When a beneficiary inherits a rental or a portion of a rental, we all know that generally the beneficiary’s basis in the inherited property is the FMV at the decedent’s date of death. Although most of the time in this situation you will hear the term step-up in basis, the step-up term is not always correct. This is because in some cases, but not too frequently, the FMV is actually lower than the decedent’s basis, which could result in a step-down in basis.

With regard to the decedent’s accumulated depreciation, it does not pass on to the beneficiary and isn’t recaptured on the decedent’s final return. Instead, it just goes away, and the beneficiary, using the inherited basis, will start the depreciation anew, just as if they had purchased the rental property.