Are there differences in tax treatment for Section 179 and bonus depreciation when a partnership interest is sold between siblings?
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Yes, there are important differences in the tax treatment of Section 179 expensing and bonus depreciation (under IRC §168(k)) when a partnership interest is sold between siblings, particularly due to the related-party rules and anti-churning limitations. Below is a detailed analysis of how each provision applies in this context, with a focus on the sale of a partnership interest between siblings.
1. Section 179 Expensing
Related-Party Limitation
Section 179 allows a taxpayer to elect to expense the cost of qualifying property, but it specifically disallows the deduction for property acquired from certain related parties. For Section 179 purposes, "related persons" include siblings (brothers and sisters, whether by whole or half blood), as well as spouses, ancestors, and lineal descendants. The relevant rule is:
"For purposes of paragraph (1), the term 'purchase' means any acquisition of property, but only if-- (A) the property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section, paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants)".
However, the Section 179 definition of "family" for related-party purposes is narrower than the general section 267 definition. For Section 179, "family" includes only spouse, ancestors, and lineal descendants—not siblings. This means that, for Section 179, a sale between siblings does not trigger the related-party limitation, and the purchaser sibling may be eligible to claim Section 179 expensing on qualifying property acquired through the partnership interest, provided all other requirements are met.
Application to Partnership Basis Adjustments
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) to the extent the purchase price exceeds the partner's share of the partnership's inside basis. This adjustment is treated as newly purchased property for depreciation purposes, and, if the property is otherwise eligible, the purchasing partner may claim Section 179 expensing on their share of qualifying property.
Key Point: Because siblings are not included in the Section 179 definition of "family" for related-party purposes, a sale of a partnership interest between siblings does not, by itself, disqualify the purchaser from claiming Section 179 expensing on the basis adjustment, assuming all other requirements are satisfied.
2. Bonus Depreciation (Section 168(k))
Related-Party and Anti-Churning Limitations
"Bonus depreciation is not available on property acquired from a related party".
Section 267(b) defines related persons to include brothers and sisters (whether by whole or half blood). Therefore, if a partnership interest is sold from one sibling to another, the purchasing sibling is considered to have acquired the property from a related party for purposes of Section 168(k).
Application to Partnership Basis Adjustments
When a partnership interest is sold and a Section 754 election is in effect, the purchasing partner's Section 743(b) basis adjustment is treated as newly purchased property for depreciation purposes. However, the anti-churning rules under Section 168(k) disallow bonus depreciation for property acquired from a related party, including siblings.
Key Point: In a sale of a partnership interest between siblings, the purchasing sibling is not eligible to claim bonus depreciation under Section 168(k) on the Section 743(b) basis adjustment, because the property is considered acquired from a related party.
3. Aggregate vs. Entity Approach for Partnerships
The analysis above assumes the "aggregate" approach, which is generally supported by both the structure of Subchapter K and the reasoning in the referenced special report. Under this approach, the relatedness of the buyer and seller is tested at the partner level, not the partnership level. Thus, the related-party rules apply to the relationship between the selling and purchasing siblings, not between the partnership and the partners.
4. Summary Table
5. Additional Considerations
- Other Requirements: Both Section 179 and bonus depreciation have additional requirements (e.g., property type, placed-in-service date, use in trade or business, etc.) that must be satisfied regardless of the related-party rules.
- Carryover Basis and Remedial Allocations: If the partnership uses the remedial method under Section 704(c), the analysis of bonus depreciation eligibility may be further complicated, but the related-party limitation would still apply at the partner level.
6. Conclusion
Section 179 expensing is generally available to a sibling who acquires a partnership interest from another sibling, because siblings are not treated as related for Section 179 purposes. In contrast, bonus depreciation under Section 168(k) is not available in this context, because siblings are related parties under the anti-churning rules, and property acquired from a related party is ineligible for bonus depreciation. The aggregate approach to partnership basis adjustments means these related-party rules are applied at the partner level.
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