Depreciation is the process of deducting for tax purposes the cost of property over its useful life rather than entirely upon purchase. Property you acquire by inheritance instead of purchase is also depreciated if it meets the tax rules for depreciable property. In such cases, the amount you depreciate is determined differently than purchases. You can only depreciate property over the prescribed period for its type and by applying percentages based upon when the property is first ready for use.
You’re entitled to a tax deduction for depreciating property you own that has a useful life of more than one year. You must use the property in a business or an income-producing activity such as rental. If the property is used both for business and personal use, depreciation is determined only on the percentage of business use. You can depreciate property you disposed of in the year you inherited it, equipment used to build other property or an item you’re only entitled to use for a limited time.
“Basis” is the term used for the amount to depreciate. The basis for inherited property is its fair market value on the decedent’s date of death. However, an estate administrator occasionally selects an alternative valuation date, especially for large estates. Property values are available from either a state or federal tax return for estate tax. If no estate tax return was filed, you’re entitled to use any reasonable method for determining the fair market value on the date of death.
The federal depreciation tax deduction is determined for most property using percentages on depreciation tables provided by the Internal Revenue Service for the Modified Accelerated Cost Recovery System. Depreciation tables are provided for nine types of properties. Each classification defines the number of years over which property is depreciated. You can begin property depreciation when it’s ready and available for business use, regardless of whether it is actually used by that date.
To calculate inheritance depreciation, you should add to your basis the cost of any improvements you made to the property between your inheritance date and the time you began using it for business. The allowed depreciation deduction is based upon when property is placed in service during its first year. Property incurs a different first year depreciation if it’s placed in service during December instead of the preceding April. This affects the depreciation percentages used in subsequent years.
- Internal Revenue Service; Publication 551: Basis of Assets; May 2002
- Internal Revenue Service: Publication 946: How to Depreciate Property
- Internal Revenue Service. "Tips on Rental Real Estate Income, Deductions and Recordkeeping." Accessed Sept. 30, 2019.
- Internal Revenue Service. "Publication 946, How to Depreciate Property." Accessed Sept. 30, 2019.
- Internal Revenue Service. "Publication 551, Basis of Assets." Accessed March 16, 2020.
- Internal Revenue Service. "Publication 527, Residential Rental Property." Accessed March 16, 2020.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.