wanderbooks/docs/spec/sources/irs-partnership-basis.md

Tax basis of fixed assets: cost, contributed property, and personal-use conversion

Governs the tax figures the fixed asset register carries beside book value (rules.md B-25): the §723 basis, the depreciable basis, and the §704(c) built-in gain or loss at contribution; and the property contributed at its adjusted basis on the K-1 worksheet's tax-basis capital (rules.md B-36). Property the partnership buys has a cost basis (IRC §1012); property a member contributes keeps the member's adjusted basis (IRC §723), and the difference from its fair market value is the built-in gain or loss that §704(c) makes the partnership account for; property a member converts from personal use has a depreciable basis of the lesser of fair market value and adjusted basis (Treas. Reg. §1.168(i)-4(b)(1)). wanderbooks records the basis; tax depreciation (MACRS, conventions, elections) stays with the CPA.

26 U.S.C. §1012(a): basis is cost

Source: https://www.law.cornell.edu/uscode/text/26/1012
Retrieved: 2026-10-15
SHA-256 of the retrieved file (usc1012.html): 831c9a6a91fceb2f78968520b6f7811b0975bdc170538fa333baa072b799990b

The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).

26 U.S.C. §723: basis of property contributed to a partnership

Source: https://www.law.cornell.edu/uscode/text/26/723
Retrieved: 2026-10-15
SHA-256 of the retrieved file (usc723.html): bfc8c78b5ef5e230f8df1c76d8ab3020ea4a515d987576bba37e740bb5c8c4c7

The basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized under section 721(b) to the contributing partner at such time.

26 U.S.C. §704(c)(1): built-in gain and loss on contributed property

Source: https://www.law.cornell.edu/uscode/text/26/704
Retrieved: 2026-10-15
SHA-256 of the retrieved file (usc704.html): 03a2c2fd087cc5e849f3755417e34bf8d869afc67e4650f5473a4e73b7cec099

§704(c)(1)(A): the variation between basis and fair market value

income, gain, loss, and deduction with respect to property contributed to the partnership by a partner shall be shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair market value at the time of contribution,

§704(c)(1)(C)

if any property so contributed has a built-in loss — (i) such built-in loss shall be taken into account only in determining the amount of items allocated to the contributing partner, and (ii) except as provided in regulations, in determining the amount of items allocated to other partners, the basis of the contributed property in the hands of the partnership shall be treated as being equal to its fair market value at the time of contribution.

Built-in loss, defined

For purposes of subparagraph (C), the term “built-in loss” means the excess of the adjusted basis of the property (determined without regard to subparagraph (C)(ii)) over its fair market value at the time of contribution.

Treas. Reg. §1.168(i)-4(b)(1): conversion from personal to business use

Source: https://www.ecfr.gov/api/renderer/v1/content/enhanced/current/title-26?part=1&section=1.168(i)-4
Retrieved: 2026-10-15
SHA-256 of the retrieved file (ecfr168i4.html): 284efb83eeb11442ab86e050f6d630bd468fd75463e27e3ec81dbc8de455e9be

Depreciation deduction allowable. This paragraph (b) applies to property that is converted from personal use to use in a taxpayer's trade or business, or for the production of income, during a taxable year. This conversion includes property that was previously used by the taxpayer for personal purposes, including real property (other than land) that is acquired before 1987 and converted from personal use to business or income-producing use after 1986, and depreciable property that was previously used by a tax-exempt entity before the entity changed to a taxable entity. Except as otherwise provided by the Internal Revenue Code or regulations under the Internal Revenue Code, upon a conversion to business or income-producing use, the depreciation allowance for the year of change and any subsequent taxable year is determined as though the property is placed in service by the taxpayer on the date on which the conversion occurs. Thus, except as otherwise provided by the Internal Revenue Code or regulations under the Internal Revenue Code, the taxpayer must use any applicable depreciation method, recovery period, and convention prescribed under section 168 for the property in the year of change, consistent with any election made under section 168 by the taxpayer for that year (see, for example, section 168(b)(5)). See §§ 1.168(k)-1(f)(6)(iii) or 1.168(k)-2(g)(6)(iii), as applicable, and 1.1400L(b)-1(f)(6) for the additional first year depreciation deduction rules applicable to a conversion to business or income-producing use. The depreciable basis of the property for the year of change is the lesser of its fair market value or its adjusted depreciable basis (as defined in § 1.168(b)-1T(a)(4)), as applicable, at the time of the conversion to business or income-producing use.

26 U.S.C. §1016(a)(1)-(2): adjusted basis

Source: https://www.law.cornell.edu/uscode/text/26/1016
Retrieved: 2026-10-20
SHA-256 of the retrieved file (usc1016.html): fe4bb279ed8d661b06d997eab76ed699cbdc51ce87eb72ccf2d0174a5d08188e

What "the contributing member's adjusted basis" adds and takes away: improvements up, depreciation down (allowed, but never less than allowable).

Proper adjustment in respect of the property shall in all cases be made— (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, [...] (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount— (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle [...], but not less than the amount allowable under this subtitle or prior income tax laws.

Treas. Reg. §1.704-3: contributed property (§704(c))

Source: https://www.ecfr.gov/api/renderer/v1/content/enhanced/current/title-26?part=1&section=1.704-3
Retrieved: 2026-10-20
SHA-256 of the retrieved file (ecfr704-3.html): b927010356e8673c1d31ac56255c942f77a32818e9f85761e86eb4f7ee12eda7

§1.704-3(a)(1) General principles (sentences three, five and six)

Notwithstanding any other provision of this section, the allocations must be made using a reasonable method that is consistent with the purpose of section 704(c). [...] An allocation method is not necessarily unreasonable merely because another allocation method would result in a higher aggregate tax liability. Paragraphs (b), (c), and (d) of this section describe allocation methods that are generally reasonable.

§1.704-3(a)(2) Operating rules (first two sentences)

Except as provided in paragraphs (e)(2) and (e)(3) of this section, section 704(c) and this section apply on a property-by-property basis. Therefore, in determining whether there is a disparity between adjusted tax basis and fair market value, the built-in gains and built-in losses on items of contributed property cannot be aggregated.

§1.704-3(a)(3)(i) Section 704(c) property (first three sentences)

Property contributed to a partnership is section 704(c) property if at the time of contribution its book value differs from the contributing partner's adjusted tax basis. For purposes of this section, book value is determined as contemplated by § 1.704-1(b). Therefore, book value is equal to fair market value at the time of contribution and is subsequently adjusted for cost recovery and other events that affect the basis of the property.

§1.704-3(a)(3)(ii) Built-in gain and built-in loss (the first four sentences)

The built-in gain on section 704(c) property is the excess of the property's book value over the contributing partner's adjusted tax basis upon contribution. The built-in gain is thereafter reduced by decreases in the difference between the property's book value and adjusted tax basis. The built-in loss on section 704(c) property is the excess of the contributing partner's adjusted tax basis over the property's book value upon contribution. The built-in loss is thereafter reduced by decreases in the difference between the property's adjusted tax basis and book value.

§1.704-3(b)(1) Traditional method (sentences one, two, five to seven)

This paragraph (b) describes the traditional method of making section 704(c) allocations. In general, the traditional method requires that when the partnership has income, gain, loss, or deduction attributable to section 704(c) property, it must make appropriate allocations to the partners to avoid shifting the tax consequences of the built-in gain or loss. [...] For section 704(c) property subject to amortization, depletion, depreciation, or other cost recovery, the allocation of deductions attributable to these items takes into account built-in gain or loss on the property. For example, tax allocations to the noncontributing partners of cost recovery deductions with respect to section 704(c) property generally must, to the extent possible, equal book allocations to those partners. However, the total income, gain, loss, or deduction allocated to the partners for a taxable year with respect to a property cannot exceed the total partnership income, gain, loss, or deduction with respect to that property for the taxable year (the ceiling rule).

IRS Publication 541 (12/2025), Partnerships: basis of contributed property

Source: https://www.irs.gov/publications/p541
Retrieved: 2026-10-20
SHA-256 of the retrieved file (p541.html): d19b1ede5efb1e7e9f25584ee2034912ed4a499833d15854545761953c5eab39

Basis of contributed property.

If a partner contributes property to a partnership, the partnership’s basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner’s adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.

Allocations to account for built-in gain or loss. (first two sentences)

The FMV of property at the time it is contributed may be different from the partner’s adjusted basis. The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference.

IRS Publication 946 (2025), How To Depreciate Property: personal-use property and the placed-in-service date

Source: https://www.irs.gov/publications/p946
Retrieved: 2026-10-20
SHA-256 of the retrieved file (p946.html): bcc1d04f59bbfc4e74181831c112745e629e671445dab78e39f17051a4a74eb1

Property changed from personal use.

If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following.

• The FMV of the property on the date of the change in use.
• Your original cost or other basis adjusted as follows.
  • Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
  • Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis.

Placed in Service (for tax depreciation, the CPA's; the book in-service date rests on ASC 360-10-35-4, rules.md B-15)

You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.