Short answer

When you inherit a rental property, its basis is reset to its fair market value at the date of the decedent's death, or the alternate valuation date if the estate elected it. The decedent's depreciation history and any recapture potential end with the step-up. You start fresh: a new basis, a new land split, a new placed-in-service date for your rental use, and a new depreciation schedule. A cost segregation study can be applied to that stepped-up basis to separate land improvements and personal property from the building, with one important limit. Bonus depreciation generally does not apply to the inherited components, because used property must be acquired by purchase, and property whose basis is determined under the inheritance rules is not acquired by purchase. Items you buy new for the rental afterward are judged on their own. This article walks through what changes at inheritance, what a study can do, and what heirs should keep. It is general education, not tax or estate advice.

What resets and what does not

ItemAt inheritance
BasisFair market value at the date of death, or the alternate valuation date if elected
Decedent's accumulated depreciationDisappears with the old basis; no recapture of the decedent's depreciation on a later sale by the heir
Land splitRedone at the stepped-up value, by the fair market values of land and building
Placed-in-service dateWhen the property is ready and available for the heir's rental use, often at or after the date of death depending on the facts
Bonus depreciation on inherited componentsGenerally unavailable: not acquired by purchase
Depreciation classesThe same rules: 27.5-year building, 15-year land improvements, 5-year personal property, decided item by item

The stepped-up basis

Publication 551 and the Code set the rule: the basis of property acquired from a decedent is generally its fair market value at the date of death. The estate's appraisal is the document that establishes it, and the appraisal usually values land and improvements separately, which gives the heir the land split at the same time. Where the estate elected the alternate valuation date, that date's value applies. An heir who cannot find the estate's appraisal should get one as of the date of death, because every later number depends on it.

Why bonus depreciation is generally off the table

Bonus depreciation on used property requires, among other things, that the property was not used by the taxpayer before acquisition and that the acquisition meets the purchase requirements of section 179(d)(2). Those requirements exclude property whose basis is determined under section 1014, which is the inheritance basis rule. Inherited property is therefore not acquired by purchase, and its components, whatever their class, are not qualified property for bonus depreciation. A study still moves land improvements and personal property into 15- and 5-year classes, which accelerates their depreciation against the 27.5-year default; it does not produce a 100 percent first-year deduction on them.

Property the heir buys new for the rental after inheriting, such as appliances, flooring or paving, is a separate acquisition by purchase and is judged on its own dates and eligibility.

What a study can do for an heir

  1. Document the land split at the stepped-up value, using the estate appraisal.
  2. Identify land improvements and personal property in the inherited building and classify each with a legal reason, the ordinary elements of a quality study.
  3. Set up a clean schedule that starts at the heir's placed-in-service date, with no inherited history to reconcile.
  4. Record the assets so later replacements can be treated as partial dispositions and a later sale can be computed component by component.
  5. Reconcile to the stepped-up basis.

Because the basis is often higher than the decedent's old basis, the amounts the study works with can be substantial. Because bonus depreciation is unavailable on the inherited components, the benefit is the ordinary acceleration of 15- and 5-year property, not an immediate write-off.

A property the decedent had already studied

If the decedent commissioned a study, its asset list is useful evidence of what the building contains, but its numbers are no longer the heir's basis. The heir's study reconciles to the stepped-up value, not to the decedent's cost. The decedent's depreciation schedule ends; nothing from it carries forward to the heir.

Selling later

Gain on a later sale is measured from the stepped-up basis less the heir's own depreciation. Depreciation the heir claimed on 5- and 15-year property is recaptured as ordinary income; the building's depreciation is unrecaptured section 1250 gain at up to 25 percent. The decedent's depreciation is not recaptured by the heir. Heirs who sell soon after inheriting often have little gain and little depreciation; a study's value grows with the holding period, as for anyone else.

Timing the study

Heirs often decide about a study in the first year, when the estate appraisal is fresh and the property has just entered their rental use. That is the right moment: the appraisal supplies the land split, the placed-in-service date is being fixed anyway, and the schedule starts clean. An heir who waits can still apply a study later through a change in accounting method, but the appraisal evidence is easiest to assemble at the start.

Records an heir should keep

  • The estate's appraisal as of the date of death or the alternate valuation date.
  • The estate tax return or the estate's records supporting the values, where one exists.
  • Evidence of when the property became ready and available for the heir's rental use.
  • The study, its workpapers and the new depreciation schedule.
  • Invoices for anything bought new after inheritance, which are eligible on their own for bonus depreciation.

Common misunderstandings

  • "I inherited the decedent's depreciation schedule." No; basis is stepped up and the schedule restarts.
  • "I owe recapture on what my parent depreciated." No; the step-up ends that.
  • "I can take 100 percent bonus on the inherited property after a study." Generally no; inherited property is not acquired by purchase.
  • "The land split from years ago still applies." No; the split is redone at the stepped-up value.

What people ask on Reddit and other forums

Inheritance questions are frequent in the "cost segregation reddit" threads on r/realestateinvesting and r/tax, often from heirs who just received a K-1 or a deed. The searches that lead people to these threads are usually phrased "inherited rental property depreciation", "stepped up basis cost segregation" and "inherited property bonus depreciation".

"Should I do a cost seg on the house I inherited?" A study can separate land improvements and personal property at the stepped-up basis, accelerating their depreciation. There is generally no bonus depreciation on the inherited components, so weigh the fee against the ordinary acceleration.

"What is my basis?" Fair market value at the date of death, or the alternate valuation date if the estate elected it, per the estate's appraisal.

"Do I recapture my parent's depreciation when I sell?" No. The step-up ends the decedent's depreciation history.

"When does my depreciation start?" When the property is ready and available for your rental use.

Questions people also ask

What is the basis of inherited rental property?

Generally its fair market value at the date of the decedent's death, or the alternate valuation date if elected, allocated between land and building by their fair market values.

Can I take bonus depreciation on inherited property?

Generally not on the inherited components, because property whose basis is determined under the inheritance rules is not acquired by purchase. Items bought new afterward are judged on their own.

Does a cost segregation study make sense on inherited property?

It can: land improvements and personal property are depreciated faster than the building, and the study sets up a clean schedule at the stepped-up basis. Without bonus depreciation the benefit is the ordinary acceleration.

Do I inherit the decedent's depreciation schedule?

No. Basis is stepped up and depreciation starts fresh at your placed-in-service date.

Is there recapture of the decedent's depreciation?

No. Only the depreciation you claim is subject to recapture on a later sale.

Sources