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Title 26 — Internal Revenue CodeRelease 119-73

§734 Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter K— - Partners and Partnerships › Part PART II— - CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS › Subpart Subpart B— - Distributions by a Partnership › § 734

Last updated Apr 6, 2026|Official source

Summary

Partnerships must not change the recorded tax value (basis) of their assets when they give property to a partner unless the partnership has made the special election under section 754 or the distribution causes a “substantial basis reduction.” When the 754 election is in effect or there is a substantial basis reduction, the partnership must increase its basis by any gain the receiving partner had to report and by the amount the partnership’s pre‑distribution basis in the given property (after adjustments) was higher than the partner’s basis in what they got. The partnership must decrease its basis by any loss the receiving partner had to report and by the amount the partner’s basis in the property they received is higher than the partnership’s pre‑distribution adjusted basis. How the partnership spreads these increases or decreases among its assets follows the rules in section 755. A “substantial basis reduction” happens when the total decrease amounts exceed $250,000. A securitization partnership (a special kind of partnership) is never treated as having a substantial basis reduction for any distribution.

Full Legal Text

Title 26, §734

Internal Revenue Code — Source: USLM XML via OLRC

(a)The basis of partnership property shall not be adjusted as the result of a distribution of property to a partner unless the election, provided in section 754 (relating to optional adjustment to basis of partnership property), is in effect with respect to such partnership or unless there is a substantial basis reduction with respect to such distribution.
(b)In the case of a distribution of property to a partner by a partnership with respect to which the election provided in section 754 is in effect or with respect to which there is a substantial basis reduction, the partnership shall—
(1)increase the adjusted basis of partnership property by—
(A)the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and
(B)in the case of distributed property to which section 732(a)(2) or (b) applies, the excess of the adjusted basis of the distributed property to the partnership immediately before the distribution (as adjusted by section 732(d)) over the basis of the distributed property to the distributee, as determined under section 732, or
(2)decrease the adjusted basis of partnership property by—
(A)the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and
(B)in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distributed property to the partnership immediately before such distribution (as adjusted by section 732(d)).
(c)The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules provided in section 755.
(d)(1)For purposes of this section, there is a substantial basis reduction with respect to a distribution if the sum of the amounts described in subparagraphs (A) and (B) of subsection (b)(2) exceeds $250,000.
(2)For regulations to carry out this subsection, see section 743(d)(2).
(e)For purposes of this section, a securitization partnership (as defined in section 743(f)) shall not be treated as having a substantial basis reduction with respect to any distribution of property to a partner.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

Amendments

2005—Subsec. (a). Pub. L. 109–135, § 403(bb)(1), inserted “with respect to such distribution” before period at end. Subsec. (b). Pub. L. 109–135, § 403(bb)(2), reenacted heading without change and amended introductory provisions generally. Prior to amendment, introductory provisions read as follows: “In the case of a distribution of property to a partner, a partnership, with respect to which the election provided in section 754 is in effect or unless there is a substantial basis reduction, shall—”. 2004—Pub. L. 108–357, § 833(c)(5)(A), substituted “Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction” for “Optional adjustment to basis of undistributed partnership property” in section catchline. Subsec. (a). Pub. L. 108–357, § 833(c)(1), inserted “or unless there is a substantial basis reduction” before period at end. Subsec. (b). Pub. L. 108–357, § 833(c)(2), inserted “or unless there is a substantial basis reduction” after “section 754 is in effect” in introductory provisions. Subsec. (d). Pub. L. 108–357, § 833(c)(3), added subsec. (d). Subsec. (e). Pub. L. 108–357, § 833(c)(4), added subsec. (e). 1984—Subsec. (b). Pub. L. 98–369 inserted at end “Paragraph (1)(B) shall not apply to any distributed property which is an interest in another partnership with respect to which the election provided in section 754 is not in effect.”

Statutory Notes and Related Subsidiaries

Effective Date

of 2005 AmendmentAmendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

Effective Date

of 2004 Amendment Pub. L. 108–357, title VIII, § 833(d)(3), Oct. 22, 2004, 118 Stat. 1592, provided that: “The

Amendments

made by subsection (c) [amending this section] shall apply to distributions after the date of the enactment of this Act [Oct. 22, 2004].”

Effective Date

of 1984 Amendment Pub. L. 98–369, div. A, title I, § 78(b),
July 18, 1984, 98 Stat. 597, provided that: “The amendment made by subsection (a) [amending this section] shall apply to distributions after
March 1, 1984, in taxable years ending after such date.”

Reference

Citations & Metadata

Citation

26 U.S.C. § 734

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73