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 real estate generally takes a new tax basis equal to its fair market value at the date of death, and a cost segregation study can be applied to that new basis to front-load depreciation on the building's shorter-life components. The main limit is that the inherited basis isn't eligible for bonus depreciation.

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.

What Is a Step-Up in Basis for Inherited Real Estate?

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.

When Depreciation Starts on an Inherited Rental

Depreciation on inherited rental property doesn't begin automatically at the date of death. The heir starts a new depreciation schedule on the § 1014 basis once the property is placed in service for rental or business use. If the property was already rented and stays rented, that's typically right away. If it sits vacant or you live in it first, the clock starts when it's available for rent.

What Happens to the Prior Owner's Depreciation

The prior owner's depreciation schedule ends at death, and their final return reports depreciation through the date of death. For property that receives a § 1014 basis, the heir generally doesn't inherit recapture on that pre-death depreciation. Depreciation the estate or heir claims after death is different: it's subject to recapture when the property is later sold.

Cost Segregation Still Works on Inherited Property

Yes, as long as the property is used as a rental or in a business, a cost segregation study can be run on inherited property the same way it's run on a purchase. An engineering-based analysis allocates the depreciable portion of your new basis among building components, and qualifying items move out of the 27.5- or 39-year building class into shorter-life classes.

Land comes out first. Before any depreciation, the inherited FMV is allocated between land, which is never depreciable, and the building and other improvements. Only the depreciable portion goes into the study.

From there, the study identifies components that qualify for shorter life treatment property depending on the asset and the industry. In a residential rental, that usually means items like appliances, carpet, cabinetry, and electrical or plumbing dedicated to specific equipment (5-year), and site work such as paving, fencing, and landscaping (15-year). The building's structure stays in the 27.5-year residential or 39-year commercial class.

Does Inherited Property Qualify for Bonus Depreciation?

Not on the inherited basis. Bonus depreciation requires that property be acquired by purchase, and property whose basis is determined under IRC § 1014(a), the rule for property acquired from a decedent, doesn't meet that requirement under IRC § 168(k)(2)(E)(ii) and Treas. Reg. § 1.168(k)-2(b)(3)(iii). The shorter-life components still depreciate faster; they just don't get the first-year write-off. Improvements you make after inheriting are different. They're new property with their own basis, and they can qualify for bonus depreciation if they meet the normal § 168(k) requirements. As of 2026, 100% bonus depreciation applies to qualifying property acquired after January 19, 2025, and placed in service after January 19, 2025. In a residential rental, that typically covers shorter-life items like new appliances, carpet, or a new driveway. Structural work on the building itself is generally 27.5-year property and isn't eligible. On commercial property, qualified improvement property (QIP) may also qualify. One related rule: you can't add the prior owner's improvement costs on top of the date-of-death value. Those improvements are already reflected in FMV, so they're part of your § 1014 basis and part of what the study allocates.

Pre-Death Cost Segregation and the Decedent's Final Return

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:

  • For the original owner (estate planning before death):The original owner’s CPA can run a cost seg study to capture last-minute depreciation that would otherwise disappear.
  • For the heir (after inheritance):The heir can commission a new study on the stepped-up FMV and start depreciation all over again.

Five Steps to Cost Segregating an Inherited Rental

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 fill 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.

Example: A $1 Million Inherited Apartment Building

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.

What You Can and Can’t Do

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

Why This Matters for Investors

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.