Does Inherited Property Qualify for Bonus Depreciation? (w/Examples) + FAQs

Inherited property does not qualify for bonus depreciation under current federal tax law. This restriction stems from Internal Revenue Code Section 168(k)(2)(E)(ii)(II), which explicitly excludes property whose basis is determined under Section 1014(a)—the provision governing inherited assets. While heirs receive a valuable “step-up in basis” that resets the property’s tax value to fair market value at the decedent’s death, this benefit comes with a significant trade-off: ineligibility for the accelerated depreciation advantages available to purchased property. Understanding this limitation is essential for tax planning, estate strategies, and maximizing depreciation deductions on inherited real estate and business assets.

Understanding Bonus Depreciation: The Legal Framework

What is Bonus Depreciation?

Bonus depreciation, formally known as the “additional first-year depreciation deduction” under IRC Section 168(k), allows taxpayers to immediately deduct a substantial percentage of qualifying property’s cost in the year it is placed in service, rather than depreciating it over its standard recovery period. Originally introduced with varying percentages, bonus depreciation reached 100% under the Tax Cuts and Jobs Act of 2017 for property placed in service through 2022.

The provision faced scheduled phase-outs—dropping to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before complete elimination in 2027. However, the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

Qualifying Property Requirements

For property to qualify for bonus depreciation, it must satisfy four fundamental requirements:

1. Property Type: The asset must be tangible personal property depreciable under Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less, computer software, qualified improvement property (QIP), or certain other specified property.

2. Original Use or Used Property Requirements: Either the property’s original use must begin with the taxpayer, or for used property, it must meet five specific acquisition requirements detailed in Section 168(k)(2)(E)(ii).

3. Timing: The property must be acquired and placed in service within specified timeframes—currently after January 19, 2025, for permanent 100% bonus depreciation.

4. Acquisition Method: The property must be “acquired by purchase” under Section 179(d) concepts, which includes critical restrictions on related-party transactions and basis determination methods.

The Critical Exclusion: Why Inherited Property Does Not Qualify

The Five Requirements for Used Property

The Tax Cuts and Jobs Act expanded bonus depreciation to include used property—a significant departure from previous law that required original use by the taxpayer. However, this expansion comes with five stringent requirements that inherited property cannot satisfy:

Requirement 1: No Prior Use by Taxpayer
The property must not have been used by the taxpayer or a predecessor at any time before acquisition. Final regulations establish a five-calendar-year lookback period.

Requirement 2: Not Acquired From Related Party
The property cannot be acquired from a person whose relationship would result in loss disallowance under Section 267 or 707(b), which covers family members, controlled entities, and other related parties.

Requirement 3: Not Acquired From Controlled Group Member
The property cannot be acquired by one component member of a controlled group from another member of the same group.

Requirement 4: Basis Not Determined by Reference
The basis in the hands of the acquirer cannot be determined, in whole or in part, by reference to the adjusted basis in the hands of the transferor.

Requirement 5: Basis Not Determined Under Section 1014(a)
This is the provision that explicitly disqualifies inherited property. The requirement states that basis cannot be determined “under section 1014(a) (relating to property acquired from a decedent)”.

Section 1014(a): The Step-Up in Basis Provision

Section 1014(a) of the Internal Revenue Code provides that property acquired from a decedent receives a basis equal to its fair market value (FMV) at the date of death (or alternate valuation date if elected). This “step-up in basis” eliminates built-in capital gains and depreciation recapture that accumulated during the decedent’s lifetime.

The legislative language in Section 168(k)(2)(E)(ii)(II) creates an absolute bar: any property whose basis is determined under Section 1014(a) is categorically excluded from bonus depreciation eligibility. This exclusion applies regardless of whether the heir is related to the decedent, how long the property was held, or whether it otherwise meets all technical requirements for bonus depreciation.

Practical Implications: What Heirs Receive Instead

The Step-Up in Basis Advantage

While inherited property cannot claim bonus depreciation, heirs receive the significant advantage of stepped-up basis, which provides two major benefits:

Elimination of Depreciation Recapture:
All depreciation previously claimed by the decedent is eliminated. The heir starts with a fresh basis and new depreciation schedule with no recapture liability upon future sale.

Elimination of Capital Gains:
Any appreciation in the property’s value during the decedent’s ownership is not subject to capital gains tax. The heir’s basis equals current fair market value.

Restarting Regular Depreciation

After inheriting property, heirs can begin depreciating the stepped-up basis using standard MACRS methods:

• Residential rental property: 27.5-year straight-line depreciation
• Commercial property: 39-year straight-line depreciation
• Personal property and land improvements: Shorter recovery periods (5, 7, or 15 years) using standard MACRS methods

The depreciation schedule completely resets, meaning even fully depreciated property in the decedent’s hands can generate new depreciation deductions for the heir.

Community Property States: Double Step-Up

Taxpayers in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and certain Alaska and Tennessee residents who elect) receive an additional advantage. When one spouse dies, both halves of community property receive a full step-up in basis, not just the deceased spouse’s half. This provides substantially greater tax benefits than separate property states, where only the deceased spouse’s 50% interest receives the step-up.

Examples: Inherited Property vs. Purchased Property

Example 1: Inherited Commercial Building

Scenario: Sarah inherits a commercial building from her uncle who died on March 15, 2026. The property details:

• Original purchase price (uncle): $800,000 (2010)
• Uncle’s adjusted basis at death: $500,000 (after depreciation)
• Fair market value at death: $1,200,000
• Depreciable portion (excluding land): $900,000

Tax Treatment:

• Sarah’s new basis: $900,000 (stepped-up to FMV)
• Bonus depreciation eligibility: None—basis determined under Section 1014(a)
• Regular depreciation: $900,000 ÷ 39 years = $23,077 annually
• Accumulated depreciation eliminated: Uncle’s $300,000 depreciation eliminated—no recapture upon future sale
• Capital gains eliminated: $400,000 appreciation during uncle’s ownership not taxable

Result: Sarah cannot claim bonus depreciation but gains $400,000 in eliminated capital gains and avoids $75,000 in depreciation recapture taxes (at 25% rate).

Example 2: Purchased Commercial Building (Comparison)

Scenario: Michael purchases an identical commercial building on March 15, 2026, for $1,200,000. After a cost segregation study, $300,000 qualifies as 5-year and 15-year property eligible for bonus depreciation.

Tax Treatment:

• Purchase price: $1,200,000
• Depreciable portion: $900,000
• Components eligible for bonus depreciation: $300,000
• Bonus depreciation deduction (Year 1): $300,000 (100%)
• Remaining basis for regular depreciation: $600,000 ÷ 39 years = $15,385 annually
• Total first-year depreciation: $315,385

Comparison: Michael receives $292,308 more in first-year deductions than Sarah ($315,385 vs. $23,077), demonstrating the substantial benefit of bonus depreciation—but only available for purchased property, not inherited assets.

Example 3: Inherited Rental Property with Cost Segregation

Scenario: Jennifer inherits a residential rental property in January 2026:

• Fair market value at death: $500,000
• Land value: $100,000
• Depreciable building: $400,000

She commissions a cost segregation study identifying property components:

• 27.5-year property (structure): $300,000
• 5-year property (appliances, carpeting): $60,000
• 15-year property (landscaping, fencing): $40,000

Tax Treatment:

• All components receive stepped-up basis to FMV allocations
• Bonus depreciation: None applicable—all property basis determined under Section 1014(a)
• Regular depreciation calculation:
  • 27.5-year property: $300,000 ÷ 27.5 = $10,909
  • 5-year property: $60,000 ÷ 5 = $12,000
  • 15-year property: $40,000 ÷ 15 = $2,667
  • Total Year 1 depreciation: $25,576

Key Insight: Cost segregation studies remain valuable for inherited property because they identify shorter-life assets that depreciate faster under regular MACRS—but the 100% bonus depreciation available on purchased property cannot be claimed.

Example 4: Estate Planning Strategy—Cost Segregation Before Death

Scenario: Robert owns a commercial property (original basis $600,000, current FMV $1,200,000). He is terminally ill. His tax advisor recommends a cost segregation study before filing his final tax return.

Pre-Death Strategy:
A cost segregation study identifies $150,000 in accelerated depreciation previously unclaimed. Robert files Form 3115 to change accounting method, claiming $150,000 in additional depreciation on his final return through a Section 481(a) adjustment.

Impact:

• Robert’s estate: $150,000 tax deduction reduces final income tax liability by approximately $37,500 (at 25% rate)
• Robert’s adjusted basis: Reduced to $450,000 before death
• Heirs receive: Property with stepped-up basis of $1,200,000 at death
• Net advantage: Permanent tax savings of $37,500, plus heirs receive full FMV basis with no carryover of depreciation recapture

This strategy leverages the fact that the step-up in basis eliminates the impact of depreciation claimed before death, making accelerated depreciation on the decedent’s final return a permanent tax savings.

Related Party Transactions and Special Situations

Section 743(b) Adjustments in Partnerships

When a partner purchases a partnership interest (rather than inheriting it), resulting Section 743(b) basis adjustments may qualify for bonus depreciation—but only if specific conditions are met:

1. The transaction occurs between unrelated partners
2. The partnership has a Section 754 election in effect
3. The adjustment relates to property with a recovery period of 20 years or less
4. The acquisition and placed-in-service requirements are satisfied

Critical Distinction: If a partnership interest is inherited, the resulting basis adjustment does not qualify for bonus depreciation because it stems from property acquired from a decedent under Section 1014(a). The same exclusion that bars inherited direct property ownership from bonus depreciation applies to inherited partnership interests.

Section 1014(e): The One-Year Gift Exception

Section 1014(e) contains an anti-abuse provision preventing manipulation of the step-up rules. If a decedent receives appreciated property as a gift within one year of death, and that property passes back to the original donor (or donor’s spouse), the basis does not receive a step-up.

Example: Father gifts appreciated stock (basis $100,000, FMV $500,000) to his terminally ill daughter. She dies eight months later, leaving the stock back to her father. Result: Father’s basis remains $100,000—no step-up to $500,000.

This provision prevents “round-trip” transfers designed solely to obtain basis step-ups on assets expected to be inherited back by the donor.

1031 Exchanges and Inherited Property

Heirs can perform Section 1031 like-kind exchanges with inherited property, deferring capital gains on subsequent appreciation. However, two key points apply:

1. Step-up typically eliminates the need: Because inherited property receives an FMV basis, there’s often minimal or no gain if sold shortly after inheritance
2. Subsequent exchanges defer taxes on post-inheritance appreciation: If the heir holds the property and it appreciates further, a 1031 exchange can defer those gains

The inherited property’s stepped-up basis carries forward into the replacement property acquired through the exchange.

Frequently Asked Questions (FAQs)

1. Can I claim bonus depreciation on property I inherited from my parents?

No. Property acquired through inheritance does not qualify for bonus depreciation under any circumstances. The basis of inherited property is determined under IRC Section 1014(a), which IRC Section 168(k)(2)(E)(ii)(II) explicitly excludes from bonus depreciation eligibility. However, you can depreciate the property using regular MACRS methods based on the stepped-up fair market value basis.

2. What if I make improvements to inherited property—do those qualify for bonus depreciation?

Yes. Improvements you make to inherited property after you acquire it are separately depreciable assets. Because you purchased these improvements (rather than inheriting them), they qualify for bonus depreciation if they meet all other requirements—recovery period of 20 years or less, acquired and placed in service after January 19, 2025, etc. The improvements are treated as separate property from the inherited building structure.

3. Does the step-up in basis apply to all inherited property?

Generally, yes, but with important exceptions:

• Qualified: Real estate, stocks, business assets, most tangible property
• Not qualified: IRAs, 401(k)s, and other “income in respect of a decedent” (IRD) items
• Special rule: Gifted property received by the decedent within one year of death that passes back to the donor does not receive a step-up

4. Can I do a cost segregation study on inherited property?

Yes, and it’s highly recommended. While inherited property doesn’t qualify for bonus depreciation, a cost segregation study can identify components with shorter recovery periods (5, 7, or 15 years) that depreciate faster than the building structure (27.5 or 39 years). This accelerates regular depreciation deductions, improving cash flow even without bonus depreciation benefits. You should obtain a date-of-death appraisal to establish the stepped-up basis for each component.

5. What happens to depreciation recapture when I inherit property?

Depreciation recapture liability is completely eliminated at death. The decedent’s accumulated depreciation does not carry over to you. Your basis steps up to fair market value, and you begin with a clean slate—no recapture obligation until you claim depreciation and eventually sell the property.

6. If I inherit property in a community property state, does that change bonus depreciation eligibility?

No. While community property states provide enhanced benefits—both spouses’ halves of community property receive a step-up in basis when one spouse dies—this does not overcome the bonus depreciation exclusion. The property still qualifies under Section 1014(a), which categorically bars bonus depreciation. However, the double step-up in community property states does provide greater regular depreciation deductions because both halves step up to current fair market value.

7. Can I elect out of the step-up in basis to claim bonus depreciation instead?

No. The step-up in basis under Section 1014(a) is mandatory, not elective. You cannot choose to take a carryover basis from the decedent in order to qualify for bonus depreciation. The tax code does not provide this option. Even if it did, the economic benefit of eliminating accumulated capital gains and depreciation recapture typically far exceeds the value of bonus depreciation.

8. What about property inherited through a trust—does that qualify for bonus depreciation?

No. Property distributed from a trust to beneficiaries after the grantor’s death is treated the same as direct inheritance. If the property receives a step-up in basis under Section 1014(a) because it was includible in the decedent’s gross estate, it does not qualify for bonus depreciation. The source of the inheritance (will, trust, intestacy) does not change this treatment—the determinative factor is whether basis is established under Section 1014(a).

9. How does inherited property compare to purchased property for tax benefits?

The comparison depends on multiple factors:

Inherited Property Advantages:

• Step-up in basis eliminates capital gains tax on pre-death appreciation
• Depreciation recapture from decedent’s ownership eliminated
• Automatically long-term holding period for capital gains purposes
• No cash outlay required

Purchased Property Advantages:

• Eligible for 100% bonus depreciation on qualifying components
• Complete control over acquisition timing and structure
• No estate tax implications
• Potential for favorable financing terms

Bottom Line: For highly appreciated property, inheritance often provides superior tax treatment despite losing bonus depreciation eligibility. The eliminated capital gains and recapture typically exceed the present value of accelerated depreciation.

10. What if I inherited a partnership interest—can the Section 743(b) adjustment qualify for bonus depreciation?

No. If you inherit a partnership interest, any resulting Section 743(b) basis adjustment does not qualify for bonus depreciation. Even though Section 743(b) adjustments can qualify for bonus depreciation when a partnership interest is purchased from an unrelated party, inherited interests fall under the Section 1014(a) exclusion. The adjustment to partnership property basis stems from property acquired from a decedent, making it ineligible for bonus depreciation.

11. Are there any states that treat inherited property differently for bonus depreciation?

No. State conformity to federal bonus depreciation rules varies significantly. While some states follow federal bonus depreciation provisions, many have decoupled and do not allow bonus depreciation at all—including California, New York, and numerous others. However, no state provides bonus depreciation for inherited property if the property doesn’t qualify at the federal level. The Section 1014(a) exclusion is a federal law matter that states cannot override for federal tax purposes, though state tax treatment of inherited property basis may vary.

12. Can I claim Section 179 expensing on inherited property?

No. Section 179 expensing has the same “acquired by purchase” requirement as bonus depreciation. Property acquired from a decedent does not meet the purchase requirement. The Section 179 deduction is available only for property acquired through a bona fide purchase transaction, not through inheritance, gift, or other non-purchase transfers.

13. What if I sell inherited property shortly after receiving it—can the buyer claim bonus depreciation?

Yes. When you sell inherited property, the buyer acquires it through a purchase transaction. Assuming the buyer is not a related party and meets all other requirements, the buyer can claim bonus depreciation on qualifying property components with recovery periods of 20 years or less. Your inherited status does not affect the buyer’s ability to claim bonus depreciation—the buyer’s eligibility depends solely on their acquisition method and relationship to you as the seller.

14. Does the One Big Beautiful Bill Act change the treatment of inherited property?

No. While the One Big Beautiful Bill Act permanently restored 100% bonus depreciation for property acquired and placed in service after January 19, 2025, it did not modify the exclusion for inherited property. IRS Notice 2026-11, issued January 14, 2026, confirms that existing regulatory rules continue to apply, including the Section 1014(a) exclusion. Inherited property remains categorically ineligible for bonus depreciation regardless of the current 100% rate.

15. Should I consider estate planning strategies to maximize depreciation benefits?

Yes. Several strategies can optimize depreciation across generations:

Pre-Death Cost Segregation: Conduct a cost segregation study and file Form 3115 before the decedent’s final tax return deadline to claim missed accelerated depreciation. The step-up eliminates the basis reduction, creating permanent tax savings.

Post-Death Cost Segregation: Heirs should commission cost segregation studies on inherited property to identify short-life assets that depreciate faster under regular MACRS.

Strategic Gifting in Community Property States: In community property states, converting separate property to community property before death can result in a full step-up on both halves.

Hold Until Death Strategy: For highly appreciated rental property, holding until death (rather than selling) eliminates capital gains and depreciation recapture for heirs—often called “swap ’til you drop” when combined with 1031 exchanges during life.

Reporting and Compliance Considerations

Form 4562: Depreciation and Amortization

Inherited property depreciation is reported on IRS Form 4562. Key reporting requirements include:

• Basis determination: Document the fair market value at date of death with appraisals or estate tax returns
• Placed-in-service date: Use the date you converted inherited property to rental or business use (if not already in such use)
• Recovery period: Apply appropriate MACRS recovery period based on property type
• Convention: Mid-month convention for real property, typically half-year for personal property

Documentation Requirements

Maintain comprehensive records for inherited property:

1. Date-of-death appraisal: Professional appraisal establishing FMV and supporting stepped-up basis
2. Estate tax return (Form 706): If filed, provides official valuation
3. Allocation between land and building: Document how FMV was allocated to depreciable vs. non-depreciable components
4. Cost segregation study: If performed, engineering report supporting component allocations
5. Inheritance documentation: Will, trust documents, or other proof of inheritance

Proper documentation is essential because the IRS may challenge basis determinations, particularly when no estate tax return was required and appraisals were not performed contemporaneously with death.

Strategic Tax Planning: Maximizing Value from Inherited Property

When Inheritance Beats Purchase: Quantitative Analysis

Consider a property with the following characteristics:

Decedent’s Position:

• Original basis: $500,000
• Accumulated depreciation: $200,000
• Adjusted basis: $300,000
• Fair market value at death: $1,000,000

If Heir Purchases (Hypothetical):

• Purchase price: $1,000,000
• Bonus depreciation (30% of value via cost segregation): $300,000
• Regular depreciation basis: $700,000
• Tax benefit of bonus depreciation in year 1 (at 37% rate): $111,000

Actual Inheritance:

• Stepped-up basis: $1,000,000
• Bonus depreciation: $0
• Regular depreciation basis: $1,000,000
• Capital gains eliminated: $700,000 × 20% = $140,000 saved
• Depreciation recapture eliminated: $200,000 × 25% = $50,000 saved
• Total taxes avoided: $190,000

Net Advantage: Inheritance provides $79,000 more benefit than purchase ($190,000 eliminated taxes vs. $111,000 bonus depreciation benefit), even without considering the time value of the deferred regular depreciation on the higher basis.

Integration with Overall Estate Planning

Depreciation strategies should integrate with broader estate planning objectives:

Basis Planning: In separate property states, consider transferring appreciated property solely into the name of the spouse expected to die first to obtain a full step-up on 100% of the property (rather than just 50%).

Timing Strategies: For properties where substantial improvements are planned, consider whether improvements should be made before or after death. Pre-death improvements increase the stepped-up basis; post-death improvements qualify for bonus depreciation as new property.

Entity Structure: Properties held in partnerships, LLCs, or S corporations may receive different basis treatment. Review entity structures with advisors to optimize both estate tax and income tax outcomes.