When a partner dies and their partnership interest transfers to a beneficiary (for example, a surviving spouse), the beneficiary generally receives a stepped-up outside basis. This article provides general entry guidance within Drake Tax.

In the 1065 return, follow these steps.

1. Go to the K1 screen.

2. Select the deceased partner.

3. Mark the check box for Final K-1. This allows the final Schedule K-1 for the deceased partner to be generated in View/Print mode.

4. Page Down to create a new K1 screen for the succeeding partner.

   Note  If the partnership interest first transfers to an estate and is later distributed to a beneficiary, separate K-1 entries may be required for the estate and the ultimate transferee.

5. Complete the OWN screen to reflect the ownership decrease for the deceased partner and corresponding increase for the successor partner effective on the date of death. Confirm total ownership remains 100%.

Basis

Use the Basis Wks tab on the K1 screen to track outside basis adjustments. The worksheet estimates outside basis but does not automatically adjust for inherited step-up, and it does not export with the Schedule K-1. Basis must be tracked and entered on the partner’s 1040, as applicable.

§754 Election

A §754 election may be in effect if previously made and not revoked, or the partnership may elect under §754 for the current year. To make a §754 election:

1. On the B screen (Schedule B), answer Yes to question 10a.

2. Open the ELEC screen and select 21 – Section 754 Election Statement, then complete the statement details as needed.

3. Drake Tax will generate the required election statement to attach to Form 1065.

   • The preparer is responsible for maintaining and attaching supporting computations and allocation papers for any §743(b) adjustment, if needed.

§743(b) Adjustment

A §743(b) adjustment applies if a §754 election is in effect or if a mandatory adjustment is triggered (e.g., substantial built-in loss rules). Drake Tax does not automatically compute §743(b) adjustments. The preparer must:

1. Calculate the adjustment outside the program.

2. Enter depreciation or amortization adjustments attributable to the transferee partner.

Generally, enter §754-related depreciation or amortization amounts using the applicable asset or deduction screens and allocate amounts to the transferee partner as needed. See Drake Tax - 1065: Section 754 Allocations for available entry options and special allocation procedures. Be sure to maintain separate workpapers supporting the §743(b) computation.

The §743(b) adjustment only affects the transferee partner and does not change total partnership asset basis for other partners. It should not affect other partners’ capital accounts.

Note

• Drake Tax does not track partner outside basis automatically.

• You must maintain separate basis schedules for each partner.

• A transfer due to death is treated as a transfer of partnership interest for reporting purposes. It does not automatically terminate the partnership.

Related Links

• Drake Tax - 1065 - Partner's Adjusted Basis Worksheet (Basis Wks)

• Drake Tax - Basis, At-Risk, and Passive Activity Limits

• Drake Tax - 1065: Section 754 Allocations

• Publication 559

• About Form 1065