Does a related-party sale of a partnership interest allow the buyer to claim both Section 179 expensing and bonus depreciation on partnership assets?
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A related-party sale of a partnership interest generally does not allow the buyer to claim both Section 179 expensing and bonus depreciation on the partnership’s assets, due to the anti-churning and related-party limitations embedded in both regimes.
1. Section 179 Expensing
Section 179 allows a taxpayer to elect to expense the cost of qualifying property, subject to annual dollar and investment limits, and only to the extent of taxable income from the active conduct of a trade or business. For partnerships, the Section 179 deduction is determined at both the partnership and partner level, and the deduction is allocated to the partners, who then apply their own limitations.
Related-Party Limitation:Section 179(d)(2) defines a "purchase" for Section 179 purposes and specifically excludes property acquired from a related party (as defined by Section 267 or 707(b)). If a partnership interest is acquired from a related party, the buyer cannot claim Section 179 expensing on the basis of the assets acquired through that interest, because the property is not considered "purchased" for Section 179 purposes.
2. Bonus Depreciation (Section 168(k))
Bonus depreciation under Section 168(k) allows for immediate expensing of the cost of qualified property, including used property, provided certain requirements are met. However, bonus depreciation is not available for property acquired from a related party or in a carryover basis transaction.
3. Application to Partnership Interest Sales
When a partnership interest is sold, and the partnership has a Section 754 election in effect, the buyer may receive a basis adjustment under Section 743(b) with respect to the partnership’s assets. Whether this adjustment is eligible for Section 179 expensing or bonus depreciation depends on the nature of the transaction:
- If the sale is between unrelated parties: The buyer may be eligible for bonus depreciation on the Section 743(b) basis adjustment, provided all other requirements are met and the property is "qualified property" under Section 168(k). Section 179 expensing is still subject to the requirement that the property is "purchased" for use in the active conduct of a trade or business.
- If the sale is between related parties: The anti-churning rules apply. The buyer is not treated as having "purchased" the property for Section 179 purposes, nor is the property eligible for bonus depreciation under Section 168(k), because the transaction is between related parties and/or the basis is determined by reference to the transferor’s basis.
- Aggregate vs. Entity Approach: For bonus depreciation, recent analysis suggests that the anti-churning limitations should be applied at the partner level (aggregate approach), meaning that if the buyer of the partnership interest is related to the seller, the Section 743(b) basis adjustment is not eligible for bonus depreciation. The same logic applies to Section 179 expensing.
4. Conclusion
A related-party sale of a partnership interest does not allow the buyer to claim Section 179 expensing or bonus depreciation on the partnership’s assets, because both regimes disallow these benefits for property acquired from a related party or in a carryover basis transaction. The anti-churning and related-party rules are designed to prevent the recycling of depreciation deductions within related groups.
If you have a specific fact pattern (e.g., the nature of the relationship between buyer and seller, whether a Section 754 election is in effect, or the type of property involved), please provide more details for a more tailored analysis.
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