Updated August 16, 2026
Step-up in basis resets the property's income tax cost basis to its fair market value as of the date of death. For an heir, that means the decades of capital gain and the accumulated depreciation the original owner would have owed tax on largely disappear — sell shortly after inheriting and there is often very little taxable gain. On a Los Angeles apartment building bought in the 1970s and fully depreciated, this is frequently the single largest number in the family's decision, and it is the reason so many long-held LA buildings come to market in the year or two after an owner dies rather than during their lifetime.
Capital gain resets. The heir's basis becomes the date-of-death value rather than what the parents paid. Fifty years of appreciation is not taxed to the heir.
Depreciation recapture resets. This is the part owners underestimate. A building that has been depreciated for decades carries a large recapture exposure taxed at a less favorable rate than long-term capital gain. The step-up clears it.
Depreciation starts over. The heir begins depreciating the stepped-up basis on a new schedule, which materially improves after-tax cash flow if they intend to hold.
Property tax is a completely separate system. Under Proposition 19, transfer to children generally triggers reassessment for property tax purposes. The income tax basis stepping up and the property tax basis resetting upward are two different things happening at once — one helps the heir, the other hurts them.
This is a genuinely important feature that owners in community property states have and owners elsewhere do not.
For property held as community property, the death of the first spouse generally results in a basis adjustment on the entire property — both halves — not just the deceased spouse's half. In a separate property state, only the decedent's interest would adjust, leaving the survivor holding half at the old basis.
The practical consequence for an LA couple who bought a building together in 1978: on the first death, the whole building's basis can reset to current value. The surviving spouse can then sell with little gain, or hold and depreciate from the new basis. How title is actually held and characterized matters enormously here, and it is worth confirming with a CPA and an estate attorney rather than assuming — the difference between the right and wrong characterization on a multi-million dollar building is very large.
Families weighing what to do with an aging owner's building are usually comparing options that the step-up changes the ranking of.
Selling during the owner's lifetime. Full capital gain plus depreciation recapture, plus Measure ULA in LA City, plus California withholding. The largest tax cost of the available paths, though it gives the family control of timing and process.
1031 exchange during the owner's lifetime. Defers the income tax and can carry the deferred gain to death, where the step-up may eliminate it. This is why "exchange and hold until death" has been a standard strategy for California multifamily families for decades.
Holding until death, then selling. Income tax largely resolved by the step-up. Property tax reassessment occurs on the transfer. Whether the heirs can carry the reassessed tax bill in the interim is the practical question.
Holding until death, then keeping the building. Best income tax outcome and a fresh depreciation schedule, but the heirs absorb the reassessed property tax on a rent-stabilized income stream that cannot be raised to meet it.
None of these is universally right. What is universally true is that the comparison cannot be made without a current, credible value for the building — which is the number most families are missing when they have this conversation.
Get a date-of-death valuation. A qualified appraisal establishing the value as of the date of death substantiates the new basis. Doing it contemporaneously is far easier than reconstructing it years later, and the IRS is entitled to ask.
Do not rely on the assessed value. The county's assessed value is not the fair market value, and on a long-held LA building the two are not remotely close.
Talk to the CPA before selling. Particularly on whether an exchange still makes sense given the step-up, which is a question that answers itself differently for heirs than for the original owner.
The step-up is usually the largest single financial fact in an inherited LA apartment building, and it frequently makes selling shortly after inheriting far cheaper in tax terms than selling before. Get a proper date-of-death appraisal to substantiate the basis, keep the income tax picture separate in your head from the Proposition 19 property tax reassessment, and confirm how title was held — because in California, community property characterization can double the benefit.
Does the step-up apply if the building was in a living trust?
Property in a revocable living trust generally receives the same treatment as property held individually, because the settlor retained control. Irrevocable structures behave differently and vary considerably — that is a question for the estate attorney and CPA on the specific trust.
If I inherit and hold, do I get to depreciate again?
Yes. Depreciation begins fresh on the stepped-up basis over a new recovery period, which is a meaningful improvement in after-tax cash flow compared with what the prior owner was left with after decades of depreciation.
Does the step-up help with Measure ULA?
No. ULA is a transfer tax on gross price with no relationship to basis or gain. The step-up affects income tax only.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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