Bonus depreciation on inherited property is generally not available for the inherited asset itself. The IRS disqualifies any property whose basis is determined under the stepped-up basis rules of Section 1014(a), and inherited assets also typically fail the “original use” test because the decedent already placed them in service. The stepped-up basis is still a powerful depreciation tool under standard MACRS schedules, and any new improvements or new personal property you buy after the inheritance can qualify for the full 100% bonus depreciation restored by the One Big Beautiful Bill Act.
Why the Inherited Asset Fails Both Qualification Paths
Section 168(k) offers two doors into bonus depreciation. Property either satisfies the original use test, meaning the taxpayer is the first person ever to place it in service, or it meets a separate set of requirements for used property. Inherited assets almost always fail both.
The original use path closes because the decedent typically already used the property. A rental building the decedent operated, equipment a family business relied on, or farmland already in production all had a prior user. The heir isn’t the first to place these assets in service.
The used property path closes for a specific statutory reason. One of the five requirements the IRS lists for used property bonus depreciation is that “the taxpayer’s basis in the property is not determined under section 1014(a) or 1022, relating to property acquired from a decedent.”1Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ Inherited property receives its basis under Section 1014(a), so it automatically fails this test.
A common misconception is that inherited property qualifies because the heir is “treated as having purchased” the asset at fair market value. Section 1014 sets the heir’s basis at FMV on the date of death, but it does not convert the inheritance into a purchase for bonus depreciation purposes.2Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Claiming the deduction based on that reasoning can produce penalties on audit.
What the Stepped-Up Basis Does Give You
Section 1014 is still one of the most valuable provisions in the code. When you inherit property, your cost basis resets to fair market value on the date of the decedent’s death, and all of the decedent’s unrealized appreciation vanishes for tax purposes.2Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
That fresh basis becomes the starting point for standard MACRS depreciation if you use the property in a trade or business or hold it for the production of income. A commercial building the decedent bought decades ago for $200,000 that’s worth $900,000 at death gives you a $900,000 depreciable basis, minus the land allocation. You depreciate that amount over the applicable MACRS life: 27.5 years for residential rental property, 39 years for nonresidential real property.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System That’s a much larger annual deduction than the decedent’s lower basis would have produced.
Before you calculate anything, subtract the land value from the total fair market value. Land is not depreciable. The most common approach references the local property tax assessment, which typically breaks land and improvement values out separately. A professional appraisal can support a different allocation when the assessment split looks unreasonable. The burden of justifying the method sits with you.
One boundary matters here. An inherited home that was the decedent’s personal residence is not depreciable in your hands until you actually convert it to business or income-producing use. Simply intending to sell doesn’t count. Listing the property for rent, making repairs to prepare it for tenants, or beginning to use it in your business are the concrete steps. The property is placed in service on the date it’s genuinely ready and available for its intended income-producing purpose.
Cost Segregation Accelerates the Standard Deductions
Even without bonus depreciation, a cost segregation study can dramatically front-load your deductions on inherited real property. The study identifies building components that qualify for shorter MACRS recovery periods — 5, 7, or 15 years instead of the 27.5 or 39 years that apply to the structure itself.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Electrical systems, plumbing fixtures, carpeting, cabinetry, parking lot paving, and landscaping are typical reclassification candidates.
For inherited property, the study applies to the stepped-up basis. If the depreciable basis after subtracting land is $800,000 and the study reclassifies 20% to 30% into shorter-lived categories, $160,000 to $240,000 of that basis depreciates over 5 to 15 years rather than 39. Annual deductions in those early years are substantially larger than straight-line depreciation on the full amount.
The reclassified components still don’t qualify for bonus depreciation. Their basis is still determined under Section 1014. But the faster MACRS schedule alone produces meaningful savings. Studies for single residential rentals generally run $5,000 to $15,000, so the math needs to work relative to the property’s value. On higher-value commercial property, the study almost always pays for itself many times over.
New Improvements Can Qualify for 100% Bonus Depreciation
This is where bonus depreciation comes back into play. New improvements you pay for after the inheritance have a basis determined by your actual expenditure, not under Section 1014. They can qualify under the normal rules.
Qualified Improvement Property is the most common example in real estate. QIP is any improvement to an interior portion of a nonresidential building placed in service after the building itself was originally placed in service. The CARES Act assigned QIP a permanent 15-year MACRS recovery period, which falls within the 20-year-or-less threshold for bonus depreciation eligibility.4Internal Revenue Service. Rev. Proc. 2020-25 New interior walls, flooring, lighting, and wiring in a commercial building you inherited all potentially qualify.
The same logic applies to new tangible personal property you buy for the inherited property: appliances for a rental, equipment for a business, or furniture for a commercial space. As long as you purchase the items yourself rather than inheriting them as part of the estate, the basis is yours and bonus depreciation applies.
Keep the costs of new improvements completely separate from the inherited building’s basis in your records. Only the amount you personally spend qualifies. The inherited structure continues depreciating under the standard straight-line schedule over its full MACRS life.
The Rate Is Now 100% Again
The bonus depreciation landscape changed significantly in 2025. Under the original TCJA phase-down schedule, the rate was dropping 20 percentage points per year: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, with full expiration in 2027. The One Big Beautiful Bill Act (P.L. 119-21), enacted in 2025, scrapped that sunset and permanently restored the rate to 100% for qualifying property acquired and placed in service after January 19, 2025.5Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k) (Notice 2026-11)
For heirs, this matters for new improvements and new personal property purchases, not the inherited asset itself. If you inherit a commercial building and spend $150,000 on interior renovations qualifying as QIP after January 19, 2025, you can deduct 100% of that cost in the year the improvements are placed in service.6Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
Property you acquired before January 20, 2025, still follows the old schedule. If you placed inherited property into service in 2024 and made qualifying improvements that same year, those improvements were subject to the 60% rate. The acquisition date, not the placed-in-service date, determines which percentage applies.
Section 179 Isn’t a Workaround
Section 179 expensing does not offer an alternative for the inherited asset itself. The IRS is explicit: “property acquired by gift or inheritance does not qualify” for Section 179 because inherited property is not considered “acquired by purchase” when its basis is determined under the stepped-up basis rules.7Internal Revenue Service. Publication 946 – How To Depreciate Property
Section 179 does apply to new property you personally purchase for use with the inherited asset. The 2026 deduction limit is $2,560,000, with a phase-out beginning once total qualifying property placed in service exceeds $4,090,000. Unlike bonus depreciation, Section 179 cannot create or increase a net operating loss. It’s limited to your taxable business income for the year, and any amount you can’t use carries forward.
Recapture When You Sell
Every dollar of depreciation you claim on inherited property reduces your adjusted basis, which increases the taxable gain when you eventually sell. The recapture rate depends on the type of property.
For personal property like equipment, appliances, and the components identified in a cost segregation study, gain attributable to prior depreciation is recaptured as ordinary income under Section 1245.8Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets That means taxation at your marginal rate, which can reach 37%. Recapture applies dollar-for-dollar up to the total depreciation you claimed.
For real property structures, the treatment is more favorable. Unrecaptured Section 1250 gain, the portion attributable to depreciation previously taken on the building, is taxed at a maximum rate of 25%.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses Any gain beyond the depreciation amount receives standard long-term capital gains rates.
Aggressive front-loading through cost segregation and bonus depreciation on improvements saves money now, but it shifts the bill to the sale date at potentially higher rates. If you plan to hold the property long-term or pass it to your own heirs (triggering another step-up that would erase the recapture), the strategy tilts toward taking every deduction available.
Check Your State’s Conformity
Several states do not conform to federal bonus depreciation rules. California, Illinois, Michigan, Maine, Delaware, and the District of Columbia are among the jurisdictions that have enacted partial or full decoupling from the federal provisions, including the 100% rate restored by the OBBB. If you live or own property in one of these states, you may need to calculate a separate state-level schedule even for new improvements that qualify federally. A mismatch between federal and state returns can trigger state audit inquiries.
How to Report It
All depreciation deductions, both standard MACRS on the inherited basis and any bonus depreciation on new improvements, are reported on Form 4562, Depreciation and Amortization. Bonus depreciation for qualifying new improvements goes in Part II. Regular MACRS depreciation on the inherited building and its reclassified components is reported in Part III.10Internal Revenue Service. Instructions for Form 4562 – Depreciation and Amortization
Bonus depreciation is claimed automatically unless you elect out for a specific class of property. Electing out applies to the entire class (all 5-year property, for example), not individual assets. You cannot cherry-pick which qualifying assets within a class receive the deduction. For rental property, depreciation flows to Schedule E on Form 1040.