Step-Up Basis Cost Segregation
Re-Originating Depreciation Through Fair Market Value Reset
Valuation-Driven | Estate-Aligned | IRS-Defensible
When income-producing real property passes through an estate, the tax basis is often reset to fair market value (FMV) as of the date of death (or alternate valuation date).
This step-up in basis creates a rare and powerful opportunity to re-originate depreciation, even for properties that were previously fully depreciated or never subjected to cost segregation.
At us, we treat estate-related cost segregation not as a continuation of prior schedules, but as a discipline of capital re-origination grounded in valuation law and depreciation mechanics.
Why Inherited Property Is Structurally Different
Unlike acquisitions or exchanges, estate-passed properties introduce a fundamentally new depreciation framework:
- Prior owner’s depreciation history does not carry forward
- Basis is reset to FMV under IRC §1014
- Depreciation is restarted from the inherited value
- Assets may now qualify for accelerated recovery even if previously exhausted
This allows cost segregation to be re-initiated from a clean capital base, anchored in estate valuation — not historical cost.
The Economic Opportunity for Heirs
For heirs, beneficiaries, and family offices, step-up basis cost segregation can:
- Restore depreciation to long-held legacy properties
- Generate substantial non-cash tax deductions
- Improve post-inheritance cash flow
- Support refinancing, recapitalization, and portfolio restructuring
- Re-align tax depreciation with current economic reality
This is one of the most powerful — and underutilized — applications of cost segregation.
Our Methodology: Valuation-Driven Depreciation Re-Origination
Estate-based cost segregation begins not with engineering — but with valuation discipline.
1. Establishing Fair Market Value (FMV)
Our process begins with a defensible FMV determination as of:
- Date of death, or
- Alternate valuation date (when elected)
This may involve:
- Appraisal-based valuation
- Review of estate tax filings (Form 706)
- Reconciliation of market, income, and cost approaches
- Coordination with estate attorneys, fiduciaries, and CPAs
FMV becomes the new depreciation foundation, not historical cost.
2. Land & Improvement Allocation Based on FMV
Once FMV is established, we allocate:
- Non-depreciable land
- Depreciable building
- Site improvements
Using:
- Market-based land abstraction
- Residual valuation techniques
- Appraisal discipline
This ensures depreciation applies only to properly depreciable capital derived from the new FMV basis.
3. Fresh Cost Segregation on the Reset Basis
We then perform a full cost segregation study based on the FMV-derived improvement basis:
- Reclassifying qualifying assets into §1245 and §1250 categories
- Applying applicable bonus depreciation and recovery rules
- Establishing new recovery lives
- Fully independent of the decedent’s depreciation history
This is not an adjustment — it is a new depreciation origination event.
Why Prior Depreciation Does Not Limit the Heirs
A common misconception is that depreciation “runs out” with the property.
In reality:
- Depreciation belongs to the taxpayer, not the asset
- Upon inheritance, the property receives a new tax basis
- The heir’s depreciation is independent of the decedent’s schedules
This allows cost segregation to be applied even when:
- The property is decades old
- Prior depreciation was fully exhausted
- No prior cost segregation existed
When Step-Up Basis Cost Segregation Is Most Valuable
- Long-held family real estate
- Fully depreciated legacy assets
- Commercial, multifamily, hospitality, and mixed-use properties
- Industrial and special-purpose assets
- Properties entering refinancing or recapitalization
- Assets being repositioned or restructured post-inheritance
IRS-Defensible Documentation
Our estate-related cost segregation engagements emphasize:
- Valuation-grade FMV support
- Full reconciliation to estate tax filings
- Clear separation from decedent depreciation
- Audit-ready classification schedules
- Documentation suitable for fiduciary, CPA, and IRS review
This ensures the depreciation reset is:
✔ Legally supportable
✔ Institutionally defensible
✔ Sustainable under audit
Why This Requires Valuation Discipline
Generic cost segregation firms are typically not equipped to:
- Establish FMV
- Interpret estate tax filings
- Reconcile depreciation across ownership boundaries
- Coordinate with fiduciaries and estate counsel
This is why step-up basis cost segregation belongs in a valuation-centric practice, not a tax-only workflow.
Bottom Line
Step-up basis cost segregation is not a tax strategy.
It is a capital re-origination discipline rooted in valuation law and depreciation mechanics.
At us, estate-related cost segregation is performed with:
- Valuation-anchored FMV establishment
- Appraisal-based land abstraction
- Fresh depreciation origination
- IRS-defensible documentation
Discuss Step-Up Basis Cost Segregation Feasibility
If you have inherited income-producing property, a properly structured cost segregation study based on FMV may materially improve after-tax cash flow — but only when executed with valuation discipline and estate alignment.
👉 Request a Step-Up Basis Cost Segregation Consultation