Introduction: Why a Section 754 Election Works Differently When You Live in Britain
A Section 754 election is the partnership-level choice that lets you, as the buyer of an existing partnership interest, step up your share of the partnership's own asset basis to the price you actually paid. Without it, you inherit the seller's old, low tax basis in buildings, equipment and goodwill, and you pay tax on gains you never enjoyed. For an American investor in New York, the decision is usually simple: make the election, take the extra depreciation and enjoy the lower tax bill.
However, the arithmetic changes completely once you live in London. As a US citizen resident in the UK, you are taxed by both countries on the same partnership income, and Britain gives you credit only for the US tax you actually pay. Consequently, every dollar of US tax the election saves can reappear as additional UK tax. In our experience, the real value of a Section 754 election for a UK resident sits somewhere most advisers never look: at exit.
Furthermore, this guide is written for high-net-worth buyers: investment bankers taking a stake in a US real estate partnership, founders buying out a co-owner of a Delaware operating business and private equity professionals acquiring secondary interests. At TaxYork, we prepare the US and UK returns for exactly these clients, so the analysis below reflects how both systems actually treat the same transaction in 2026.
How the Section 754 Election Fits the Purchase Timeline
You should raise the Section 754 election before you sign, not after the first Schedule K-1 arrives. The partnership, not you, makes the election, so your purchase agreement must oblige the general partner or managing member to file it. Additionally, you must check whether an election is already in force from an earlier year, because it stays in effect until the IRS approves a revocation.
Who This Guide Is For
This article addresses UK-resident buyers of interests in US partnerships and US limited liability companies taxed as partnerships. It covers US citizens and green card holders living in Britain, and it also explains the position of British investors who are not American but hold US partnership interests. If you are behind on reporting a partnership you already own, our US tax returns for expats service handles the catch-up filings first.
How a Section 754 Election Creates a Section 743(b) Basis Step-Up
A Section 754 election activates two adjustments in the Internal Revenue Code. When a partnership interest is sold, Section 743(b) adjusts the basis of partnership property for the buyer alone. When the partnership makes certain distributions, Section 734(b) adjusts the common basis of its assets for all partners. Under the text of IRC Section 754, the election applies to all transfers and distributions in the year it is made and every later year.
Inside Basis Versus Outside Basis
Two different basis figures sit behind every partnership interest. Your outside basis is the tax cost of your interest itself, which for a buyer is broadly the purchase price plus your share of partnership liabilities. Inside basis, by contrast, is the partnership's own tax basis in its assets, and your share of it is inherited from the seller.
The problem arises when the two figures diverge. For example, suppose a Texas apartment partnership bought its building in 2012 and has depreciated it heavily. A new partner paying today's market value will have an outside basis far above their share of the depreciated inside basis. Without a Section 754 election, the partnership keeps calculating depreciation and gains on the old figure, so the buyer is allocated taxable income that the seller has already been paid for.
What the Section 743(b) Adjustment Actually Does
The Section 743(b) adjustment equals the difference between your outside basis and your share of inside basis. Importantly, it belongs to you personally and does not change the common basis that the other partners use. The partnership tracks it separately and reports its effect on your Schedule K-1 through additional depreciation, amortisation or reduced gain.
Furthermore, the Treasury regulations under Section 743 treat any increase in the basis of depreciable property as newly purchased property placed in service on the date of transfer. Consequently, the step-up on a building starts a fresh 27.5-year or 39-year recovery period, rather than continuing the seller's remaining life.
Allocating the Step-Up Under Section 755
The total adjustment must then be spread across the partnership's assets. Section 755 and its allocation regulations first split the adjustment between ordinary income property and capital gain property, then allocate it within each class by reference to each asset's built-in gain. Therefore, a valuation of the underlying assets is essential. Land, which cannot be depreciated, often absorbs a large slice, while goodwill amortises over 15 years under section 197.
Making, Notifying and Revoking a Section 754 Election
The procedural rules for a Section 754 election are short but unforgiving. Under Treasury Regulation 1.754-1, the partnership makes the election by attaching a written statement to a timely filed Form 1065 for the year of the transfer, including extensions. The statement must give the partnership's name and address and declare that it elects under section 754. Since the 2017 amendments, the statement no longer needs a partner's signature.
Deadlines and Late Election Relief
For a calendar-year partnership, the Form 1065 partnership return is due on 15 March, or 15 September with an extension. If the partnership misses the election, the regulations under section 9100 give an automatic 12-month extension, provided the partnership acts promptly and files the statement with an amended or late return. Beyond that window, a private letter ruling is needed, which costs significant time and an IRS user fee.
The 30-Day Notice You Must Give as Buyer
Many buyers overlook their own obligation. The regulations require a transferee who acquires an interest by purchase in a partnership with a Section 754 election in force to notify the partnership in writing within 30 days. The notice is signed under penalties of perjury and states your name, address, taxpayer identification number and the price paid. Crucially, the partnership is not required to make or report your adjustment until it has been notified. As a result, a buyer living in London with no US taxpayer number yet can delay their own step-up simply by failing to send a letter.
Separately, if the partnership holds unrealised receivables or inventory, the sale is a section 751(a) exchange. The partnership then reports it to the IRS on Form 8308, and the seller's share of that ordinary income must be identified at completion.
Revoking the Election With Form 15254
Once made, the election binds the partnership for every future transfer, including sales at a loss that trigger a step-down. Revocation requires IRS consent on Form 15254, filed within 30 days after the close of the partnership year in which the revocation should take effect. The IRS frequently asked questions on section 754 elections and revocations confirm that the IRS will refuse a revocation whose main purpose is to avoid a downward adjustment. Therefore, sellers and existing partners sometimes resist a new election, and you may need to negotiate it as a commercial term.
When a Section 754 Election Is Mandatory: Built-In Losses
Not every adjustment is optional. Under section 743(d), a partnership with a substantial built-in loss must make the basis adjustment even without a Section 754 election. A substantial built-in loss exists where the partnership's adjusted basis in its property exceeds the property's fair market value by more than $250,000. Since 2018, it also exists where the buyer would be allocated a net loss of more than $250,000 on a hypothetical sale of all partnership assets for fair value.
Why Step-Downs Matter for 2026 Buyers
Commercial office partnerships bought before 2020 are the clearest example of built-in losses today. If you buy into one at a discount, your share of inside basis is reduced to your purchase price. Consequently, your future depreciation shrinks, and you cannot use the seller's unrealised loss to shelter your own income. Additionally, the reduction applies whether or not anyone wanted an election, so the purchase price should reflect it.
Section 734(b) After Distributions
Distributions create a second category of adjustments. When the partnership distributes cash or property and a partner recognises gain, or when the distributed property's basis changes, Section 734(b) adjusts the common basis of the remaining assets. For a UK-resident partner, these adjustments rarely produce a matching UK entry, which is one more reason to track the US and UK computations separately from the first year.
How HMRC Sees the Same Purchase
Britain has no equivalent of a Section 754 election, because it does not need one. Instead, HMRC's approach to partnership gains is set out in Statement of Practice D12, which treats each partner as owning a fractional share of each partnership asset. When you pay an outgoing partner directly, the Capital Gains Manual example at CG27640 confirms that your base cost is the amount you paid. In effect, UK capital gains law gives you an automatic, asset-by-asset step-up.
Transparent Partnership or Opaque Company?
The UK first decides what the US entity is. HMRC's international manual guidance on entity classification generally treats a US limited partnership as transparent, so you are taxed on your share of its profits as they arise. By contrast, HMRC's Revenue and Customs Brief 15/2015 states that it will continue to treat US LLCs as opaque in most cases, despite the Supreme Court's decision in Anson. Therefore, the same purchase can be taxed on an arising basis through a limited partnership or as dividends through an LLC.
No UK Income Deduction for Your Premium
For a transparent partnership, UK taxable profits are computed under UK rules at partnership level. No part of the premium you paid the outgoing partner is deductible against income, and buildings attract no depreciation deduction at all. Residential property also qualifies for no capital allowances. Consequently, your UK share of profits from a US apartment partnership is usually much higher than the US figure once the step-up is in place.
UK Rates in 2026 and 2027
UK income on these profits is taxed at up to 45% for 2026/27, according to the gov.uk income tax rates page. Moreover, the November 2025 Budget announced separate property income rates of 22%, 42% and 47% from 6 April 2027. Capital gains are taxed at 18% and 24%. Meanwhile, the top US federal rate is 37% plus the 3.8% net investment income tax, so a London-based additional-rate taxpayer almost always faces a higher UK rate on the same rental income.
The Foreign Tax Credit Mismatch That Can Erase Your Step-Up
The core problem for a UK resident is how double tax relief works. Under the US-UK income tax treaty, the United States keeps the primary right to tax income from US real property under Article 6 and business profits from a US permanent establishment under Article 7. Britain therefore gives you a credit for the US tax under Article 24. Crucially, the credit equals the US tax actually paid, not the tax you would have paid without a Section 754 election.
Why Lower US Tax Means Higher UK Tax
Suppose your share of partnership income is $180,000 and your US tax on it is $66,600. If the UK tax on the same income is £61,560, Britain credits the US tax and collects only the difference. Now make a Section 754 election that wipes out your US taxable income. Your US tax falls to zero, but Britain then collects the full £61,560 because there is no US tax left to credit. In other words, you have moved tax from Washington to London without reducing the total.
Furthermore, re-sourcing under Article 24(6) cannot rescue you here. US real property income and gains remain US-source with primary US taxing rights, so the ordinary credit mechanism applies. For a detailed explanation of when re-sourcing does help, see our guide to treaty re-sourcing for US-source income.
Bonus Depreciation on the Step-Up
The One Big Beautiful Bill Act restored 100% bonus depreciation permanently for qualifying property acquired after 19 January 2025. Because the regulations treat the Section 743(b) increase as newly purchased property, the share allocated to five-year, seven-year and fifteen-year assets can be written off immediately. A cost segregation study usually identifies a substantial short-life component in an apartment complex. However, for a UK resident, a large first-year deduction often creates nothing more than a passive loss.
Additionally, the bonus depreciation regulations allow the partnership to elect out of bonus depreciation for each partner's Section 743(b) adjustment, class by class, separately from its own assets. That flexibility matters for UK residents, because the best answer depends on when you will use the deductions.
Passive Losses and the Hidden Store of Value
Most investors who are not real estate professionals hold rental partnerships as passive activities. Under section 469, passive losses cannot offset salary, and the $25,000 rental allowance disappears completely once modified adjusted gross income exceeds $150,000. Consequently, the extra depreciation from a Section 754 election frequently becomes a suspended loss reported on Form 8582.
Rather than a defect, those suspended losses are where the value lies for a UK resident. They carry forward indefinitely and are released in full when you dispose of your entire interest. That release happens in the year of sale, which is precisely when US tax tends to exceed UK tax. For more on how passive rules collide with UK taxation, our analysis of US master limited partnerships for Americans in Britain covers the same mechanics in a listed context.
Exit: Where the Section 754 Election Really Pays
At disposal, the two systems diverge in a way that makes the Section 754 election valuable. Without the election, if the partnership sells its building, you are allocated your share of the full historic gain, including gain that accrued before you bought in. Your outside basis rises by the same amount, but you only recover it as a capital loss when you eventually sell or liquidate your interest, perhaps years later.
The Phantom Gain Britain Will Not Tax
Britain, applying SP D12, measures your gain from the price you paid. Therefore, on the same building sale, your UK gain is small or nil, while the United States taxes you on the seller's accumulated appreciation. This US tax on a phantom gain has no UK tax to absorb it, and Britain gives no credit for it beyond the UK tax on the same gain. Consequently, the US tax becomes a pure, permanent cost. A Section 754 election removes that phantom gain by aligning your US basis with the price you paid, which is the same base cost HMRC already uses.
Selling Your Interest Rather Than the Assets
If you sell your partnership interest instead, your outside basis already reflects your price, so the election matters less for the capital gain itself. However, the step-up still changes the character of the gain. Under section 751, the part of your gain attributable to ordinary income assets is taxed as ordinary income, and depreciation recapture can apply. Moreover, the buyer of your interest must withhold 10% of the amount realised under section 1446(f) unless you provide the correct certificates; our guide to Section 1446(f) withholding on a partnership sale explains how to recover it.
Moving Back to the United States
The calculation also changes if you return to America. If you become US resident again, the UK no longer taxes the income, and suspended passive losses from the step-up become fully valuable against US income. Accordingly, a client planning a return within five years has a strong reason to take bonus depreciation now and bank the losses, while a client settled in London permanently may prefer slower depreciation that tracks the UK computation more closely.
British Investors Who Are Not US Citizens
A British investor who is neither a US citizen nor a green card holder files as a nonresident alien when a US partnership carries on a US trade or business or owns US real property. The partnership must withhold US tax under section 1446(a) on effectively connected income allocable to foreign partners, and you claim the withholding on Form 1040-NR. The same principle applies: Britain credits the US tax actually paid, so a lower US tax bill increases the UK tax.
Why the Election Still Matters for You
For a non-American, the exit point is even sharper. Gains on US real property interests are taxed by the United States under FIRPTA regardless of residence, while Britain taxes you on a gain computed from your purchase price. A Section 754 election ensures the US gain is computed from that same price. Without it, you pay US tax on gain you never received, with no matching UK tax to credit it against.
Reporting Your Share in Both Countries
You will receive a Schedule K-1 each year and, for a transparent partnership, report your share in the foreign section of your UK Self Assessment return. Furthermore, the US figures and UK figures will differ every year once a step-up exists, so you need a reconciliation that tracks both bases. IRS Publication 541 on partnerships sets out the US side, and you claim UK relief for US tax on your Self Assessment foreign pages.
Case Study: A London Banker Buys 20% of a Texas Apartment Partnership
Consider David, a US citizen and managing director at a London investment bank, earning well above the UK additional-rate threshold. On 1 March 2026 he buys a 20% interest in a Texas limited partnership owning a 240-unit apartment complex, paying a retiring partner $3.2 million. His share of the partnership's inside basis is only $1.1 million, because the building was bought in 2012 and heavily depreciated.
The US-Only View
David's US adviser in Dallas models a Section 754 election creating a $2.1 million step-up. Under section 755, $500,000 goes to land, $1.2 million to the building and $400,000 to short-life components identified by a cost segregation study. With 100% bonus depreciation on the $400,000 and about $34,500 of building depreciation for the part-year, David's extra 2026 deductions total roughly $434,500. Against his $180,000 share of partnership income, that produces a passive loss of about $254,500. The adviser's spreadsheet shows a first-year federal saving of over $160,000.
The Two-Country Reality
We then ran the UK computation. HMRC treats the Texas limited partnership as transparent, so David's UK share of rental profit is about £136,800 after UK-allowable expenses, at an exchange rate of $1 to £0.76. At 45%, his UK tax is £61,560. Without the election, his US federal income tax of $66,600 would be credited in full against that, leaving UK tax of £10,944. With the election, US tax is zero, so the UK tax is the full £61,560. Setting aside the 3.8% net investment income tax, the total cost is about $81,000 either way. The headline first-year saving was, in reality, a transfer from the IRS to HMRC.
Why We Still Insisted on the Election
Nevertheless, we advised David to secure the Section 754 election in the purchase agreement, because a Section 754 election cannot be imposed on the partnership after completion. The partnership expects to sell the building around 2031. Without the election, David would be allocated about $2.1 million of pre-purchase gain on that sale, costing roughly $500,000 of US tax at 23.8%, which Britain would not credit because his SP D12 gain would be small. With the election, the US gain largely matches the UK gain, and the suspended passive losses are released in the sale year to absorb depreciation recapture. Additionally, David may return to New York within six years, which makes the banked losses valuable in their own right. We therefore kept bonus depreciation, reported the suspended losses carefully and set up a two-column basis ledger for his US and UK returns.
How TaxYork Can Help
We prepare the US and UK returns of UK-resident partners every year, so we model the Section 754 election across both systems before you sign. Our team works to the professional standards promoted by the ICAEW Tax Faculty and the AICPA tax community. We review the partnership agreement, draft the election covenant, prepare the 30-day transferee notice and coordinate the section 755 allocation with the partnership's accountants. Furthermore, we prepare your Form 1040 with the correct passive loss reporting, your Self Assessment return with the foreign partnership pages and the foreign tax credit claims in both directions.
Where earlier years have gone unreported, for example K-1 income left off a US return or UK pages never filed, we correct the history first through our tax treaty optimisation and catch-up services. Clients with several years of missed US tax returns can also regularise their position through the IRS Streamlined Filing procedures, before any new purchase complicates the picture.
Conclusion
A Section 754 election remains one of the most valuable tools for any buyer of a US partnership interest. For a UK resident, however, its value rarely comes from the year-one depreciation that US models highlight. Britain's credit system absorbs most of that saving, because lower US tax simply means higher UK tax. Instead, the election protects you from a phantom US gain at exit that Britain will never relieve, and it builds a store of suspended losses that becomes valuable if you return to America.
Therefore, insist on the Section 754 election in your purchase documents, send your 30-day notice, and model both countries before choosing between bonus depreciation and slower recovery. Ultimately, the right answer depends on your residence plans, the partnership's exit timetable and whether HMRC sees the entity as transparent or opaque.
Contact Us
If you are buying into a US partnership while living in Britain, book a consultation before you sign. We will model the election in both countries and prepare every return that follows. Email hello@taxyork.com or call 020 3488 8606 to speak to our US-UK tax specialists.
Disclaimer
This article provides general information about US and UK taxation for UK-resident partners in US partnerships and does not constitute tax, legal or financial advice. Tax rules, rates and HMRC and IRS practice change frequently, and the outcome of any Section 754 election depends on your specific facts, the partnership agreement and your residence position. You should obtain professional advice before acting. TaxYork accepts no liability for action taken on the basis of this article alone.