The step-up in basis
When you inherit property, your tax basis is generally the property's fair market value on the date of the decedent's death (or an alternate valuation date elected by the estate). This step-up applies regardless of what the decedent originally paid. If the decedent paid $200,000 forty years ago and the property is worth $800,000 at death, your basis is $800,000 — not $200,000. You start fresh at current market value.
What happens to deferred depreciation recapture
All depreciation the decedent claimed during their lifetime — which would have created a large recapture obligation had they sold — is permanently eliminated by the step-up. You, as the heir, have no recapture liability from the decedent's ownership. If you sell immediately at the stepped-up value, you owe no capital gains and no recapture. This is the mechanism behind the 'swap till you drop' estate planning strategy used by sophisticated real estate investors.
Your holding period and depreciation going forward
Inherited property is automatically treated as long-term property regardless of how quickly you sell after inheriting. You are not required to hold for more than one year to access long-term capital gains rates. If you continue to rent the property, your stepped-up basis becomes your new starting point for depreciation — divide the building's fair market value at inheritance by 27.5 years to compute your new annual deduction.
Frequently asked questions
Do I owe depreciation recapture when I sell an inherited rental?
No — the step-up in basis at the decedent's death permanently eliminates accumulated recapture. You start with a clean basis at the date-of-death market value.
Can I depreciate an inherited rental property?
Yes. Your depreciable basis is the date-of-death fair market value of the building (not land). Divide by 27.5 years to get your new annual deduction going forward.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.