Inherited Multi-Member LLC or Partnership: Basis & Elections

You've inherited a share of a multi-member LLC or partnership, which involves pass-through taxation and potential Section 754 basis adjustments. Partnership allocations and your ownership percentage will affect your ongoing tax liability.

Partnership taxation governs. The LLC files Form 1065 and issues K-1s to each member. When you inherit a membership interest, you step into the decedent's role as a partner. Your share of income, losses, deductions, and credits flows to your personal return starting from the date of death.

The operating agreement controls your rights. Many operating agreements contain restrictions on transfers, rights of first refusal, or mandatory buyout provisions triggered by a member's death. The agreement may limit you to an economic interest only, without voting or management rights. Read this document before making any tax decisions.

Section 754 election is critical. If the partnership makes a Section 754 election, the inside basis of partnership assets is adjusted to reflect your stepped-up outside basis. Without this election, you pay tax on gains the decedent already "paid for" through the estate. This election must be filed with the partnership's return for the year of death.

The tradeoff: You depend on the other members to agree to the 754 election. If they refuse or the deadline passes, you carry a permanent mismatch between your outside basis and your share of inside basis, increasing your tax burden on every future sale of partnership assets.