754 election

I got two different 754 situations this year.

1. A single member LLC owns a land @ 100k without income (some expenses paid for future development). Now He sold 50% to another member at 60k for 50% of LLC interest. The new member will have a new basis 60k. The old member reports capital gain on himself. I have done some reseach per Rev. Rul. 99-5, 1999-1 CB 434. It seems like we do not need to do 754 election. Do we need to do 754 here? if not, for book purpose, do we need book 10k under separate asset class. Or we adjust it via m-2 on 1065?

2. Two member owns 90/10 on LLC, also with land development with 1 mil investment. The third member purchased 85% from member 1 @ 1.25 mil. It shall be 754 step up for this one, correct?

In #1, there is not an option for a 754 election as a partnership interest is not being sold.

Rev. Rul. 99-5, which you mentioned, is helpful. If the LLC units were sold by A to B, and the purchase money was transferred directly from B to A, you have an asset sale. A recognizes gain outside of the LLC and a partnership is immediately created as A and B are deemed to contribute their undivided interests in the LLC assets into the new partnership.

Even if you could make a 754 election, there's no disparity between inside and outside basis created by this sale.

Two member owns 90/10 on LLC, also with land development with 1 mil investment. The third member purchased 85% from member 1 @ 1.25 mil. It shall be 754 step up for this one, correct?

Not "shall" but "can". A 754 election is only mandatory upon a sale of partnership interest if there is substantial built-in loss. It's helpful to read Sec 743 and the related regs.

thank you, MT. very helpful.

In scenario 1, the 704(c) rules will account for the disparity. The partners should also track 704(b) capital accounts for their 50/50 ownership. It’s up to you how the disparity should be handled for presentation purposes (actually ask the client for their preference), but if you report tax-basis capital and a tax basis balance sheet, there is no need to have an m-2 adjustment for the difference. In the contributing partner’s k-1 with the lower tax basis, you have to disclose the difference between the tax basis and FMV of the contributed property and check a box on the k-1.

In scenario 2, make sure the step-up is allocated appropriately (not just to depreciable property). Also, the step-up is computed based on the difference between the purchase price (including acquisition costs) and the transferred tax capital account (you can’t simply look at the partner percentages in the partnership, those may not represent the transferred capital). And, remember to check the state conformity rules for 754/743(b). And also new for 2019, unrecovered 743(b) asjustements have to be reported on the k-1 for that partner.