If Section 179 expensing is allowed after a partnership interest is transferred between brothers, does this transaction also qualify for bonus depreciation under current tax law?
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To answer whether a partnership interest transferred between brothers allows for Section 179 expensing and also qualifies for bonus depreciation under current tax law, we must analyze the eligibility requirements for both Section 179 and bonus depreciation, and how related party rules apply to each.
1. Section 179 Expensing and Related Party Transfers
Section 179 allows a taxpayer to elect to expense the cost of qualifying property acquired by purchase for use in the active conduct of a trade or business. However, property is not considered "acquired by purchase" if it is acquired from a related person, as defined in Section 179(d)(2) and Section 267(b) (with a 50% threshold for family relationships, including brothers).
However, the transfer in question is not a transfer of property, but a transfer of a partnership interest between brothers. The partnership itself continues to own the property; only the ownership of the partnership changes. The property inside the partnership is not newly acquired by the partnership as a result of the transfer of the partnership interest. Therefore, the partnership's basis in its property is unchanged, and the property is not considered newly "acquired" by the partnership for Section 179 purposes. The new partner (the brother) steps into the shoes of the previous partner for purposes of partnership property.
Thus, the transfer of a partnership interest between brothers does not by itself create a new acquisition of property by the partnership or the new partner for Section 179 purposes. If the partnership property was already eligible for Section 179 expensing, the partnership may continue to claim Section 179 deductions (subject to the usual limitations), and the new partner will receive their share of the deduction through the partnership.
2. Bonus Depreciation and Related Party Transfers
Bonus depreciation under Section 168(k) is available for "qualified property" acquired by purchase, with rules for related party transactions similar to Section 179. Specifically, property is not treated as "acquired by purchase" if it is acquired from a related person as defined in Section 179(d)(2).
However, as with Section 179, a transfer of a partnership interest does not constitute an acquisition of the underlying partnership property by the partnership or by the new partner. The partnership continues to own the property, and the property is not considered newly acquired for bonus depreciation purposes. The new partner's purchase of a partnership interest does not create a new placed-in-service event for the partnership's property.
If the partnership property was already eligible for bonus depreciation, the partnership may continue to claim bonus depreciation (if the property was placed in service in a year when bonus depreciation is available and all other requirements are met). The new partner will receive their share of the deduction through the partnership, but the transfer of the partnership interest itself does not create a new opportunity for bonus depreciation on the underlying property.
3. Section 754 Election and Step-Up in Basis
If the partnership makes a Section 754 election, the purchasing partner may receive a step-up in basis in the partnership's property under Section 743(b). The step-up is personal to the purchasing partner and is depreciated as if the partner had acquired a new interest in the property. The step-up is eligible for depreciation, but bonus depreciation is not allowed on a Section 743(b) adjustment, because the property is not considered "acquired by purchase" for purposes of Section 168(k).
4. Summary Table
5. Conclusion
If Section 179 expensing is allowed after a partnership interest is transferred between brothers, this transaction does not, by itself, create new eligibility for bonus depreciation under current law. The transfer of a partnership interest does not constitute an acquisition of the underlying property by the partnership or the new partner for purposes of Section 168(k). The partnership may continue to claim bonus depreciation on property that was already eligible and placed in service in a qualifying year, but the transfer itself does not create a new opportunity for bonus depreciation. Similarly, a Section 754 step-up in basis is not eligible for bonus depreciation.
In summary: The transfer of a partnership interest between brothers does not, by itself, qualify the underlying partnership property for bonus depreciation, even if Section 179 expensing is allowed. The related party rules and the definition of "acquired by purchase" for both Section 179 and bonus depreciation are not triggered by a mere transfer of a partnership interest. The partnership's eligibility for bonus depreciation depends on when the property was placed in service and whether it was originally acquired in a qualifying manner. The Section 743(b) step-up is not eligible for bonus depreciation.
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