The Basis Matrix: Navigating The Interplay Of Sections 743(b) And 734(b)

Real estate funds and family offices are two types of investors¹ that often (i) purchase equity interests in partnerships² and (ii) make in-kind asset distributions for tax planning purposes.³ Well advised real estate and family office investors will work to ensure basis is appropriately accounted for to both comply with tax laws and maximize investment returns.

Persons or funds that buy partnership equity from existing partners take a cost basis in the acquired equity and succeed to the seller's (book and tax)⁴ capital accounts and share of inside basis.⁵ This means that following an equity purchase, there is almost always a disparity between the buyer's outside basis and share of inside basis. The delta between the two represents the amount by which the buyer is temporarily over or under taxed.⁶ The buying partner often requires the partnership to make a § 754 election, which enables the buyer to benefit from a § 743(b) adjustment. The § 743(b) adjustment resolves