By the Numbers (illustrative example)
If you've inherited an industrial building, the most valuable tax fact is also the least known: the cost basis resets to market value on the date of death. Decades of depreciation and appreciation that would have been taxed on a sale by the original owner can largely disappear for the heirs. That reset shapes every decision that follows, so it's worth understanding before you list, hold, or divide anything.
The step-up in basis, in plain terms
Under IRC Section 1014, property you inherit generally takes a tax basis equal to its fair market value at the owner's date of death. Your gain on a later sale is measured from that number, not from what your parent paid decades ago. The depreciation the prior owner took, including the Section 1250 recapture most sellers underestimate, does not carry over to you. It is one of the few places the tax code favors the heir over the original owner.
What it looks like on a real building (illustrative)
Say a parent bought a Concord industrial building in the late 1990s and, after years of depreciation, the adjusted basis is about $600,000. The building is now worth $5 million. If the parent sold it while alive, the taxable gain would be roughly $4.4 million, and federal, state, and recapture taxes on that could easily run well over $1 million. If the heirs inherit it at a $5 million stepped-up basis and sell at that value, the taxable gain is close to zero. These figures are illustrative only; your numbers depend on the actual basis, the date-of-death value, and your CPA's read of your situation.
What the step-up does not fix: California reassessment
The federal basis reset and California property tax are separate systems. Since Proposition 19 took effect in 2021, the parent-child exclusion covers a family home and family farm, but not commercial or industrial property. When the building passes to heirs, the county generally reassesses it to market value, much like a sale would. On a $5 million building, that can mean a substantially higher annual tax bill. Our Prop 13 reassessment guide walks through how that number gets built, and whether it reaches your NOI depends on your lease structure.
Sell, hold, or split it among heirs
Because the basis reset removes most of the tax cost of selling soon after inheritance, the sell-or-hold question becomes a business decision rather than a tax-avoidance one. Selling gets you liquidity, a clean division among siblings, and an end to management duties. Holding gets you the income and a fresh depreciation schedule on the stepped-up building value, but it also means owning a property under new reassessed taxes, often with several heirs who may not agree on strategy. If the heirs disagree, a buyout of one sibling by another, or a sale with the proceeds divided, is usually cleaner than co-owning indefinitely.
Pro Tip: Get the date-of-death appraisal early
The stepped-up basis is only as defensible as the valuation behind it. Commission a qualified appraisal as of the date of death, and keep it with the estate records. A well-documented number protects you if the IRS questions your basis later, and it gives you a solid pricing anchor before any conversation with buyers.
Practical next steps
Confirm the estate is settled and who has legal authority to sell. Get the date-of-death appraisal. Review the leases and tenant estoppel status so a buyer can underwrite the income quickly. Then compare a sale against holding once you know the reassessed tax bill and the after-tax numbers. This is general information, not tax or legal advice; confirm the details with your CPA and an estate attorney.
Inherited a Building and Not Sure What Comes Next?
I'll walk you through what the building is worth today and what selling, holding, or splitting it would look like for your family — alongside your CPA and attorney. No obligation.
Talk Through Your Options