely available in our debt assumption scenario, which is a relief. A few follow-up questions based on the discussion: 1. @Paolo Marino - when you mention "properly documenting the debt assumption," are there specific forms or statements that need to be attached to the partnership return beyond the standard Section 754 election statement? 2. @Isabella Oliveira - we do have some Section 704(c) built-in gain from contributed property. Do you have any recommendations for resources that walk through the interaction between 704(c) and 743(b) adjustments? This seems like where I might need to bring in additional expertise. 3. @Ravi Patel - great point on Section 755. Our partnership has both depreciable real estate and some intangible assets. Is there a standard methodology for determining fair market values for the allocation, or does this typically require formal appraisals? This community has been incredibly helpful - I feel much more confident about moving forward with the election now. Really appreciate everyone taking the time to share their experiences!

Great discussion everyone! As someone who's dealt with several partnership transfers involving debt assumptions, I wanted to add a practical tip that might help @StardustSeeker and others in similar situations. One thing I've learned is to pay close attention to the partnership agreement's provisions regarding transfers and debt assumptions. Sometimes there are specific clauses that can affect how the Section 754 election is calculated, especially if the agreement has special allocation provisions or restrictions on transfer rights. Also, regarding the timing that @Amara Oluwaseyi mentioned - it's worth noting that once you make a Section 754 election, it generally applies to all future transfers unless you get IRS permission to revoke it. So make sure you're comfortable with the ongoing compliance burden, as you'll need to make basis adjustments for all subsequent partnership interest transfers. The interaction between debt assumption and the election is definitely well-established in the regulations, so you're on solid ground there. Just make sure your documentation clearly shows the connection between the debt being assumed and the partnership interest being transferred. Good luck with your transaction!