Real Estate Tax Calc
The step-up in basis and what it does to depreciation
When a property passes to an heir at death, the tax code resets the basis to the property's fair market value at the date of the decedent's death. This is the "step-up in basis" — named because, in most cases, the property has appreciated and the new basis steps up to a higher number. (In the rare case the property has declined in value, the basis steps down.)
For depreciation purposes, this reset is transformative. The decedent may have purchased a rental house decades ago for $200,000, allocated $60,000 to land and $140,000 to the building, and depreciated the building for 25 of its 27.5-year life — leaving only $12,727 of remaining depreciable basis. If the property is worth $500,000 at death, the heir's new basis is $500,000. The heir allocates this new basis between land and building, arrives at a depreciable basis on the building portion (say $380,000), and begins a brand-new 27.5-year depreciation clock.
The prior $127,273 of accumulated depreciation the decedent took? Gone. It does not reduce the heir's basis. It does not create a liability the heir must repay through reduced future deductions. The slate is wiped clean by the step-up.
This is one of the most powerful tax benefits in the US code for real estate investors: transferring appreciated, depreciated property at death completely eliminates the income-tax consequence of both the built-in gain and the accumulated depreciation, at least for the decedent's heirs.
How to calculate the new depreciable basis after inheritance
The calculation has three steps:
- Establish FMV at date of death. Get a qualified appraisal from a certified real estate appraiser. The appraisal should be as of the date of death (or the alternate valuation date, if the estate elected it under IRC §2032). A contemporaneous appraisal is far stronger audit evidence than one prepared years later. If the estate filed an estate tax return (Form 706), the values reported there establish the step-up basis for the heirs.
- Allocate FMV between land and building. Land is not depreciable, so you must separate the land component from the building component. Common methods: use the ratio from the local property tax assessor's records (land assessed value ÷ total assessed value × FMV), obtain a separate land appraisal, or use a cost segregation study for larger properties.
- Determine recovery period and method. Residential rental property: 27.5-year straight-line, mid-month convention. Commercial property: 39-year straight-line, mid-month convention. The heir starts with 100% of the building's allocated FMV and depreciates it from the month the property is placed back in service as a rental.
The heir places the property "in service" for depreciation purposes when it is ready and available for rent after the inheritance — not necessarily when a tenant moves in. If the estate took time to settle and transfer the property, depreciation begins when the heir holds the property and it is available for rental use.
Why the decedent's depreciation history does not carry over
This surprises many heirs who expect to somehow "take over" the prior owner's depreciation schedule. The reason no carryover occurs is straightforward: the heir does not purchase the decedent's basis. Under the step-up rule, the heir's basis is determined by law (FMV at death), not by what the decedent paid or what the decedent's adjusted basis was at death.
Consider the two numbers that matter for depreciation: the basis you start with, and the number of years remaining. The heir's starting basis is the stepped-up FMV. The years remaining are a full 27.5 or 39 — because the heir is starting a new recovery period, not continuing the decedent's. There is simply no mechanism in the tax code for the heir to pick up where the decedent left off.
The same is true for partial depreciation. If the decedent owned the property for 10 of the 27.5 years and had taken 10/27.5 of the building's cost, the heir does not continue from year 11 on the decedent's basis. The heir starts from year 1 on their own stepped-up basis.
One nuance: the mid-month convention applies in the year of inheritance just as it does in any other year the property is first placed in service. If the heir inherits a property in June and puts it in service as a rental in August, the first year's depreciation is prorated to the months the property was in service (5 months out of 12 for a mid-month August start = 5 out of 12 applied to the full-year depreciation rate).
What happens to the deferred depreciation recapture
The step-up in basis does more than reset depreciation — it also permanently eliminates the depreciation recapture that had been building up in the decedent's estate.
When a property owner takes depreciation deductions, those deductions reduce the property's adjusted basis. If the owner later sells, the IRS taxes the gain attributable to prior depreciation at a maximum 25% recapture rate (for real property §1250 gain). This is often called "unrecaptured §1250 gain" and represents a significant embedded tax liability for owners of long-held, heavily depreciated properties.
When the property transfers at death, the basis steps up to FMV. The decedent's accumulated depreciation is baked into that FMV — the property is worth $500,000 regardless of how much depreciation was taken. With the heir's basis now at $500,000, there is no recapture liability for any depreciation taken by the decedent. If the heir sells the property the day after inheriting it for $500,000, their gain is zero (aside from transaction costs) — both the income tax and the recapture tax disappear.
Going forward, the heir will build up their own recapture exposure as they take depreciation on their new basis. But the prior generation's recapture is gone forever.
A worked example with real numbers
Marcus purchased a single-family rental house in 2006 for $300,000, allocating $80,000 to land and $220,000 to the building. He depreciated the building on a 27.5-year schedule, taking $8,000 per year ($220,000 ÷ 27.5). By the time Marcus passed away in 2026 — 20 years later — he had taken $160,000 of accumulated depreciation ($8,000 × 20 years). His adjusted basis in the building was $60,000 ($220,000 − $160,000), and his total adjusted basis in the property was $140,000 ($80,000 land + $60,000 building).
At the time of his death, the house was worth $600,000. An appraisal supported a land value of $150,000 and a building value of $450,000.
Under IRC §1014, his daughter Sofia inherits the property with a stepped-up basis of $600,000. She allocates: $150,000 to land, $450,000 to building. Marcus's $160,000 of accumulated depreciation is irrelevant to Sofia.
Sofia's annual depreciation: $450,000 ÷ 27.5 = $16,364 per year
Compare to what Marcus was claiming in his final years: $8,000 per year on a nearly-exhausted basis. Sofia's annual deduction is more than double, and she has a full 27.5-year clock running from 2026.
The recapture that vanished: If Marcus had sold the house for $600,000 before his death, he would have owed tax on $160,000 of unrecaptured §1250 gain at up to 25% — a potential tax bill of $40,000 on that component alone, before accounting for any additional capital gains tax. Because Marcus held the property until death, that $40,000 liability permanently disappeared.
Gifts vs. inheritances: a completely different rule
The step-up in basis applies only to property acquired from a decedent. If a parent gives rental property to a child as a gift during the parent's lifetime — not at death — an entirely different rule applies: carryover basis under IRC §1015.
Under carryover basis, the recipient of a gift takes the donor's adjusted basis (reduced for any depreciation the donor took), not FMV at the time of the gift. The donor's accumulated depreciation does carry over to the recipient, reducing the recipient's basis. The donor's recovery period carries over as well — the recipient continues depreciating on the donor's schedule from where the donor left off.
Using the Marcus/Sofia example: if Marcus had gifted the property to Sofia in 2026 while he was still alive (instead of leaving it to her at death), Sofia would have inherited Marcus's $140,000 adjusted basis. Her annual depreciation on the building would be limited to the $60,000 remaining depreciable basis ÷ the remaining 7.5 years of Marcus's recovery period = $8,000 per year — the same amount Marcus was taking, and only for another 7.5 years. The $450,000 stepped-up building basis she received at death never materializes in a lifetime gift.
This distinction is profound. A parent who holds appreciated, heavily depreciated rental property until death gives heirs a far better tax outcome than a parent who gives the property away while alive. The decision between gifting during life and bequeathing at death is among the most important tax-planning choices for real estate owners with appreciated and depreciated rental property.
Special situations and edge cases
Revocable living trusts. Property held in a revocable trust that pours over to heirs at the grantor's death is treated as property "acquired from a decedent" under IRC §1014(b)(6). The step-up applies the same as if the property had passed directly through a will. This is a common estate-planning structure that does not affect the heir's stepped-up basis.
Joint tenancy. For property held in joint tenancy with right of survivorship, IRC §1014(b)(9) generally steps up only the deceased joint tenant's share. For community property in community property states, both halves of the property receive a stepped-up basis when one spouse dies — a significant advantage for married couples holding appreciated property in those states.
The 2010 carryover basis election. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) temporarily repealed the estate tax for the year 2010, replacing the step-up with a modified carryover basis for large estates. Estates of decedents who died in 2010 could elect carryover basis treatment. This is a narrow historical edge case affecting virtually no current transactions, but it is worth knowing exists if you are reviewing a property inherited in 2010.
IRD property. Income in respect of a decedent (IRD) is income the decedent earned before death but did not yet receive. IRD does not receive a stepped-up basis — it is taxed to the recipient when collected, as it would have been to the decedent. Rental property is not typically IRD, but accrued rent or unpaid installment sale notes owned by the decedent may be. Verify with a tax professional if the estate includes these items.
Frequently asked questions
Can I depreciate inherited rental property even if the previous owner already depreciated it?
Yes. The step-up in basis under IRC §1014 gives you a brand-new depreciable basis equal to the fair market value of the building at the date of death. The prior owner's accumulated depreciation is irrelevant — you start a fresh 27.5-year (residential) or 39-year (commercial) recovery period.
Does the decedent's accumulated depreciation carry over to the heir?
No. The stepped-up basis wipes out the prior depreciation history. The heir's basis is the FMV at death, and depreciation begins again from zero. There is no inherited depreciation "debt" to repay.
What basis do I use for depreciation on inherited property?
Your depreciable basis is the FMV of the building (not land) at the decedent's date of death, or the alternate valuation date if the estate elected it. Get a qualified appraisal to document this number — the IRS will ask if you are ever audited.
Does inheriting property eliminate depreciation recapture?
Yes — for the decedent. The step-up in basis erases the deferred recapture that would have applied if the decedent had sold the property. The heir's basis is FMV at death, so there is no recapture on the prior owner's depreciation. If the heir later sells, only depreciation taken by the heir since inheriting is subject to recapture.
Is the rule different for property received as a gift versus an inheritance?
Yes — completely different. A gift uses carryover basis: the recipient gets the donor's original basis (reduced by the donor's accumulated depreciation), and the prior depreciation history does carry into the recipient's return. Only inherited property (received at death) triggers the step-up in basis under §1014.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.