Inherited a rental property: how basis and depreciation work

Step one: find the basis

Basis is the number the IRS uses for depreciation and for working out gain when you sell. For property you bought, it starts with cost. IRS Publication 527 says you cannot use cost as basis for property received as an inheritance and sends you to Publication 551.

IRS Publication 551 says the basis of inherited property is generally one of these: the fair market value on the date of death, the value on an alternate valuation date if the estate chose one, or a special-use value in some farm and closely held business cases. For a typical rental apartment building or house, the first one is the one to expect.

• If the estate had to file a federal estate tax return (Form 706), the beneficiaries generally receive a Schedule A (Form 8971) from the executor showing the estate tax value of what they received. Publication 551 says certain beneficiaries must use that value as their starting basis.
• If you did not get a Schedule A, Publication 551 says you can generally use the appraised value at the date of death for state inheritance or transmission tax purposes.
• Ask the executor early for the appraisal or the Schedule A. It is far easier to get it now than three years later.

One exception to know about: Publication 551 says the date-of-death rule does not apply to appreciated property you or your spouse gave to the person within one year before their death. In that case your basis is their adjusted basis immediately before death. Tell your preparer if that could apply.

Step two: split land and building

Land is never depreciated, so the new basis has to be divided. The same method used for a purchase works: use the county assessment's land and improvement values, or an appraisal, to find the land share. The full method is in allocating a purchase price between land and building.

Example a made-up fourplex is worth $400,000 on the date of death. The county's latest assessment shows land at $80,000 and improvements at $320,000 out of $400,000, so land is 20% and building is 80%. The building basis is 80% of $400,000, which is $320,000. The land basis is $80,000. Check: $320,000 plus $80,000 is $400,000.

Step three: start your own depreciation

Your depreciation is figured on your new basis. Residential rental buildings are depreciated over 27.5 years with the mid-month convention, which treats the property as placed in service at the middle of the month. IRS Publication 527 says you can begin to depreciate rental property when it is ready and available for rent, so for a rental that is already occupied, depreciation starts when you take it over and it is available for rent. Ask your preparer to confirm the placed-in-service date for your case.

Example continuing the made-up fourplex, a full year of straight-line depreciation on the $320,000 building is $320,000 divided by 27.5, which is $11,636 (rounded). The first and last years are partial because of the mid-month convention. The IRS percentage tables in Publication 527 give the exact first-year amount for the month you started.

The person who died may have taken years of depreciation. Because your basis is reset, you start fresh and their past depreciation does not reduce your basis. The detail on the schedule itself is in 27.5 year depreciation.

Step four: open the books

1. Create the property's accounts on the day you take ownership: Land, Building, and a Building accumulated depreciation account that starts at zero.
2. Book the land and building at the split above. The other side of the entry is an equity account, such as Inherited property, not income. Inheriting something is not rental income.
3. If the property has a mortgage or other debt you took over, record it as a liability on the same day.
4. Move security deposits and prepaid rent from the estate's account to the LLC's books. Security deposits when a building changes hands explains the same issue for a sale.
5. Keep the appraisal, the Schedule A if you got one, and the assessment in the property's documents.

Example the made-up fourplex entry is debit Land $80,000, debit Building $320,000, credit Inherited property (equity) $400,000. Debits and credits both total $400,000.

Why the date-of-death value matters when you sell

Gain or loss on a later sale is measured from your basis, plus improvements and less depreciation you take. A higher starting basis means less gain on paper. If you sell soon after inheriting, the gain is often small. Depreciation you claim after inheriting can still be recaptured when you sell, as covered in depreciation recapture.

Do not guess at the number. A missing or low basis is the most common reason heirs pay more tax than they owe. Whether to keep the property in your name or move it into an LLC is a question for a lawyer, not for this article.

How DoorKeeping handles it

In DoorKeeping each property is its own LLC with its own ledger, so the land, building and depreciation start on the day you set the property up. Upload the appraisal and Schedule A to the property's documents, and ask Claude or ChatGPT to prepare the opening entry for your one-tap approval. DoorKeeping does not hold rent and does not give tax or legal advice, so confirm basis and the placed-in-service date with your preparer.

Sources

1. IRS, Publication 551, Basis of Assets, read Oct 30, 2026
2. IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026

Questions

What is my basis in an inherited rental property?

Generally its fair market value on the date the owner died. Publication 551 lists the main alternatives and the exceptions.

Do I keep the previous owner's depreciation schedule?

No. Your basis is reset, so you start your own depreciation on the building part of the new basis.

Is inheriting a rental property taxable income?

Receiving the property is not rental income. The rent you collect afterward is. Ask your preparer about any estate or inheritance tax your state may charge.

Where do I find the date-of-death value?

Ask the executor for the appraisal or the Schedule A (Form 8971). Without one, Publication 551 points to the appraised value used for state inheritance tax.