You inherit a rental property from a parent. The basis steps up to fair market value at the date of death. You place the property in service in your rental activity, and the tax savings look big.
So can you run a cost segregation study and pull bonus depreciation on the stepped-up basis?
The short answer is no. The longer answer is that you still get most of what makes inherited real estate one of the most tax-efficient assets in the Code. You just don't get the first-year bonus kicker on top of it.
Here's why, and what you should actually do.
The statutory chain that kills it
Bonus depreciation under IRC §168(k) lets you deduct a large percentage of qualifying property in year one. Under the One Big Beautiful Bill Act (P.L. 119-21, enacted July 4, 2025), the rate is back to 100% for qualified property that is both acquired and placed in service after January 19, 2025. Property placed in service from January 1–19, 2025, is generally limited to 40%. IRS Notice 2026-11 (issued January 14, 2026) is the interim guidance interpreting these rules, and taxpayers may continue to rely on the existing Treas. Reg. §1.168(k)-2 framework with the OBBBA dates substituted in.
OBBBA also made 100% bonus permanent; there is no scheduled phase-down after 2025.
To qualify, used property has to satisfy the acquisition requirements in §168(k)(2)(E)(ii)(II). That subclause incorporates the rules in §179(d)(2).
And §179(d)(2)(C) tells you exactly what is NOT a "purchase" for these purposes. Subparagraph (C)(ii) excludes property whose basis is determined under §1014(a).
§1014(a) is the step-up at death.
So inherited property fails the used-property acquisition test by definition. It cannot be bonus-eligible. The Treasury regulations confirm this through the used-property acquisition rules in Reg. §1.168(k)-2(b)(3)(iii) (which cross-references §179(d)(2)(C)), and the partnership analogue is illustrated explicitly in Reg. §1.168(k)-2(b)(3)(vi), Example 15, where a §743(b) basis adjustment triggered by a partner's death is denied bonus because the transferee's basis is determined under §1014.
The same exclusion shuts down bonus on a few other situations worth knowing:
- Property received by gift, where basis is determined under §1015 (substituted basis from the donor)
- The carryover-basis portion of §1031 replacement property, only excess basis above the relinquished property's remaining basis can potentially qualify for bonus
- §743(b) adjustments arising from a partner's death (per Example 15 above)
- §734(b) basis adjustments (separately ineligible because the partnership already had a depreciable interest)
What you still get
The bonus disallowance gets the headlines, but for most heirs the §1014 step-up is the bigger economic prize.
Three things happen at death that an heir gets to keep:
- All unrealized gain on the property is wiped out (for non-IRD property). The decedent's accumulated depreciation and §1250 recapture exposure die with them. You take the property at fair market value with a clean slate.
- The depreciation clock resets. You start a fresh 27.5-year (residential rental) or 39-year (nonresidential real property) MACRS schedule on the new, higher basis.
- You can still run a cost segregation study on that stepped-up basis.
Community-property bonus: Under §1014(b)(6), property held as community property in a community-property state generally receives a full step-up on both halves at the first spouse's death, not just the decedent's half. For couples in CA, TX, AZ, NV, NM, ID, LA, WA, WI (and certain elective-community-property regimes), this materially expands the step-up.
IRD carve-out: §1014(c) denies the step-up for items of income in respect of a decedent (e.g., installment-sale notes from a pre-death sale). A straightforward inherited rental property held directly by the decedent is not IRD, but watch for embedded IRD items.
Point 3 is where investors leave money on the table by assuming "no bonus" means "no acceleration."
Cost segregation still works on inherited property
A cost segregation study reclassifies components of the building from 27.5- or 39-year real property into shorter MACRS lives. For a residential rental, the typical reclassified buckets are:
- 5-year property, carpet, decorative lighting, appliances, certain tenant improvements, and other §1245 personalty (this is where the bulk of apartment-building reclassification lands)
- 15-year property, land improvements such as paving, fencing, landscaping, and site utilities
7-year property (office-style furniture, fixtures, and equipment) shows up in some studies but is uncommon as a dominant bucket on a pure residential rental.
Under MACRS:
- 5- and 7-year property uses the 200% declining balance method with the half-year convention (or mid-quarter, if more than 40% of MACRS personal property is placed in service in the last three months).
- 15-year property uses the 150% declining balance method with the half-year convention (or mid-quarter, when applicable).
- 27.5- and 39-year real property uses straight-line with the mid-month convention.
The bonus first-year deduction is off the table on the reclassified components, but the accelerated MACRS schedule on the shorter-lived components is fully available. On a building with meaningful 5- and 15-year content, that still produces a substantially front-loaded depreciation deduction compared to straight-lining 100% of the basis over 27.5 or 39 years.
A worked example
Say you inherit a small apartment building. Date-of-death FMV is $2,000,000, with $400,000 allocated to land and $1,600,000 to the building.
Without cost segregation: You depreciate $1,600,000 over 27.5 years, an annual run-rate of roughly $58,200. Year one is prorated under the mid-month convention based on the month you place the property in service. A January placement yields roughly $55,800; a July placement, roughly $26,700; a December placement, roughly $2,400. So "year one" is rarely the full annual figure.
With cost segregation: A study reclassifies, say, 20–30% of the building basis into 5- and 15-year lives. Assume 25%, or $400,000, leaving $1,200,000 in 27.5-year real property. Year-one depreciation jumps materially because the 5- and 15-year buckets are running on accelerated declining balance (with half-year/mid-quarter convention), while the 27.5-year piece continues at the same straight-line pace under mid-month.
You do not get a bonus first-year deduction on the reclassified components. But you do get the time value of recovering them over 5 and 15 years instead of 27.5.
The 25% reclassification figure is illustrative. Actual short-life percentages vary widely by property type, apartments often land in the 20–30% range, hospitality and certain retail can be higher, and office or pure industrial can be lower. Always rely on an engineering-based study for property-specific numbers.
For a property held long term, the cumulative present-value benefit of cost segregation on the stepped-up basis is significant on its own.
What can limit the deduction in practice
The accelerated deduction is only valuable if you can use it.
- Passive activity loss rules (§469). Rental real estate is per se passive unless you qualify as a real estate professional (REPS) under §469(c)(7) and materially participate, or unless the short-term rental exception applies. Without one of those, the loss is generally suspended and carries forward, useful, but not immediate.
- Excess business loss limitation (§461(l)). Even where the loss is non-passive, this can cap current-year usage for non-corporate taxpayers.
- State conformity. Many states decouple from federal MACRS lives, bonus, or §168(k) entirely. Check your state.
- Recapture on exit. When you sell, §1245 recapture on the 5-/7-/15-year property is taxed as ordinary income to the extent of prior depreciation, and §1250 on the real-property piece is taxed at a maximum 25% rate (unrecaptured §1250 gain). The decedent's recapture died at death, but yours begins to accrue from your placed-in-service date.
Filing mechanics
If you take the property and miss the cost seg in year one, you can generally capture the benefit later through a Form 3115 accounting method change with a §481(a) catch-up adjustment in the current year. You generally do not amend prior returns.
The narrow exception: a depreciation method is not "established" until used on two consecutive returns (Rev. Proc. 2015-13 framework, as updated by Rev. Proc. 2024-23). If you have filed only one return on the wrong life, you do not yet have a method to change, in that case the correct path is to amend that single return rather than file Form 3115.
In either path, you do not lose the deduction. You just file under the procedure that fits your facts.
What this looks like in practice
The strategy for inherited real estate is straightforward:
- Establish the date-of-death FMV and the basis allocation between land and building. Get an appraisal if one was not done for estate purposes. For community-property couples, confirm whether §1014(b)(6) gives a full double step-up.
- Run cost segregation on the building basis to reclassify components into 5-, 7-, and 15-year lives.
- Depreciate everything on accelerated MACRS over the assigned recovery periods. Skip §168(k) bonus entirely on the inherited basis.
- If inheritance and placed-in-service dates are in different tax years, or if the study is done after year one, claim the catch-up via Form 3115 with the current-year return, unless you only have one prior return on the wrong life, in which case amend that return.
- Plan around §469 / REPS, §461(l), and state conformity before assuming the deduction lands in the current year.
- Consider whether to elect out of §168(k) by class on other (non-inherited) acquisitions, now that 100% bonus is permanent and future-year deductions may be more valuable than current-year ones in some fact patterns.
Bottom line
Inherited property does not qualify for bonus depreciation. The statute is clear, the regulations confirm it, and there is no planning workaround that gets you around §179(d)(2)(C)(ii).
That is fine. The §1014 step-up, and, where it applies, the §1014(b)(6) community-property double step-up, is the bigger prize. Combined with regular MACRS and cost segregation on the shorter-lived components, you still get accelerated cost recovery on a clean, fair-market basis with no recapture exposure for the prior owner's depreciation.
If you have inherited real estate that is now in a rental activity, get the basis nailed down, run the study, file the depreciation method correctly, and model the §469 / §461(l) result before relying on the deduction. The dollars are still there, even without the bonus headline.
