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The Investor's Tax Playbook

The Step-Up in Basis. The Last Page Forgives Everything.

How inherited property resets its basis, why a lifetime gift does not, and what that means for the capital gains and depreciation you spent a career deferring.

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The Answer, First

When you die owning appreciated property, your heirs inherit it at its fair market value on the date of death. The deferred capital gains vanish. The depreciation history resets to zero. The heirs can sell the next day and owe little or nothing, or hold, re-depreciate from the new basis, and start the cycle again. This is why investors defer relentlessly: deferred long enough, the bill is forgiven entirely.

The Essentials
Who it's forEvery owner of appreciated property, and every family behind one
The benefitHeirs' basis resets to fair market value; deferred gain and recapture are erased
What people missGifting during life hands heirs your old basis instead
AuthorityIRC Section 1014

Arthur bought his warehouse decades ago for $300,000, depreciated it down, refinanced it twice, and exchanged into it through a 1031. On paper he is carrying a mountain of deferred gain and recapture. When Arthur passes, his daughter inherits the building at its $2.4 million date-of-death value. The mountain is gone. Not deferred. Gone. She can sell at that price nearly tax free, or keep it and depreciate a $2.4 million basis all over again, this time with a cost segregation study from day one.

Passing the warehouse, two ways
✓Inherit at death: basis steps up to fair market value, deferred gain and depreciation history erased, fresh depreciation begins.
✗Gift during life: the daughter takes Arthur's old basis and his entire tax problem with it, out of generosity.

The rules in plain English

  1. Inherited property takes a basis equal to fair market value at death. Appreciation during the owner's life is never income-taxed to anyone.
  2. Gifts do the opposite: the recipient carries over your basis. The most expensive mistake in family real estate is gifting the building a year too early. Timing belongs to your estate attorney and CPA together.
  3. Very large estates can face estate tax, a separate system with its own thresholds that adjust annually. The step-up question and the estate tax question get planned as one.
  4. Laws change. A plan built once and never reviewed is not a plan; it is a hope with a binder.
The Catch

Gift the building during life and your heirs inherit your old basis and your old tax problem. Very large estates still face estate tax. And laws change, so a plan built once and never reviewed is not a plan. The forgiveness is real; the patience and the planning are the price.

Questions owners actually ask

Does the step-up erase depreciation recapture?
Yes. The depreciation history dies with the owner. Heirs take a fresh fair-market basis with no recapture attached and can begin depreciating anew.
Can heirs do a cost segregation study on inherited property?
Yes, and it is one of the strongest uses of the strategy: a stepped-up basis means a bigger number for the engineers to work with, from day one of the heirs' ownership.
Should I put the building in my kids' names now?
Usually the costliest version of a kind idea, because gifts carry over your old basis. Structure that question with your estate attorney and CPA before moving anything.
The Bigger Play

The last page forgives everything, but it rewards the owners who harvested along the way. Between now and then, most owners sit on $200,000 to $450,000 per million in unclaimed deductions. If you own the walls, send in the engineers, and let the code keep its promise on the timeline you choose.

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Continue the education
The Cash-Out Refinance: the borrow chapter of the story →The 1031 Exchange: the defer chapter →Cost Segregation: the harvest itself →
The Cost Seg America Team
Cost Seg America · Engineered, Not Estimated · 1-888-365-5023 · info@costsegamerica.com
The Investor's Tax Playbook is educational. It is not tax, legal, or accounting advice, and reading it does not create a client relationship. Dollar thresholds and rates adjust annually. Execute every strategy with your CPA or qualified tax professional.