If a partner in a partnership that invests in a Qualified Opportunity Fund dies and passes their interest to an heir, does the heir get a basis step-up for their inherited partnership interest?
The final regulations provide there is simply no basis step-up upon the death of a QOF owner. The deferred capital gain is preserved for later recognition by the heirs. This makes QOFs inefficient assets from an estate planning point of view, which will require careful planning.
All the partnership rules still apply without regard to OZ tax law. Therefore, if a partnership makes a Sec. 754 election to step up the basis on the death of a partner, the answer is yes. However, the step-up is only for appreciation in excess of the original deferred gain which must be recognized by the heir as if they were the original taxpayer (i.e., heir steps into the shoes of the decedent).
This is one of the no inclusion events. The gain that has brought deferral will not be triggered and the heirs will step on the original owner’s shoes.
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