---
kind: "section"
citation: "26 U.S.C. § 743"
title: "26"
title_heading: "Internal Revenue Code"
number: "743"
heading: "Special rules where section 754 election or substantial built-in loss"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/743"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter K — Partners and Partnerships"
  - "Part II — Contributions, Distributions, and Transfers"
  - "Subpart C — Transfers of Interests in a Partnership"
---

# §743. Special rules where section 754 election or substantial built-in loss

- (a) **General rule—** The basis of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) shall not be adjusted as the result of a transfer of an [interest](/usc/26/856.md?p=f-1) in a [partnership](/usc/26/761.md?p=a) by [sale or exchange](/usc/26/864.md?p=c-8-D) or on the death of a [partner](/usc/26/761.md?p=b) unless the election provided by [section 754](/usc/26/754.md) (relating to optional adjustment to basis of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a)) is in effect with respect to such [partnership](/usc/26/761.md?p=a) or unless the [partnership](/usc/26/761.md?p=a) has a substantial built-in loss immediately after such transfer.
- (b) **Adjustment to basis of partnership property—** In the case of a transfer of an [interest](/usc/26/856.md?p=f-1) in a [partnership](/usc/26/761.md?p=a) by [sale or exchange](/usc/26/864.md?p=c-8-D) or upon the death of a [partner](/usc/26/761.md?p=b), a [partnership](/usc/26/761.md?p=a) with respect to which the election provided in [section 754](/usc/26/754.md) is in effect or which has a substantial built-in loss immediately after such transfer shall—
  - (1) increase the adjusted basis of the [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) by the excess of the basis to the transferee [partner](/usc/26/761.md?p=b) of his [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) over his proportionate share of the adjusted basis of the [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a), or
  - (2) decrease the adjusted basis of the [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) by the excess of the transferee [partner](/usc/26/761.md?p=b)’s proportionate share of the adjusted basis of the [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) over the basis of his [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a).

  Under regulations prescribed by the Secretary, such increase or decrease shall constitute an adjustment to the basis of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) with respect to the transferee [partner](/usc/26/761.md?p=b) only. A [partner](/usc/26/761.md?p=b)’s proportionate share of the adjusted basis of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) shall be determined in accordance with his [interest](/usc/26/856.md?p=f-1) in [partnership](/usc/26/761.md?p=a) capital and, in the case of [property](/usc/26/317.md?p=a) contributed to the [partnership](/usc/26/761.md?p=a) by a [partner](/usc/26/761.md?p=b), [section 704(c)](/usc/26/704.md?p=c) (relating to contributed [property](/usc/26/317.md?p=a)) shall apply in determining such share. In the case of an adjustment under this subsection to the basis of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) subject to depletion, any depletion allowable shall be determined separately for the transferee [partner](/usc/26/761.md?p=b) with respect to his [interest](/usc/26/856.md?p=f-1) in such [property](/usc/26/317.md?p=a).

- (c) **Allocation of basis—** The allocation of basis among [partnership](/usc/26/761.md?p=a) [properties](/usc/26/317.md?p=a) where [subsection (b)](#b) is applicable shall be made in accordance with the rules provided in section 755.
- (d) **Substantial built-in loss—**
  - (1) **In general—** For purposes of this section, a [partnership](/usc/26/761.md?p=a) has a substantial built-in loss with respect to a transfer of an [interest](/usc/26/856.md?p=f-1) in the [partnership](/usc/26/761.md?p=a) if—
    - (A) the [partnership](/usc/26/761.md?p=a)’s adjusted basis in the [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) exceeds by more than $250,000 the fair market [value](/usc/26/851.md?p=c-4) of such [property](/usc/26/317.md?p=a), or
    - (B) the transferee [partner](/usc/26/761.md?p=b) would be allocated a loss of more than $250,000 if the [partnership](/usc/26/761.md?p=a) assets were sold for [cash](/usc/26/856.md?p=c-5-K) equal to their fair market [value](/usc/26/851.md?p=c-4) immediately after such transfer.
  - (2) **Regulations—** The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of [paragraph (1)](#d-1) and [section 734(d)](/usc/26/734.md?p=d), including regulations aggregating related [partnerships](/usc/26/761.md?p=a) and disregarding [property](/usc/26/317.md?p=a) acquired by the [partnership](/usc/26/761.md?p=a) in an attempt to avoid such purposes.
- (e) **Alternative rules for electing investment partnerships—**
  - (1) **No adjustment of partnership basis—** For purposes of this section, an electing investment [partnership](/usc/26/761.md?p=a) shall not be treated as having a substantial built-in loss with respect to any transfer occurring while the election under paragraph (6)(A) is in effect.
  - (2) **Loss deferral for transferee partner—** In the case of a transfer of an [interest](/usc/26/856.md?p=f-1) in an electing investment [partnership](/usc/26/761.md?p=a), the transferee [partner](/usc/26/761.md?p=b)’s distributive share of losses (without regard to gains) from the [sale or exchange](/usc/26/864.md?p=c-8-D) of [partnership](/usc/26/761.md?p=a) [property](/usc/26/317.md?p=a) shall not be allowed except to the extent that it is established that such losses exceed the loss (if any) recognized by the transferor (or any prior transferor to the extent not fully offset by a prior disallowance under this paragraph) on the transfer of the [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1).
  - (3) **No reduction in partnership basis—** Losses disallowed under [paragraph (2)](#e-2) shall not decrease the transferee [partner](/usc/26/761.md?p=b)’s basis in the [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1).
  - (4) **Certain basis reductions treated as losses—** In the case of a transferee [partner](/usc/26/761.md?p=b) whose basis in [property](/usc/26/317.md?p=a) distributed by the [partnership](/usc/26/761.md?p=a) is reduced under [section 732(a)(2)](/usc/26/732.md?p=a-2), the amount of the loss recognized by the transferor on the transfer of the [partnership](/usc/26/761.md?p=a) [interest](/usc/26/856.md?p=f-1) which is taken into account under [paragraph (2)](#e-2) shall be reduced by the amount of such basis reduction.
  - (5) **Electing investment partnership—** For purposes of this subsection, the term “electing investment [partnership](/usc/26/761.md?p=a)” means any [partnership](/usc/26/761.md?p=a) if—
    - (A) the [partnership](/usc/26/761.md?p=a) makes an election to have this subsection apply,
    - (B) the [partnership](/usc/26/761.md?p=a) would be an [investment company](/usc/26/368.md?p=a-2-F-iii) under section 3(a)(1)(A) of the Investment Company Act of 1940 but for an exemption under paragraph [(1)](/usc/26/3.md) or [(7)](/usc/26/3.md) of section 3(c) of such Act,
    - (C) such [partnership](/usc/26/761.md?p=a) has never been engaged in a [trade or business](/usc/26/1402.md?p=c),
    - (D) substantially all of the assets of such [partnership](/usc/26/761.md?p=a) are held for investment,
    - (E) at least 95 percent of the assets contributed to such [partnership](/usc/26/761.md?p=a) consist of money,
    - (F) no assets contributed to such [partnership](/usc/26/761.md?p=a) had an adjusted basis in excess of fair market [value](/usc/26/851.md?p=c-4) at the time of contribution,
    - (G) all [partnership](/usc/26/761.md?p=a) [interests](/usc/26/856.md?p=f-1) of such [partnership](/usc/26/761.md?p=a) are issued by such [partnership](/usc/26/761.md?p=a) pursuant to a private offering before the date which is 24 months after the date of the first capital contribution to such [partnership](/usc/26/761.md?p=a),
    - (H) the [partnership](/usc/26/761.md?p=a) agreement of such [partnership](/usc/26/761.md?p=a) has substantive restrictions on each [partner](/usc/26/761.md?p=b)’s ability to cause a redemption of the [partner](/usc/26/761.md?p=b)’s [interest](/usc/26/856.md?p=f-1), and
    - (I) the [partnership](/usc/26/761.md?p=a) agreement of such [partnership](/usc/26/761.md?p=a) provides for a term that is not in excess of 15 years.

    The election described in [subparagraph (A)](#e-5-A), once made, shall be irrevocable except with the consent of the Secretary.

  - (6) **Regulations—** The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including regulations for applying this subsection to tiered [partnerships](/usc/26/761.md?p=a).
- (f) **Exception for securitization partnerships—**
  - (1) **No adjustment of partnership basis—** For purposes of this section, a securitization [partnership](/usc/26/761.md?p=a) shall not be treated as having a substantial built-in loss with respect to any transfer.
  - (2) **Securitization partnership—** For purposes of [paragraph (1)](#f-1), the term “securitization [partnership](/usc/26/761.md?p=a)” means any [partnership](/usc/26/761.md?p=a) the sole business activity of which is to issue [securities](/usc/26/368.md?p=a-2-F-vii) which provide for a fixed principal (or similar) amount and which are primarily serviced by the [cash](/usc/26/856.md?p=c-5-K) flows of a discrete pool (either fixed or revolving) of receivables or other financial assets that by their terms convert into [cash](/usc/26/856.md?p=c-5-K) in a finite period, but only if the sponsor of the pool reasonably believes that the receivables and other financial assets comprising the pool are not acquired so as to be disposed of.

## Source credit

(Aug. 16, 1954, ch. 736, 68A Stat. 249; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 98–369, div. A, title I, § 71(b), July 18, 1984, 98 Stat. 589; Pub. L. 108–357, title VIII, § 833(b)(1)–(4)(A), (5), (6)(A), Oct. 22, 2004, 118 Stat. 1589, 1591; Pub. L. 115–97, title I, §§ 13502(a), 13504(b)(2), Dec. 22, 2017, 131 Stat. 2141, 2142.)

## Notes

### Editorial Notes

### References in Text

Section 3(a)(1)(A), (c)(1), (7) of the Investment Company Act of 1940, referred to in subsec. (e)(5)(B), is classified to section 80a–3(a)(1)(A), (c)(1), (7) of Title 15, Commerce and Trade.

### Amendments

2017—Subsec. (d)(1). Pub. L. 115–97, § 13502(a), amended par. (1) generally. Prior to amendment, text read as follows: “For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in a partnership if the partnership’s adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of such property.”

Subsec. (e)(4) to (7). Pub. L. 115–97, § 13504(b)(2), redesignated pars. (5) to (7) as (4) to (6), respectively, and struck out former par. (4). Prior to amendment, text of par. (4) read as follows: “This subsection shall be applied without regard to any termination of a partnership under section 708(b)(1)(B).”

2004—Pub. L. 108–357, § 833(b)(6)(A), substituted “Special rules where section 754 election or substantial built-in loss” for “Optional adjustment to basis of partnership property” in section catchline.

Subsec. (a). Pub. L. 108–357, § 833(b)(1), inserted “or unless the partnership has a substantial built-in loss immediately after such transfer” before period at end.

Subsec. (b). Pub. L. 108–357, § 833(b)(2), inserted “or which has a substantial built-in loss immediately after such transfer” after “section 754 is in effect” in introductory provisions.

Subsec. (d). Pub. L. 108–357, § 833(b)(3), added subsec. (d).

Subsec. (e). Pub. L. 108–357, § 833(b)(4)(A), added subsec. (e).

Subsec. (f). Pub. L. 108–357, § 833(b)(5), added subsec. (f).

1984—Subsec. (b). Pub. L. 98–369 substituted “property contributed to the partnership by a partner, section 704(c) (relating to contributed property) shall apply in determining such share” for “an agreement described in section 704(c)(2) (relating to effect of partnership agreement on contributed property), such share shall be determined by taking such agreement into account” in penultimate sentence.

1976—Subsec. (b). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2017 Amendment

Pub. L. 115–97, title I, § 13502(b), Dec. 22, 2017, 131 Stat. 2141, provided that: “The amendments made by this section [amending this section] shall apply to transfers of partnership interests after December 31, 2017.”

Amendment by section 13504(b)(2) of Pub. L. 115–97 applicable to partnership taxable years beginning after Dec. 31, 2017, see section 13504(c) of Pub. L. 115–97, set out as a note under section 168 of this title.

### Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 833(d)(2), Oct. 22, 2004, 118 Stat. 1592, provided that: In general.—Except as provided in subparagraph (B), the amendments made by subsection (b) [amending this section and section 6031 of this title] shall apply to transfers after the date of the enactment of this Act [Oct. 22, 2004]. Transition rule.—In the case of an electing investment partnership which is in existence on June 4, 2004, section 743(e)(6)(H) [now 743(e)(5)(H)] of the Internal Revenue Code of 1986, as added by this section, shall not apply to such partnership and section 743(e)(6)(I) [now 743(e)(5)(I)] of such Code, as so added, shall be applied by substituting ‘20 years’ for ‘15 years’.”

### Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 applicable with respect to property contributed to the partnership after Mar. 31, 1984, in taxable years ending after such date, see section 71(c) of Pub. L. 98–369, set out as a note under section 704 of this title.