Inherited Rental Property Calculator (2026)

When you inherit a rental property, IRC §1014 resets your tax basis to fair market value — permanently eliminating every dollar of deferred capital gain, depreciation recapture, and NIIT the decedent built up over decades. This calculator quantifies the tax windfall, shows your new depreciation deduction, reveals the often-missed §469(j)(6) passive loss trap, and compares the sell-now vs. hold-and-rent decision with real numbers.

The IRC §1014 step-up: your largest single tax event

Most investors know, in the abstract, that inherited property gets a "step-up in basis." Fewer understand what that actually erases. A parent who bought a fourplex in 2001 for $300,000 and rented it for 23 years has three liabilities piling up invisibly on their balance sheet:

• §1250 unrecaptured depreciation. Twenty-three years of straight-line deductions (roughly $200K on a $240K building) are taxed at up to 25% when the property sells.
• Long-term capital gains. Appreciation from $300K to $950K creates a $650K+ LTCG layer taxed at 15–20%.
• NIIT. The 3.8% surtax stacks on both layers for passive investors with income above $250K (MFJ).

On the $950K example: that's roughly $212,000 in federal tax. At death, all of it disappears permanently under IRC §1014. You inherit with a $950,000 basis. If you sell the next week at $950,000, your gain is zero and your tax is zero.

Your fresh depreciation schedule: 2–4× the decedent's deduction

The step-up doesn't just eliminate sale taxes — it resets your depreciation for as long as you hold the property as a rental. Under Reg. §1.168(i)-4, you take the property in service on the date of inheritance (or estate distribution) with a fresh 27.5-year recovery period and a depreciable basis equal to the stepped-up FMV (building portion).

In the $950K example: the parent's building basis was $240,000, yielding $8,727/year. With 4.5 years left on their schedule, they were nearly out of deductions. You inherit with a $760,000 depreciable basis, generating $27,636/year — more than 3× larger and running for a full 27.5 years.

This is one of the few scenarios in tax law where the heir ends up materially better positioned than the decedent would have been: more depreciation, lower taxable rental income, and no exposure to any of the accumulated liabilities.

The §469(j)(6) passive loss trap that catches heirs off guard

Here's the trap: the decedent may have accumulated years of suspended passive activity losses on this property — deductions that were never usable because rental income was insufficient or income was too high to qualify for the $25K active allowance. These losses live on Form 8582. They're real assets, in a sense — they represent future tax deductions waiting to be unlocked.

IRC §469(j)(6) extinguishes most of them at death. The rule: suspended losses are allowed only to the extent they exceed the step-up in basis. In most long-hold cases, the step-up is large and the suspended losses are smaller — so all of them are permanently disallowed. If suspended losses are $150K and the step-up is $650K, every dollar is gone.

The planning implication: if a decedent had large suspended PAL carryforwards and a rental property with modest accumulated gains (maybe a recently purchased property they've already depreciated aggressively with cost segregation), it might have been worth disposing of the property during their lifetime to unlock those losses rather than letting them evaporate at death. This kind of pre-death planning is something a specialist can model.

Sell immediately vs. hold: the decision framework

The unusual thing about inheriting at FMV is that selling immediately is essentially tax-free. There's no other legal scenario where a property with $650,000 of embedded gain can be sold at full price with $0 in federal tax. This creates a genuinely symmetric decision:

• Sell immediately if you don't want to be a landlord, need liquidity, or the property has management challenges. You walk away with your full equity, zero capital gains tax, and clean books.
• Hold if the rental income plus depreciation tax shield produces a return that exceeds what you'd earn investing the sale proceeds. Your depreciation deduction is typically much larger than the decedent's — which may make the economics compelling.
• Hold and cost segregate if you qualify for REPS or the STR loophole. Inherited property is the ideal cost seg candidate: fresh stepped-up basis, no legacy cost seg recapture to manage, and the full 100% OBBBA bonus depreciation available on 5/7/15-year components. A $950K property with 30% reclassification produces $228,000 in year-1 deductions.

The calculator's break-even year assumes no property appreciation — add expected equity growth to make the comparison more realistic. Most heirs who hold quality rental property long-term benefit from both the cash flow and continued appreciation, which compounds significantly over time.

1. IRC § 1014 — Basis of property acquired from a decedent; FMV step-up at death (Cornell LII)
2. IRC § 469(j)(6) — Treatment of passive losses on death of taxpayer; suspended losses allowed only to extent they exceed the §1014 basis increase (Cornell LII)
3. IRC § 1(h)(1)(D) — Unrecaptured §1250 gain taxed at maximum 25% rate (Cornell LII)
4. IRC § 1411 — Net Investment Income Tax; 3.8% surtax on passive investment income; thresholds $200K single/$250K MFJ, not indexed for inflation (Cornell LII)
5. IRS Rev. Proc. 2025-61 — 2026 inflation adjustments including LTCG brackets: 0% ≤$49,450 single/$98,900 MFJ; 20% above $545,500 single/$613,700 MFJ (IRS.gov)
6. Treas. Reg. § 1.168(i)-4 — Depreciation following change in use; basis and recovery period reset on conversion to rental use (Cornell LII)

Tax values verified as of June 2026. §1014 step-up rule: stable statutory provision. §469(j)(6) PAL trap: stable statutory provision. §1250 max rate 25%: IRC §1(h)(1)(D). 27.5-yr MACRS residential: §168(c). LTCG brackets: IRS Rev. Proc. 2025-61. NIIT 3.8%: IRC §1411, thresholds not indexed.