5 Key Facts About the IRS’ New Partnership “Basis Shifting” Transaction Regulations

The Internal Revenue Service (IRS) recently finalized a new set of regulations governing what the agency calls “partnership related-party ‘basis shifting’ transactions.” These new regulations are effective immediately, and they establish new disclosure requirements (and new risks) for partnerships, partners and their tax advisors. Learn more from New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.

What Partners (and Their Advisors) Need to Know in 2025

The IRS’ new regulations address two specific types of transactions in particular: (i) the “tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership;” and (ii) the “tax-free transfer of a partnership interest by a related partner to a related transferee.” Here are five key facts about the new regulations:

1. The Final Regulations Differ from the IRS’ Original Proposal

The first thing to know is that the final regulations differ from the IRS’ original proposal released in June 2024. As a result, for any partnerships that made changes or preparations in anticipation of the proposed regulations becoming final, it will be necessary to carefully review the final regulations to ensure compliance.

2. Transactions Covered By the New Regulations are Classified as “Transactions of Interest”

The IRS’ new regulations classify covered partnership related-party “basis shifting” transactions as “transactions of interest.” As a result of this classification, covered transactions are now subject to federal disclosure requirements.  

3. Two Different Dollar-Amount Thresholds Apply

Under the final regulations, two different dollar-amount thresholds apply. These thresholds are as follows:

• Transactions Closed Before the 2025 Tax Year: $25 million in increased basis
• Transactions Closed in the 2025 Tax Year or Later: $10 million in increased basis

To be clear, even if a transaction is not subject to disclosure because it falls under the applicable threshold, it could still trigger scrutiny from the IRS. The IRS is prioritizing partnership tax enforcement in 2025, and related-party transactions of any size have the potential to raise questions during an IRS audit or investigation.

4. Timely Disclosure is Essential

To comply with the IRS’ new regulations, timely disclosure is essential. Taxpayers and their advisors generally have 90 days to disclose transactions of interest, and the new regulations establish a 90-day disclosure window for transactions closed prior to January 14, 2025.

5. Noncompliance Can Trigger Both Scrutiny and Penalties

Failing to timely disclose a transaction of interest to the IRS can have serious consequences. Even if the transaction itself is federally compliant, violating the IRS’ disclosure requirements can trigger both scrutiny and penalties.

Schedule a Confidential Consultation with New Jersey Tax Attorney Kevin E. Thorn

Do you need more information about the IRS’ new disclosure requirements for partnership related-party “basis shifting” transactions? If so, we encourage you to contact us promptly. To schedule a confidential consultation with New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696 or tell us how we can reach you online today.