704(c) built-in gain

When you contribute cash to a partnership, the tax is simple. When you contribute a building that has already gone up in value, it is not, because that appreciation happened on your watch, before the partnership existed, and the code refuses to let you quietly spread it to the other partners. Section 704(c) is the rule that keeps pre-contribution gain with the partner who earned it. It is the last core mechanic of the partnership flagship, and the method the partnership chooses to apply it decides who actually gets the depreciation.

The problem 704(c) solves

Say you own a building with a tax basis of $200,000 that is now worth $500,000. You contribute it to a new partnership. That $300,000 of appreciation, the “built-in gain,” is yours; it accrued before you had partners. Without a rule, the partnership might allocate that gain across everyone when the building is later sold, handing your partners a tax bill for appreciation they had nothing to do with, and giving you a break you did not earn.

Section 704(c) prevents that. It requires the partnership to allocate items related to contributed property so that the pre-contribution built-in gain goes back to the contributing partner. Your $300,000 stays yours for tax purposes, no matter how the partnership otherwise splits things. The non-contributing partners are insulated: their tax results are supposed to match the property’s value at contribution, not its old basis.

Section 704(c) keeps the gain that built up before contribution with the partner who contributed the property, so the others are not taxed on appreciation they never shared.

The book-tax gap this creates

Here is where 704(c) connects to everything else in the flagship. The moment you contribute appreciated property, the partnership carries two different numbers for it: a book basis equal to its $500,000 fair market value, which the capital accounts reflect, and a tax basis equal to your old $200,000 carryover. That gap is the built-in gain, and it does not close instantly. It closes slowly as the property depreciates or when it sells.

This is the same two-ledger split that runs through capital accounts: the 704(b) book world tracks economics at fair value, the tax world tracks carryover basis, and contributed property is the main thing that drives them apart. 704(c) is the machinery for reconciling the two over the life of the property.

Contributing appreciated property opens a permanent gap between the partnership’s book value and its tax basis, and 704(c) governs how that gap closes over time.

The three methods, and why they decide who gets depreciation

This is the part that has real money in it. There is a shortfall problem: the non-contributing partner is supposed to get depreciation based on the property’s full $500,000 book value, but there may not be enough tax depreciation to give it to them, because the tax basis is only $200,000. How the partnership handles that shortfall is a choice among three methods, and the choice is consequential.

The traditional method is simplest and gives the contributing partner the built-in gain over the property’s life, but it is capped by the “ceiling rule”: the partnership can only allocate the tax depreciation it actually has, so if there is not enough, the non-contributing partner is shorted, receiving less tax depreciation than their economic share.

The traditional method with curative allocations fixes that shortfall by reallocating other partnership tax items of the same character to make the non-contributing partner whole, but only if the partnership has other items to work with.

The remedial method eliminates the shortfall entirely by creating notional tax items purely for allocation, with matching notional income to the contributing partner, so no real tax items are needed. It is the most reliable at giving the cash partner their full depreciation, and the most complex.

The partnership picks a method per property and applies it consistently. In a real estate deal where the cash partner joined for the depreciation, the method choice is the difference between getting it and being shorted by the ceiling rule.

The 704(c) method the partnership picks decides whether the non-contributing partner actually receives their full share of depreciation or gets shorted by the ceiling rule.

The bottom line

• Section 704(c) keeps pre-contribution appreciation with the partner who contributed the property.
• Contributing appreciated property opens a book-tax gap that 704(c) reconciles over time.
• Three methods handle the depreciation shortfall: traditional, traditional with curative, and remedial.
• The traditional method’s ceiling rule can short the non-contributing partner on depreciation.
• The method choice, made per property at contribution, decides who really gets the deductions.

For the ledger this gap lives in, read capital accounts. For the two-basis distinction underneath, see tax basis vs book basis. For the full picture, start at the entity and LLC tax strategies hub.

Last verified August 2026.