If a sale of a partnership interest between siblings qualifies for Section 179 expensing, does it also permit bonus depreciation on the acquired assets?
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To answer whether a sale of a partnership interest between siblings that qualifies for Section 179 expensing also permits bonus depreciation (under Section 168(k)) on the acquired assets, we must analyze the relevant statutory and regulatory provisions, as well as the anti-churning rules and the treatment of related-party transactions.
1. Section 179 Expensing and Related-Party Rules
Section 179 allows a taxpayer to elect to expense the cost of qualifying property placed in service during the taxable year, subject to certain limitations. The property must be acquired by purchase for use in the active conduct of a trade or business, and not from a related party as defined in Section 179(d)(2). For Section 179 purposes, related parties include siblings (whether by whole or half blood), spouses, ancestors, and lineal descendants.
However, if a transaction between siblings is not considered related for Section 179 purposes (for example, if the specific facts or structure of the transaction avoid the related-party rules), and the property otherwise qualifies, Section 179 expensing may be available.
2. Bonus Depreciation (Section 168(k)) and Related-Party/Anti-Churning Rules
Section 168(k) provides for bonus depreciation (additional first-year depreciation) for "qualified property," which includes most tangible property with a recovery period of 20 years or less, provided it is acquired by purchase and not from a related party, and was not previously used by the taxpayer.
The anti-churning rules under Section 168(k) and the related regulations (see Reg. §1.168(k)-2) are designed to prevent taxpayers from obtaining bonus depreciation on property acquired from related parties or in non-arm’s-length transactions. For bonus depreciation, the property must not have been used by the taxpayer or a predecessor at any time prior to acquisition, and it must not be acquired from a related party as defined in Section 179(d)(2).
3. Application to Sale of Partnership Interest Between Siblings
When a partnership interest is sold, and a Section 754 election is in effect, the purchasing partner receives a basis adjustment under Section 743(b) in the partnership’s assets. The question is whether this basis adjustment is eligible for bonus depreciation.
- Aggregate vs. Entity Approach: The prevailing view, supported by both the regulations and leading commentary, is that for purposes of the anti-churning rules, the partnership is treated as an aggregate of its partners. Thus, the relevant relationship for bonus depreciation is tested between the selling and purchasing partners, not between the partnership and the partners.
- Siblings as Related Parties: Siblings are related parties under Section 179(d)(2)(A), and this definition is incorporated into the bonus depreciation rules.
- Effect on Bonus Depreciation: If the purchasing partner acquires the partnership interest from a sibling, the transaction is considered a related-party transaction for purposes of Section 168(k). As a result, the basis adjustment under Section 743(b) is not eligible for bonus depreciation, even if Section 179 expensing is available (for example, due to a specific exception or structure that allows Section 179 but not bonus depreciation).
- Supporting Example: The regulations and commentary make clear that bonus depreciation is not available for property acquired from a related party, and this includes basis adjustments under Section 743(b) when the transfer is between related parties such as siblings.
4. Conclusion
Even if a sale of a partnership interest between siblings qualifies for Section 179 expensing, the transaction does not permit bonus depreciation on the acquired assets. This is because, for bonus depreciation, the anti-churning rules specifically disallow bonus depreciation for property acquired from a related party, and siblings are related parties under the relevant definitions. The Section 743(b) basis adjustment resulting from the sale of a partnership interest between siblings is not eligible for bonus depreciation, regardless of Section 179 eligibility.
If you have a specific fact pattern where Section 179 is available despite the related-party status, please provide more details, as this would be unusual and may require further analysis. But under the general rules, bonus depreciation is not available in this scenario.
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