Midnight §754 Quandries

Technical topics regarding tax preparation.
#1
adamant  
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I have an issue where a member's interest was completely redeemed with a distribution transaction in a prior year but an installment note remains. There was a §754 election in place in this entity, we'll call it entity A.

My understanding is that the step-up in basis relating to this transaction is not fully recognized in the initial year, but ratably over time as principle on the note is received.

Let's make this easy and say that this step-up was allocated to two fixed assets, Land & Building. Let's also assume a 5-year note. What happens if in year 2, you dispose of one of the assets that the step-up was allocated to?

Does that step-up get re-allocated to remaining assets?

First-timer on this one, really not sure how to handle it.

Bonus question, what happens if one of the assets that was owned, was interest in another entity, Entity B, and let's assume B did NOT have a §754 election in place, and B's interest was disposed of.

Double bonus (purely academic), what happens if B DID a §754 election in place.

Triple bonus question (even more academic), what happens if instead of B being disposed of, it redeemed the other partners and became a disregarded entity?
 

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