When an interest in a partnership with appreciated assets is sold and no § 754 election is made, the new partner's outside basis exceeds his inside basis due to the applicability of the entity concept.

Question

Quizplus · Accepted Answer

When there is no § 754 election made, the basis of the partnership assets is adjusted to fair market value, which increases the new partner's outside basis. However, the inside basis remains the same for the existing partners. This leads to a disparity between the inside and outside basis for the new partner, resulting in the entity concept applying and the outside basis exceeding the inside basis.

When an Interest in a Partnership with Appreciated Assets Is