An inherited rental property arrives with a new tax basis equal to its fair market value at the date of death, and a depreciation schedule that starts from zero. Whatever the decedent claimed over thirty years of ownership is wiped away, along with the recapture attached to it. That combination makes inherited property one of the better candidates for a cost segregation study, with one significant qualification: the stepped-up basis does not qualify for bonus depreciation, so the acceleration comes through MACRS rather than a first-year write-off.
How the Step-Up in Basis Resets the Depreciation Schedule
Under section 1014, property acquired from a decedent takes a basis equal to its fair market value on the date of death. Where a valid section 2032 alternate valuation election is made, property retained by the estate is generally valued six months after death, while property sold, distributed, exchanged or otherwise disposed of during that six-month period is generally valued on the applicable disposition date. The decedent’s original cost is irrelevant to the heir, as is the depreciation the decedent claimed against it.
The heir places the property in service on their own date and begins a fresh recovery period. A building the decedent had depreciated for twenty-two of its 27.5 years does not pass to the heir with five and a half years remaining. It starts again at 27.5, on the stepped-up number.
For qualifying community property the effect is larger. Section 1014(b)(6) generally adjusts both spouses’ halves to fair market value where at least half of the community interest is includible in the decedent’s gross estate, which resets the entire property rather than 50% of it. The same adjustment is a step down where value has fallen.
One point has to be stated clearly, because a good deal of published material gets it wrong. Bonus depreciation is not available on the stepped-up basis. The used property acquisition rules require that the taxpayer’s basis in the property is not determined under section 1014, and a stepped-up basis is determined under section 1014 by definition. Inherited property fails that condition.
| Item | Treatment for the heir |
| Basis | Fair market value at the date of death, or the applicable alternate valuation date under section 2032 if elected |
| Recovery period | Begins again at 27.5 or 39 years from the heir’s placed-in-service date |
| Depreciation the decedent claimed | Does not carry over and does not reduce the heir’s basis |
| Recapture from the decedent’s ownership | Eliminated at death under the section 1245 and 1250 exceptions |
| Bonus depreciation on the stepped-up basis | Not available |
| MACRS on reclassified 5, 7 and 15-year components | Available, and materially faster than straight line |
Why an Inherited Property Is Often a Strong Study Candidate
Losing bonus depreciation removes the first-year headline. It does not remove the case for a study, and on many inherited properties the case is stronger than it would be on a purchase.
The basis being accelerated is usually much larger. A building bought for $300,000 in 1994 and worth $1.4 million at the date of death gives the heir $1.4 million of basis, less land, to depreciate. An engineering-based cost segregation study typically reclassifies 20% to 40% of building value into 5, 7 and 15-year categories, which moves a meaningful sum forward even at MACRS rates rather than 100% in year one.
The comparison that matters is not against bonus depreciation. It is against the alternative, which is straight-line recovery of the entire building basis over 27.5 or 39 years. Five and seven-year MACRS runs on a declining balance method, and fifteen-year land improvements run at 150% declining balance. All of them are dramatically faster than 2.6% a year.
There is also no inherited recapture to plan around. Section 1245 and section 1250 both contain exceptions for transfers at death, so the depreciation the decedent claimed does not follow the property. The heir’s own recapture exposure begins from their own deductions, which our guide to depreciation recapture covers.
Establishing the Date-of-Death Valuation and Allocation
Estate administration produces a valuation of the property as a whole. A depreciation schedule needs two further splits, and neither comes out of a standard appraisal.
Land versus building. Land is not depreciable, so the first allocation removes it. An appraisal prepared for estate tax purposes frequently gives a single figure or a split based on assessment ratios, which is a weak foundation for a depreciation schedule that will run for decades.
Building versus components. Within the building figure, the study allocates cost across structural elements, land improvements, and personal property such as flooring, cabinetry, specialty electrical, decorative lighting and site work.
The date-of-death figure anchors both. Where a formal appraisal was obtained for estate purposes it should be retained with the depreciation records, since it is the primary support for the basis being depreciated. Where none was obtained, because the estate fell under the filing threshold, establishing a defensible date-of-death value becomes the first task rather than an afterthought.
Depreciation Already Claimed by the Decedent
The decedent’s depreciation history does not transfer. It is accounted for on the decedent’s final return, up to the date of death, and it stops there. The heir does not inherit the accumulated depreciation, does not reduce the stepped-up basis by it, and does not carry the associated recapture.
This is what makes a fully depreciated property valuable to inherit rather than problematic. A building the decedent had written down to almost nothing still passes to the heir at full fair market value, and the deductions begin again from that number.
Suspended passive losses are a separate question. Losses the decedent could not use are generally allowed on the final return, subject to a limit tied to the amount of the basis step-up, and this is worth raising with the estate’s tax preparer rather than assuming either outcome.
Timing the Study Relative to the Estate Administration
A study can be commissioned once the date-of-death value is settled and the property is in service in the heir’s hands. Earlier is better, because the first return sets the schedule everything else follows.
If the first return has already gone in on straight-line, the position is recoverable. A look-back study reconstructs what should have been claimed since the heir placed the property in service and brings the catch-up into the current year through a change in accounting method, with no need to amend the earlier returns. Our catch-up depreciation guide covers how that works.
Where the property is held in an estate or trust that has not yet distributed, the analysis belongs with the fiduciary, because who reports the depreciation depends on the distribution position for the year.
If you have inherited income-producing property, or you advise someone who has, the depreciation schedule set on the first return is worth getting right. You can request a free analysis, or estimate the reclassification using our cost segregation calculator with the date-of-death value as the basis.
Frequently Asked Questions
Can I take bonus depreciation on inherited rental property?
No. The used property acquisition requirements exclude property whose basis is determined under section 1014, which is how a stepped-up basis is determined. The reclassified components are still depreciated under MACRS over 5, 7 and 15 years, which remains much faster than 27.5 or 39-year straight line.
Does the depreciation my parent claimed reduce my basis?
No. Your basis is the fair market value at the date of death under section 1014, without reduction for the depreciation the decedent claimed. That depreciation is reported on the decedent’s final return and the associated recapture does not carry over to you.
What value do I use if the estate never got an appraisal?
The date-of-death fair market value still governs, and it needs to be established on a defensible basis. Many estates fall below the estate tax filing threshold and never obtain a formal appraisal, which makes a retrospective valuation the starting point for the depreciation schedule.
Can I still do a study if I inherited the property several years ago?
Yes. A look-back study picks up the depreciation that was not claimed and brings the catch-up into the current tax year through a change in accounting method on Form 3115. Prior returns are not amended.
Does this apply to a property I inherited and live in?
No. Cost segregation applies to income-producing or business-use property. If you convert an inherited residence to a rental, the property enters service on the conversion date and the basis rules for converted property apply, which is a different analysis worth confirming before a study is commissioned.
