Inherited property does not qualify for bonus depreciation. The IRS disqualifies any asset whose basis is set under the stepped-up basis rules of Section 1014, and that covers virtually everything you receive from a decedent. The useful exception: new improvements and new tangible personal property you buy yourself for use with the inherited asset can qualify for the 100% bonus depreciation restored by the One Big Beautiful Bill Act, because your basis in those items comes from what you actually spent, not from the inheritance.
Why the Inherited Asset Itself Is Disqualified
Section 168(k) gives property two possible routes to bonus depreciation. It can satisfy the original use test, meaning the taxpayer is the first person ever to use the asset, or it can satisfy the used property acquisition requirements. Inherited assets fail both.
The original use path closes because the decedent almost always used the property before death. A rental building the decedent operated, equipment a family business relied on, farmland already in production — each had a prior user. You are not the first to place the asset in service.
The used property path closes at the basis-determination step. One of the five IRS requirements 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 this requirement is failed automatically.
A common misconception says heirs are “treated as having purchased” inherited property and therefore qualify. Section 1014 does set your basis at fair market value, 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 bonus depreciation on an inherited asset on this theory can draw penalties on audit.
What the Stepped-Up Basis Still Gives You
Losing bonus depreciation on the inherited asset is not as painful as it sounds, because the stepped-up basis itself is one of the most valuable provisions in the code. Your cost basis resets to the fair market value on the date of the decedent’s death, and the decedent’s unrealized appreciation disappears for tax purposes.2Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
That fresh basis is the starting point for standard MACRS depreciation when you use the property in a trade or business or hold it for income production. Suppose the decedent bought a commercial building decades ago for $200,000 and it is worth $900,000 at death. Your depreciable basis is $900,000 minus the land allocation, written off over the applicable MACRS life: 27.5 years for residential rental property or 39 years for nonresidential real property.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System That is a far larger annual deduction than the decedent’s low basis would ever have produced.
Land has to be stripped out before you depreciate, because land itself is never depreciable. The usual approach is to use the local property tax assessment, which typically breaks out land and improvement values. If that split looks unreasonable, a professional appraisal can support a different allocation. The burden to justify the method falls on you.
Documenting Fair Market Value
Your basis is only as defensible as your valuation. Large estates filing Form 706 can lean on the values reported there, but most estates fall below the filing threshold and never prepare one. In that case, order a formal appraisal close to the date of death. Residential and small commercial appraisals typically run $450 to $1,000, and that expense protects you if the IRS questions your basis years later.
If the Property Was the Decedent’s Home
An inherited home that was the decedent’s personal residence is not depreciable in your hands until you convert it to business or income-producing use. Planning to sell it does not count. You need concrete steps: listing the property for rent, making repairs to ready it for tenants, or beginning to use it in your business. The property is placed in service on the date it is genuinely ready and available for its income-producing purpose, and that date triggers your first depreciation deduction.
Cost Segregation Still Accelerates Your Deductions
Even without bonus depreciation on the inherited asset, a cost segregation study can front-load deductions significantly. The study identifies building components that qualify for shorter MACRS recovery periods of 5, 7, or 15 years instead of the 27.5 or 39 years that apply to the structure.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 reclassifications.
Applied to a stepped-up basis of $800,000 (after land), a study that moves 20% to 30% of the basis into shorter-lived categories could put $160,000 to $240,000 on a 5- to 15-year schedule instead of 39 years. The reclassified components still cannot claim bonus depreciation, because their basis still traces back to Section 1014. But the faster MACRS schedule alone produces meaningful tax savings.
Studies for single residential rentals generally run $5,000 to $15,000, so the math has to make sense relative to the property’s value. On higher-value commercial properties, the study almost always pays for itself many times over.
When New Improvements Can Qualify for Bonus Depreciation
Bonus depreciation re-enters the picture for anything you pay for after the inheritance. New improvements and new personal property have a basis determined by your actual expenditure, not by Section 1014, so the normal qualification rules apply.
Qualified Improvement Property is the most common example in real estate. QIP covers improvements to the interior of a nonresidential building placed in service after the building itself was placed in service. The CARES Act gave QIP a permanent 15-year MACRS recovery period, which puts it inside the 20-year-or-less threshold for bonus depreciation.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, furniture for a commercial space. If you purchase these items yourself rather than inheriting them with the property, the basis is yours and bonus depreciation is on the table.
Keep the cost of new improvements completely separate from the inherited building’s basis in your records. Only the amount you personally spend qualifies for bonus treatment. The inherited structure continues depreciating on its own straight-line schedule.
The Current 100% Rate and the Acquisition-Date Cutoff
Bonus depreciation changed significantly in 2025. The One Big Beautiful Bill Act (P.L. 119-21) scrapped the TCJA 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 at the level of new improvements and new personal property, not the inherited asset. Inherit a commercial building, spend $150,000 on QIP interior renovations placed in service after January 19, 2025, and you can deduct the full $150,000 that year.6Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
Property acquired before January 20, 2025 still follows the older phase-down schedule. Improvements made in 2024, for example, were subject to the 60% rate. It is the acquisition date, not the placed-in-service date, that determines which percentage applies.
Section 179 Is Also Off the Table
Section 179 is not a workaround. The IRS states plainly that “property acquired by gift or inheritance does not qualify” for the Section 179 deduction, because inherited property is not acquired by purchase when its basis is set 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 when total qualifying property placed in service exceeds $4,090,000. Section 179 cannot create or increase a net operating loss; it is limited to your taxable business income for the year, and any amount you cannot use carries forward.
Before You Count on the Deductions
Passive Activity Loss Limits
Large depreciation deductions on inherited rental property often exceed rental income and create a paper loss. Rental activities are generally classified as passive regardless of how much time you spend managing them, and passive losses can only offset passive income, not wages or business profits.8Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited Unused passive losses carry forward until you generate passive income or sell the property.
Smaller landlords get a limited break. If you actively participate in the rental and own at least 10% of the property, you can deduct up to $25,000 of rental losses against non-passive income. That allowance phases out at 50 cents per dollar once AGI exceeds $100,000 and disappears entirely at $150,000.8Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited Qualifying as a real estate professional removes the passive classification entirely, but the hour requirements are high enough that taxpayers with full-time jobs outside real estate rarely qualify.
Depreciation Recapture When You Sell
Every dollar of depreciation reduces your adjusted basis and increases the taxable gain at sale. For personal property such as equipment, appliances, and components identified in a cost segregation study, gain attributable to prior depreciation is recaptured as ordinary income under Section 1245, taxed at your marginal rate up to 37%.9Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets For the building structure itself, unrecaptured Section 1250 gain attributable to prior depreciation is taxed at a maximum rate of 25%.10Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Aggressive depreciation saves money now but shifts tax to the sale year at potentially higher rates. If you plan to hold long-term or pass the property to your own heirs (which triggers another step-up and erases the recapture), the calculation tilts toward taking every deduction available.
State Nonconformity
Several states do not conform to federal bonus depreciation. California, Illinois, Michigan, Maine, Delaware, and the District of Columbia are among the jurisdictions with partial or full decoupling, including from the 100% rate restored by the OBBB. In those states you may need a separate state-level depreciation schedule even for new improvements that qualify federally. A tax professional familiar with your state’s conformity status is worth having when inherited property is producing large deductions.
How to Report It
All depreciation deductions, standard MACRS and any bonus depreciation on new improvements, go on IRS Form 4562, Depreciation and Amortization. Bonus depreciation for qualifying new improvements is reported in Part II; regular MACRS depreciation on the inherited building and its reclassified components is reported in Part III.11Internal Revenue Service. Instructions for Form 4562 – Depreciation and Amortization
Bonus depreciation applies automatically unless you elect out, and the election out applies to an entire class of property such as all 5-year assets. You cannot pick and choose within a class. For rental property, the deduction flows through to Schedule E on Form 1040. Bonus depreciation on new improvements can create or increase a net operating loss, which carries forward to offset future income; most taxpayers have no carryback available. Standard MACRS depreciation on inherited property components can also contribute to passive losses, which carry forward separately under the Section 469 rules until released.