A partnership book-up generally changes the partnership’s Section 704(b) books and the partners’ book capital accounts. It does not, by itself, increase the partnership’s tax basis in its assets or a partner’s tax basis in their interest. The difference matters when someone buys into an LLC that already owns appreciated property or the LLC cashes out a member and keeps the property.
When can a partnership book up its assets?
A book-up is an upward revaluation for Section 704(b) capital-account purposes. A downward revaluation is often called a book-down. A partnership can generally revalue in connection with a qualifying event, such as a more-than-de-minimis capital contribution for a partnership interest or a qualifying distribution in exchange for an interest, when the adjustment is principally for a substantial non-tax business purpose. Check the operating agreement, the actual transaction, and the regulatory conditions. An ordinary direct purchase from an existing owner does not by itself fit the contribution trigger. See Treas. Reg. §1.704-1(b)(2)(iv)(f).
The revaluation generally reflects the fair market value of partnership property and credits or charges the existing partners for the unrealized gain or loss they would share on a hypothetical disposition. Keep the Section 704(b) books, tax-basis capital on Schedule K-1, inside tax basis of assets, and each partner’s outside tax basis distinct. See partnership outside basis and capital accounts.
Fictional example of a new partner buying in
Two equal partners own an LLC with one asset, debt-free land. The land has a $300,000 book value and adjusted tax basis, and a supported $900,000 fair market value. A third investor contributes $300,000 cash to the LLC for a 25% interest in capital and profits. Assume a permitted revaluation immediately before admission, equal historical economics, and no preexisting book-tax differences or special allocations.
- Before the admission. The LLC increases the land’s book value from $300,000 to $900,000. The $600,000 book gain is credited $300,000 to each existing partner. Their book capital accounts increase from $150,000 to $450,000 each.
- At admission. The new investor has $300,000 of book capital after contributing cash. The land’s tax basis remains $300,000. The $600,000 difference between book value and tax basis stays associated with the appreciation that existed before the investor joined.
- If the land later sells for $900,000. Assuming no intervening changes or selling costs, there is no additional book gain and there is $600,000 of tax gain. Reverse Section 704(c) principles generally allocate that built-in gain to the two existing partners, $300,000 each under these facts.
Reverse Section 704(c) applies the contributed-property principles to book-tax differences created by a revaluation. The selected method, prior layers, asset-level values, and depreciation can matter. A depreciable building requires calculations beyond this land example. See Treas. Reg. §1.704-3 and our guide to contributed property.
When does a Section 754 election affect tax basis?
Identify who pays and what changes hands. A qualifying purchase of an interest from an existing owner can produce a Section 743(b) adjustment that generally applies only to the transferee. An LLC redemption structured as a partnership distribution can instead produce a Section 734(b) adjustment to the basis of property the partnership keeps. The amount and assets affected depend on the statutory calculations. An effective Section 754 election can enable these adjustments, and specified loss or basis-reduction rules can require an adjustment even without an election. See IRC §743, IRC §734, and the IRS Section 754 election guide.
What to review before the ownership changes
- Confirm the revaluation trigger, effective date, voting approval, and allocation of hypothetical gain under the agreement.
- Obtain asset-level values, inside basis and depreciation schedules, and historical Section 704(c) and book capital records.
- Determine whether the transaction is a contribution, direct purchase, or redemption. Check any existing Section 754 election and model the applicable adjustment.
- Review old references to former §708(b)(1)(B). The federal technical-termination rule was repealed for partnership tax years beginning after 2017. An ownership change that ends the partnership’s federal status still requires analysis. See the IRS guidance on technical terminations.
If the ownership change accompanies a property exchange, see how to coordinate a partnership 1031 exchange and cash redemption. For a negotiated departure, review how the operating agreement sets the buyout price.
Review the revaluation before the transaction
Schedule a $500 Tax Attorney Consultation with Philip Falco, Attorney & CPA. Bring the current agreement, proposed transaction, valuation, and basis schedules. The fee covers up to one hour total for review, analysis, preparation, and the call. Written opinions, modeling, or implementation require a separate engagement.
Authorities checked November 12, 2026. The example is fictional. Results depend on the facts and governing documents.