Topic 08 · 6 min read
Basis You Did Not Pay For
Inheritance, gifts, and turning a home into a rental.
Not every property arrives through a purchase. Inherited property generally takes a basis equal to its value on the date of death, which erases built-in gain and past depreciation. A gift usually carries the giver's basis along with it. And a home converted into a rental starts depreciating from the lower of its cost or its value at conversion.
What to know
- Step-up at death
- Heirs generally begin with today's market value as basis, and depreciation starts fresh on that number.
- Gifts carry history
- A gifted property usually keeps the giver's basis and depreciation record, so the gain travels with it to the new owner.
- Converting a home
- Depreciable basis at conversion is the lower of adjusted cost or fair market value that day, which can be less than you expect in a soft market.
- Document the date
- Appraisals as of the death, gift, or conversion date are what make the number stand up years later.
The tax benefit
A step-up can wipe out decades of accumulated gain and recapture, and a conversion starts a new depreciation stream on a property you already owned.
Worked example
Two heirs, one house
A rental bought for $120,000 and depreciated to $60,000 is worth $450,000 at the owner's death. The heirs take a $450,000 basis: the built-in gain and the recapture both disappear.
Watch out for
- State rules and community property treatment change the step-up result.
- Gifting during life forfeits the step-up the same property would get at death.
- Converting back to personal use stops depreciation but not the recapture history.
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