What is a step up in basis?
A step up in basis is the rule in Section 1014 of the tax code that gives inherited property a basis equal to its fair market value on the date of the decedent’s death. Your gain on a later sale is measured from that value, not from what the original owner paid.
Basis is the number you subtract from the sale price to figure your taxable gain. For a building held for decades, the owner’s adjusted basis is often tiny, because the purchase price was low and depreciation has been chipping away at it every year. At death, Section 1014(a) wipes out that history and starts the heir fresh at today’s value.
The rule cuts both ways. If the property is worth less than the owner’s basis at death, the basis steps down to market value, and the built-in loss is gone.
How the step-up works for an inherited rental or apartment building
For an inherited rental, the stepped-up basis is the combined fair market value of the building and land at death, and the heir starts depreciating the building portion again from that new number. The old owner’s depreciation schedule ends, and the heir places the property in service on a fresh schedule: 27.5 years for residential rental property.
That’s a double benefit for heirs of an apartment building. The gain that built up over the owner’s life disappears, and the heir gets a new, larger depreciation deduction to shelter rental income going forward. A cost segregation study on the new basis can speed those deductions up even more.
Not everything steps up. Under Section 1014(c), items of income in respect of a decedent, such as rent owed but not yet collected at death or remaining payments on an installment sale note, keep their original tax character and don’t get a new basis.
Is depreciation recapture erased at death?
Yes, in practice: a transfer at death isn’t a recapture event, and the step-up wipes out the depreciation that would have been recaptured on a sale. Section 1250(d)(2) says the recapture rules for buildings don’t apply to a transfer at death, and Section 1245(b)(2) says the same for personal property such as appliances and items from a cost segregation study.
Because the heir’s basis is the full date-of-death value, the original owner’s depreciation is no longer baked into it. An owner who claimed $850,000 of depreciation would have owed up to 25% federal tax on it as unrecaptured Section 1250 gain in a sale. An heir who sells for the date-of-death value owes nothing on it.
The heir’s own depreciation is a different story. Any depreciation the heir claims after inheriting lowers the new basis and is subject to recapture when the heir sells.
Community property vs. joint tenancy: full or half step-up
In community property states, both halves of community property can get a stepped-up basis when the first spouse dies, while property spouses hold in joint tenancy usually steps up on only half. On an apartment building, that difference can be worth hundreds of thousands of dollars.
Section 1014(b)(6) treats the surviving spouse’s half of community property as acquired from the decedent, as long as at least half of the community interest is included in the decedent’s gross estate. The IRS lists nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
For spouses who hold title as joint tenants with right of survivorship or as tenants by the entirety, Section 2040(b) includes only half the value in the first spouse’s estate, so only that half steps up. The survivor’s own half keeps its old basis, past depreciation included. For joint tenants who aren’t married, Section 2040(a) generally includes the property based on how much each owner paid toward it.
| How the couple held title | Basis after first death | Who gets the step-up |
|---|---|---|
| Community property | Full date-of-death value | Both halves, Section 1014(b)(6) |
| Joint tenancy or tenancy by the entirety | Half old basis plus half date-of-death value | Decedent’s half only, Section 2040(b) |
| Owned by the decedent alone | Full date-of-death value | The whole property |
| Owned by a living trust the decedent could revoke | Full date-of-death value | Included in the estate, so it steps up |
Gifts vs. inheritance: carryover basis
A gift during life doesn’t get a step-up. Under Section 1015, the person receiving the gift generally takes over the giver’s basis, called carryover basis. If a parent deeds a fully depreciated building to a child before death, the child takes the parent’s low basis and the built-in gain along with it.
Section 1014(e) closes a related loophole. If you give appreciated property to someone who dies within one year and it comes back to you or your spouse, your basis is the decedent’s adjusted basis just before death, not a step-up. For most owners of appreciated rental property, holding until death and passing it through the estate leaves the heirs a far smaller tax bill than giving it away.
The alternate valuation date
The alternate valuation date lets an executor value estate property six months after death instead of on the date of death, and the heirs’ basis then follows that value under Section 1014(a)(2). Section 2032 allows the election only if it lowers both the value of the gross estate and the estate tax, so it’s mostly used by taxable estates when values fall.
Property sold or distributed during those six months is valued on the date it’s sold or distributed. The executor makes the election on Form 706, and it can’t be revoked.
How to document your stepped-up basis
The best evidence of a stepped-up basis is a qualified appraisal of the property as of the date of death, kept with the estate records and your tax files. If the estate filed Form 706, the value reported there is the number to use, and Section 1014(f) generally says your basis can’t be higher than the final estate tax value.
Get the appraisal done soon after the death, even if nobody plans to sell. A retrospective appraisal done years later is harder to defend. For an apartment building, ask the appraiser to split the value between land and building, since only the building is depreciable, and to show the rent roll and income approach behind the number.
Consistent basis reporting ties this together. When an estate must file Form 706, the executor files Form 8971 with the IRS and gives each beneficiary a Schedule A showing the value of the property they received. It’s due the earlier of 30 days after Form 706 is due or 30 days after it’s filed. Estates that file Form 706 only to elect portability don’t need to file it.
Inherited property capital gains: what if you sell soon after?
If you sell inherited property soon after the death, your capital gain is the sale price minus selling costs minus your stepped-up basis, and it’s usually small. Under Section 1223(9), inherited property is treated as held for more than one year, so any gain is long-term even if you sell a month after the funeral.
If the market dips or selling costs run high, you may even show a loss. A later sale, after years of the heir’s own depreciation, works like any rental sale: depreciation recapture first, then capital gains rates, plus the 3.8% net investment income tax for higher earners.
Worked example: an apartment building bought decades ago
Here’s how the step-up changes the tax on one building. A widowed owner bought a 16-unit building in 1990 for $800,000, put in $400,000 of improvements and claimed $850,000 of depreciation over the years, leaving an adjusted basis of $350,000. Today the building is worth $4,000,000.
If she sells it herself for $4,000,000 with $200,000 of selling costs, her gain is $3,450,000. At the top federal rates, $850,000 is unrecaptured Section 1250 gain taxed at up to 25%, or $212,500, and the remaining $2,600,000 is taxed at 20%, or $520,000. Add the 3.8% net investment income tax of $131,100, and the federal bill is about $863,600.
If she dies owning it instead, her children’s basis is $4,000,000. Eight months later they sell for $4,300,000 with $215,000 of selling costs. Their gain is $85,000, all long-term, and the federal tax at the top rates is at most $20,230, split among them. The depreciation she took is never recaptured.
If she had been married and the building were held in joint tenancy, the survivor’s basis would be $2,175,000: half the old $350,000 basis plus half the $4,000,000 value. A sale for $4,000,000 with $200,000 of costs would produce a $1,625,000 gain, including $425,000 of unrecaptured Section 1250 gain, for about $408,000 of federal tax. As community property, the basis would be $4,000,000 and the same sale would show a $200,000 loss.
| Scenario | Basis | Net sale proceeds | Gain | Federal tax at top rates |
|---|---|---|---|---|
| Owner sells during life | $350,000 | $3,800,000 | $3,450,000 | About $863,600 |
| Children inherit, sell for $4.3M | $4,000,000 | $4,085,000 | $85,000 | At most $20,230 |
| Spouse inherits, joint tenancy | $2,175,000 | $3,800,000 | $1,625,000 | About $408,000 |
| Spouse inherits, community property | $4,000,000 | $3,800,000 | -$200,000 loss | $0 |
Does estate tax matter?
For most families, no. The IRS says the basic exclusion amount for 2026 is $15,000,000 per person, set by the 2025 tax law, and a married couple can use both exclusions through portability. Only estates above that level owe federal estate tax, though some states have their own estate or inheritance tax with lower thresholds.
The step-up applies whether or not any estate tax is owed. A building included in the gross estate gets a new basis even when the estate is far below the exclusion.
How this works for a 5+ unit apartment building
For a 5+ unit building, the date-of-death value is usually set with the income approach: the building’s NOI divided by a market cap rate, checked against comparable sales. The appraiser will want the rent roll, leases and operating statements as of the date of death, so gather them early.
Heirs then have a choice: keep the building and use the new depreciation, sell soon and pay little or no capital gains tax, or roll the proceeds into a 1031 exchange. Since the step-up already removed most of the gain, a quick sale often makes the most sense for heirs who don’t want to be landlords.
Selling an inherited building to Skyline
Skyline Capital Investments buys apartment buildings with five or more units nationwide, including inherited buildings still in probate or held in a trust. We can close on a timeline that works for the estate and pay the heirs their shares through escrow, so the low tax bill from a stepped-up basis turns into cash without a long listing.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours.
