The estate planning case for accelerating depreciation

The mechanism

Property passing through an estate generally receives a basis step-up to fair market value at the date of death under section 1014. Depreciation taken during the owner's life is not recaptured on that transfer.

That converts what is normally a timing benefit into a permanent one for the depreciation taken before death.

Why it changes the calculus

The standard objection to cost segregation is recapture: you take deductions now and pay some of it back on sale. For an owner who intends to hold to death and pass property to heirs, that objection largely disappears.

An owner in their seventies holding stabilised property with no intention to sell is close to the ideal candidate — particularly if they have other income the accelerated loss can shelter.

The heirs' position

Heirs take the stepped-up basis and begin a fresh depreciation schedule. That is itself an excellent moment for a study, because the new basis is typically much larger than the decedent's remaining basis and the entire schedule restarts.

Inherited property is one of the most consistently overlooked study opportunities. Families frequently continue the decedent's old schedule out of habit.

The interactions to work through

Estate tax exposure at the exemption levels applicable to the estate. Whether property is held in a revocable trust, an irrevocable trust, or an entity, since not all structures produce a step-up. Community property rules, which can produce a full step-up on both halves rather than a half step-up. State estate and inheritance taxes.

None of that is a cost segregation question, which is exactly why this planning should involve the estate attorney and the tax adviser together rather than the study firm alone.

A caution

Nothing here is a reason to hold an asset that should be sold. Tax tails should not wag investment dogs. But where the hold decision has already been made on the merits, the estate planning context makes acceleration considerably more attractive than it looks in a generic model.