On this page
- Your basis in an inherited building is generally what it was worth on the date of death. The alternate valuation date applies only if the executor elects it on a federal estate tax return.
- Community property can take a new basis on both halves at a spouse's death. Joint tenancy between spouses resets only the half that belonged to the spouse who died.
- Inherited property counts as held for more than a year, so the gain on a quick sale is long-term.
- Depreciation restarts on the building's share of your new basis, over 27.5 years. Land is never depreciable.
What does section 1014 do?
Internal Revenue Code section 1014 sets the basis of property acquired from a decedent at its fair market value on the date of death, with some exceptions. The Treasury regulation gives the reason. An heir's basis is meant to equal the value placed on the property for federal estate tax purposes. Property acquired from a decedent includes what passes by bequest, devise or inheritance, and property that has to be included in the decedent's gross estate.
IRS Publication 551 allows the value on either of these dates:
- Date of death. The fair market value on the date of death applies whether or not the executor files an estate tax return, Form 706.
- Alternate valuation date. This applies only if the executor files Form 706 and elects alternate valuation on that return.
Whichever date applies, the rule is fair market value, and you have to be able to support the figure. Get a written valuation of the building as of the day the owner died, while the rents, the leases and its condition that day can still be documented. Rebuilding them years later, when you finally sell, is much harder.
How much gain does the step-up erase?
It erases the gain that built up while your parent owned the building, so a sale soon after inheriting, at a price close to the date-of-death value, may show little gain at all. Gain is measured from your basis. Your basis starts at that value, and what your parent paid, or what was left of it after decades of depreciation, drops out of the calculation.
| Made-up example | Amount |
|---|---|
| Your parent's adjusted basis, after purchase price and depreciation | $350,000 |
| Fair market value on the date of death, your basis | $2,200,000 |
| Sale price a year later | $2,260,000 |
| Gain measured from your basis, before selling costs | $60,000 |
| Gain if the parent had sold at the same price | $1,910,000 |
The same example shows where the step-up stops. It moves the starting line once, on the date of death, and leaves it there. From then on the building's value can rise above your basis or fall below it, and the depreciation you claim lowers the basis each year you hold it.
The length of time you held the building does not count against you. IRS Publication 544 says inherited property is considered held for more than one year no matter how briefly you held it. A gain on a sale the month after you receive title is long-term.
Does it matter whether a couple held it as community property or as joint tenants?
Yes, and by a lot, when a married couple bought the building together and one of them has died. The vesting decides how much of the building gets a new basis.
| How the couple held it | What gets a new basis at the first death | IRS source |
|---|---|---|
| Community property | Generally the whole property, both halves, if at least half the value of the community interest is includible in the deceased spouse's gross estate | Publication 555 |
| Joint tenancy between the two spouses only | Only the deceased spouse's half. The survivor keeps the cost of their own half, reduced by the depreciation allowed to them | Publication 551, qualified joint interest |
Publication 555 works an example. A couple's community property had a basis of $80,000 and was worth $100,000 when one spouse died. The surviving spouse's half takes a basis of $50,000, and so does the half that goes to the deceased spouse's heirs.
Publication 551 calls property held by spouses as the only joint tenants a qualified joint interest. Half its value is included in the deceased spouse's gross estate, whoever paid for it and whichever spouse dies first. The survivor's basis is the cost of their own half, less the depreciation allowed to them, plus the stepped-up basis of the half they inherited.
Start with the deed. Shaya can price the building for the decision, but which basis rule applies is a question for a CPA, and a surviving spouse thinking about selling should have that answer in writing before the listing is signed.
How does depreciation work after you inherit?
It starts over from your new basis. Under IRS Publication 527, residential rental property is depreciated over 27.5 years by the straight-line method, and land can never be depreciated. The date-of-death value therefore has to be split between the land and the building, and only the building's share goes on the depreciation schedule.
Your parent's depreciation stays with your parent. What they claimed over the years does not reduce your basis, because your basis is the date-of-death value and their adjusted basis no longer matters. What you claim after inheriting does reduce it, and a lower basis means a larger gain when you sell. That is the cost of the deduction, and it belongs in the numbers before you decide to hold the building for its income.
Can you do a 1031 exchange after inheriting?
Yes, if you hold the building for investment, though after a step-up there may be little gain to defer. Since the Tax Cuts and Jobs Act, section 1031 covers only exchanges of real property held for use in a trade or business or for investment, and it excludes property held primarily for sale, according to the instructions for Form 8824. Real properties are generally like-kind to each other, improved or not.
The deadlines are fixed. Under the IRS fact sheet on like-kind exchanges, you have 45 days from the sale to identify replacement property. You then have to receive it within 180 days of the sale, or by the due date of your return for that year, extensions included, if that comes sooner.
An exchange also ties the money back into real estate, with its own costs. It starts to make sense once you have held the building long enough for real gain to build up above the stepped-up basis. That is a CPA's calculation with your own numbers, and the time to run it is before the building is listed.