A Typical Indication for 754 Election – Real Estate Acquisition

An alumnus of Brown University, Dean Britton is a financial and real estate executive who started his career in the late1980s as a debt and equity originations professional at MONY. Dean Britton joined Allegiance Investment Advisors (AIA) in 2008 as a managing principal. His responsibilities include seeking and negotiating financing arrangements for real estate projects.

When investors look to inject capital into real estate properties, they consider the tax consequences of the investment option, especially when a sponsor intends to use the funds for refinancing or property recapitalization. Some investors obtain ownership interests in appreciated properties, which means their partnership basis will differ from those of early investors. In this case, their tax obligation may need to be adjusted to ensure that they can enjoy impartial tax benefits. 754 Election may be instrumental in this regard.

For instance, three partner investors may initially acquire a property for $600,000 (a cost divided among the investors). After a year, the property may appreciate by $900,000. If one of the partners sells his shares to a new investor, he transfers the ownership to the entity for $300,000. His taxable gain would be $100,00 (the amount of appreciation).

The transfer of ownership also subjects the new owner to a $100,000 taxable gain, although the appreciation occurred before they became partners. As a result, if all investors decide to sell their shares, the new investor will be subject to a taxable event. Applying for a 754 election can prevent this from happening.

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