Estate Planning & Inherited Real Estate: Depreciation Strategies for Owners and Heirs

When you inherit a property, most people focus on the estate side what it’s worth, how to transfer title, or what the taxes might be.

But there’s another piece that often gets missed: depreciation.

Inherited properties come with a clean slate for depreciation, and that creates an opportunity if you know how to use it.

At Maven Cost Segregation, we’ve worked with investors who inherited everything from single-family rentals to full portfolios. The rules are a little different when you inherit, but the potential tax savings are still very real.

When you inherit a property, the IRS gives you what’s called a “step-up in basis.”

That means your new tax basis equals the property’s fair market value (FMV) on the date of death (or the alternate valuation date, if the estate elects it under § 2032).

Let’s say your dad bought a rental property for $400,000. By the time you inherit it, it’s worth $1 million. Your basis isn’t $400K, it’s $1M.

That matters because depreciation starts over based on that new number.

All of your parent’s prior depreciation schedules end at death. You begin depreciation from the stepped-up basis, as if you had just purchased the property at today’s value. (IRS Publication 559 and Pub 946 both confirm this rule under § 1014.)

A cost segregation study breaks down that new stepped-up basis into parts that can be depreciated faster with things like flooring, cabinetry, electrical, plumbing, and landscaping.

Instead of waiting 27.5 or 39 years to write everything off, you can accelerate deductions into the early years of ownership.

However, it’s important to note that: Inherited property doesn’t qualify for bonus depreciation.

Under IRS rules, property whose basis is determined under § 1014(a) (acquired from an original owner) is excluded from “additional first-year depreciation.”

But that doesn’t mean you lose the benefit of cost segregation you just rely on the standard accelerated depreciation methods for the 5-, 7-, and 15-year asset classes identified in the study.

In order for the estate to lock in depreciation deductions permanently, a cost segregation study must be done before the original owner’s final tax return is filed. 

Then, the heir receives a step-up in basis on the inherited property who starts with a fresh depreciation schedule.

So, any depreciation taken on the original owner’s final return doesn’t carry forward or create depreciation recapture for the heir because the asset’s basis resets at fair market value.

That means there are two potential opportunities in play:

Here’s what the process looks like, step by step:

Step 1: Get a date-of-death appraisal.

The fair market value on the date of death (or alternate valuation date, if elected) becomes your new depreciable basis. An appraisal provides support for that number under IRS § 1014.

Step 2: Collect your records.

Gather the deed, improvement receipts, and estate paperwork showing the transfer. These documents substantiate ownership and the new basis.

Step 3: Run a cost segregation study.

A qualified firm identifies which components qualify for shorter depreciation lives typically 5, 7, 15, and 27.5 or 39 years.

Step 4: Update your depreciation schedule.

Your CPA will input the new allocations and apply the correct method. If depreciation already began before the study, your CPA may need to file Form 3115 (Application for Change in Accounting Method) to align your tax records.

Step 5: Coordinate with your tax professional.

Inherited properties can affect both estate filings (Form 706) and your personal income tax return. Make sure your CPA and estate attorney are aligned on how the study’s deductions are reported.

Imagine you inherit a small apartment building valued at $1 million.

A cost segregation study finds that 25% of that basis about $250,000 qualifies for accelerated depreciation.

Even without bonus depreciation, that $250K could produce around $25K to $35K in first-year deductions, and more than $150K in deductions within the first five years.

That’s real money.

It can offset rental income, reduce taxable income, and improve cash flow immediately.

And because your depreciation schedule restarts at FMV, there’s no carryover or recapture from the prior owner’s depreciation.

Any future sale, of course, will still be subject to depreciation recapture on the deductions you take as the new owner, but not on the original owner’s old ones.

You can:

• Run a new cost segregation study on your stepped-up basis.
• Depreciate the newly allocated 5-, 7-, and 15-year components using standard MACRS.
• Claim deductions on your personal return beginning when the property is placed in service for rental or business use.

You can’t:

• Claim bonus depreciation on inherited property (it’s excluded by § 168(k)(2)(E)(ii)).
• Amend the original owner’s final return after they pass to add missed depreciation.
• Include pre-inheritance improvements in your basis unless they were completed after you took ownership unless they were on the original owner’s depreciation schedule

If you’ve inherited rental property, you now own an income-producing asset with a clean, fair-market-value basis.

Depreciation is one of the most powerful tools you have to manage cash flow and taxes.

A cost segregation study helps you:

• Capture deductions sooner instead of over decades
• Free up cash flow to reinvest or de-risk
• Keep documentation that aligns with IRS audit guidelines

Most heirs never think to revisit depreciation after inheritance. But if you do, you can turn a passive windfall into an active financial advantage.

By running a cost segregation study after the step-up in basis, you can unlock new depreciation deductions and set yourself up for stronger cash flow in the years ahead.

If you’ve recently inherited property or manage an estate portfolio, it’s worth running the numbers.

Try the Maven Cost Seg Calculator

Or reach out to our team to see how much depreciation might be hiding in your newly inherited assets.