Inherited rental property: step-up, depreciation reset and selling

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Inherited rental property generally takes a basis equal to fair market value at the date of death. The decedent’s depreciation and its recapture largely disappear, you start a fresh 27.5-year schedule on the new building basis, and any sale is automatically long-term. Sell soon after death and there is often little or no gain. In community property states, both halves of a couple’s property can step up at the first death.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). When a parent who owned that rental dies, the clock resets. Decades of depreciation that would have been recaptured, and appreciation that would have been taxed, can largely vanish under section 1014.

Here is how inherited rentals are taxed, using IRS Publication 551 (Basis of Assets), Publication 527 and Publication 559 (Survivors, Executors, and Administrators).

CPA Warning Label: The step-up is the best deal in the tax code, but only if you can prove the value. Get a date-of-death appraisal now, not when you sell in 12 years.

Basis step-up

Under section 1014, the basis of property acquired from a decedent is generally its fair market value on the date of death, or on the alternate valuation date (six months later) if the executor elects it on an estate tax return that reduces both the gross estate and the estate tax.

• Up or down. The rule is a step to fair market value, which is a step-down if the property lost value.
• Consistency. If an estate tax return was required, your basis must be consistent with the value reported. The executor may have to give you Form 8971 Schedule A showing the value. Most estates are far below the $15,000,000 per-person exclusion for 2026 and file no estate tax return, in which case an appraisal supports your basis.
• Holding period. Under section 1223(9), inherited property is treated as held more than one year, so any gain is long-term even if you sell a month later.
• Joint tenancy. If you owned the property jointly with the decedent, only the decedent's share is stepped up. For spouses holding as joint tenants or tenants by the entirety in non-community property states, generally half is included and stepped up.
• Recapture disappears. Depreciation taken by the decedent is not recaptured by you, because your basis is new.

Appraisal

Hire a qualified appraiser to value the property as of the date of death, with a separate allocation between land and building. Retrospective appraisals are possible, but contemporaneous ones are stronger. Keep the appraisal for as long as you own the property plus at least three years after the return reporting its sale.

Restart depreciation

You place the inherited rental in service on the date you acquire it (generally the date of death) or when you first make it available for rent, if later. Depreciation restarts:

• Building: 27.5-year straight line, mid-month convention, on the building's share of the date-of-death value.
• Land: never depreciated, so the land/building split matters.
• Components: appliances, carpet and land improvements can be valued and depreciated separately over 5 and 15 years. A cost segregation study can be done on an inherited building; see cost segregation explained. Bonus depreciation generally does not apply to property acquired from a decedent, because property acquired by inheritance generally does not meet the acquisition requirements for bonus depreciation. Confirm this with your preparer before relying on it.

Illustration: Fran inherits a rental from her father, who bought it in 1998 for $140,000 and took $110,000 of depreciation. Value at his death in March 2026 is $480,000; the appraisal allocates 25% to land. Her building basis: $360,000. She keeps the tenant in place (placed in service in March). 2026 depreciation: $360,000 times 2.879% (March, Table A-6) = about $10,364. Following years: about $13,091. Her father's $110,000 of depreciation and his gain ($480,000 minus his adjusted basis of $30,000 = $450,000) are never taxed.

Suspended passive losses

If the decedent had suspended passive losses on the property, they are allowed on the final return only to the extent they exceed the step-up in basis (section 469(g)(2)). Losses equal to the step-up are lost. Heirs do not inherit them.

Selling soon after

Because basis equals date-of-death value, a quick sale often produces little gain or even a loss:

• Gain is the sale price minus your stepped-up basis minus selling costs (commissions, title, transfer taxes). Long-term by statute.
• Loss from a sale of inherited property held as an investment or rental is deductible. Rental property loss on sale is generally a section 1231 loss, which is ordinary, if you held it for rent. If you never used it personally and sold it as an investment, it is a capital loss. If you or a relative moved in, the loss is personal and not deductible.
• Depreciation in between: any depreciation you took after inheriting is recaptured as unrecaptured section 1250 gain (up to 25%) if you sell at a gain.
• Estate sells instead. If the estate sells before distribution, gain or loss is the estate's, reported on Form 1041, and may pass out to beneficiaries.

If you plan to keep it, consider a 1031 exchange later; the stepped-up basis carries into the replacement.

Splitting with siblings

Inheriting with siblings creates common situations:

• Co-owners. If the property passes to three siblings as tenants in common, each has a one-third share of the basis and reports a third of the rent and expenses (unless a partnership is formed). Each can make their own choices about selling their share.
• One sibling buys out the others. The selling siblings report a sale of their share, usually with little gain right after death. The buying sibling has a new cost basis for the purchased share plus a stepped-up basis for their inherited share, with two separate depreciation schedules.
• An LLC or partnership. If siblings put the property into a multi-member LLC, it generally files Form 1065 and issues K-1s. Contributions are generally tax-free under section 721. See partnership rentals and K-1s.
• Use by a sibling. If one sibling lives in it below market rent, the other co-owners have personal-use issues; see renting to family.

Remember the rent and expenses before distribution belong to the estate, which reports them on Form 1041 and may pass income to beneficiaries on Schedule K-1. Put the agreement in writing: who manages, how expenses and rent are split, and how a future sale is decided.

Community property

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), section 1014(b)(6) gives a double step-up: when one spouse dies, both halves of community property get a basis equal to fair market value, as long as at least half the community interest is included in the decedent's gross estate.

Illustration: Larry and his wife, California residents, own a rental as community property with an adjusted basis of $200,000 and value of $1,000,000 when she dies in 2026. Larry's basis in the whole property becomes $1,000,000. In a common-law state with joint ownership, only her half would step up: $100,000 plus $500,000 = $600,000. The difference in taxable gain if Larry sells for $1,000,000: $0 versus $400,000.

Some common-law states (such as Alaska, Kentucky, South Dakota and Tennessee) allow elective community property trusts; their effect for section 1014(b)(6) is not settled in every case. See an estate attorney.

Trusts

Property held in a revocable living trust is included in the grantor's estate and generally gets the step-up at death. Property held in many irrevocable trusts does not, because it is not included in the gross estate; Rev. Rul. 2023-2 confirmed that assets in an irrevocable grantor trust not included in the estate do not get a section 1014 step-up. If a parent is planning to move a rental into an irrevocable trust, the loss of the step-up should be part of the decision. See gifting a rental to your kids.

Depreciation for the surviving spouse

With the double step-up, the survivor restarts depreciation on the new building basis. With a half step-up, the survivor continues the old schedule on their own half and starts a new schedule on the inherited half.