Where to Send Your Section 751 Statement for Filing

A Section 751 statement is a tax document required when certain partnership interests are transferred. It ensures the IRS properly tracks gains related to “hot assets,” which can affect how income is taxed for both buyers and sellers. Failing to submit it correctly can lead to compliance issues or unexpected tax consequences.

Key Filing Triggers

This statement must be filed when a partnership interest is transferred and involves “hot assets” that generate ordinary income rather than capital gains. These assets include unrealized receivables and substantially appreciated inventory, which can significantly affect tax treatment. If a partnership holds these types of assets, any sale or exchange of an interest may require this filing.

When a partner sells their interest in a partnership with hot assets, the IRS mandates that the seller recognize ordinary income on their share of those assets. This prevents converting income taxed at higher ordinary rates into lower-taxed capital gains. The buyer must also adjust their basis in the partnership to reflect the ordinary income portion of the purchase.

Certain partnership restructurings, such as mergers or reorganizations, can also trigger a Section 751 statement if hot assets are involved. Even non-cash transactions, like contributing or withdrawing assets, may require reporting if the assets meet the criteria.

Required Statement Details

The Section 751 statement must include details about the hot assets involved in the transaction. This allows the IRS to assess tax implications for both the seller and the buyer. The statement should identify the assets triggering ordinary income treatment and provide enough information to support tax calculations.

Unrealized Receivables

Unrealized receivables include rights to payment for goods or services that have been earned but not yet received. In a partnership, these can include accounts receivable and depreciation recapture under tax rules. When a partner sells their interest, the portion of the proceeds attributable to unrealized receivables must be reported as ordinary income.

For example, if a partnership has $100,000 in unrealized receivables and a partner with a 25% interest sells their stake, $25,000 of the sale price is treated as ordinary income. This prevents benefiting from lower capital gains tax rates, which in 2024 range from 0% to 20%, while ordinary income tax rates can be as high as 37%. The statement should specify the total unrealized receivables, the seller’s share, and how the ordinary income portion was calculated.

Inventory Items

Substantially appreciated inventory can also trigger ordinary income treatment when a partnership interest is sold. The IRS defines this as inventory with a fair market value exceeding 120% of its adjusted basis. This rule prevents converting what would be ordinary income if sold by the partnership into capital gains through the sale of a partnership interest.

For instance, if a partnership holds inventory with an adjusted basis of $50,000 and a fair market value of $80,000, it meets the substantially appreciated threshold. If a partner with a 30% interest sells their stake, $9,000 (30% of the $30,000 appreciation) must be reported as ordinary income. The statement should detail the inventory’s adjusted basis, fair market value, and the portion allocated to the selling partner.

Other Hot Assets

Depreciation recapture can also trigger Section 751 reporting. These rules apply to gains from the sale of depreciable property, such as equipment and buildings. If a partnership holds depreciable assets, a portion of the gain from selling a partnership interest may be reclassified as ordinary income.

For example, if a partnership owns machinery with an original cost of $200,000 and accumulated depreciation of $120,000, its adjusted basis is $80,000. If the machinery’s fair market value is $150,000, the $70,000 gain is subject to depreciation recapture. A partner selling their interest must recognize their share of this gain as ordinary income. The statement should outline the depreciable assets involved, their adjusted basis, accumulated depreciation, and the portion of gain subject to recapture.

Mailing or Electronic Submission

The Section 751 statement must be attached to the tax return of the partner transferring their interest. It is not a standalone filing and should be included with Form 4797 (Sales of Business Property) or Schedule D (Capital Gains and Losses), depending on how the transaction is reported.

For electronic filers, most tax software allows attachments in PDF format. However, not all e-filing platforms support this feature, and some may require mailing a separate paper attachment to the IRS. If electronic submission is not an option, the statement should be included with a printed tax return and sent to the appropriate IRS processing center based on the taxpayer’s location and filing status. The IRS updates mailing addresses annually, which can be found in the instructions for Form 1040 or Form 1065.

Failure to attach the statement can lead to processing delays or IRS inquiries, especially if the transaction results in a significant reclassification of income. If omitted, the IRS may assume the entire gain qualifies for capital treatment, potentially leading to an audit or amended return requirement. To avoid these issues, taxpayers should retain a copy of the statement along with supporting documentation, such as partnership agreements, purchase contracts, and valuation reports.