What to do when you inherit a rental property

You did not go shopping for a rental. A parent or an aunt died, the will named you, and now there is a tenant in a house two counties away who expects rent on the first and a furnace that is somebody's problem for the first time in years. Most of what you will read about inherited rentals is written for estate attorneys or for the people trying to sell you a Delaware Statutory Trust. This is written for the accidental landlord who now owns a building and a lease and has to decide what to do with both.

The good news, and it is real, is that the tax code treats an inherited rental more kindly than almost anything else you could own. The basis resets to today's value, the old owner's depreciation disappears, and you get a fresh deduction schedule on a higher number. The work is mostly sequencing: prove the value, keep the income legal, and set up the books before the first tax year closes. Here is the order.

Get a date-of-death appraisal before anything else

The single most valuable document you can produce is a qualified appraisal of the property as of the date the prior owner died. Under IRC Section 1014 and IRS Publication 551, your cost basis in inherited property is generally its fair market value on that date, not what the deceased paid decades ago. That single number drives your depreciation deduction every year you own the place and your taxable gain on the day you sell, so it is worth paying a licensed appraiser a few hundred dollars to nail it down rather than guessing from a tax-assessed value.

Order the appraisal as soon as you can, because a clean retrospective valuation written close to the date of death is far easier to defend than one reconstructed years later. File it where you can find it in a decade. This is the document an examiner will ask for first.

Confirm the leases and keep the rent legal

The tenants did not stop renting because the owner died. In most states a valid lease conveys with the property: you step into the prior owner's position, and the tenant keeps the terms they signed until that term ends. Probate timing can complicate who has authority to collect rent in the gap between the death and the deed transferring to you, so get clear title or a written letter of authority from the executor before you cash a single check.

• Find the signed lease and the deposit. You need the rent amount, the due day, the term end date, and the dollar amount of any security deposit the prior owner was holding. That deposit is now your liability even if no money ever changes hands.
• Notify the tenant in writing. Tell them where to send rent now and that nothing else about their lease has changed. Keep a copy. Clean documentation of every tenant interaction is what wins the argument later, so start the paper trail on day one. See how to document tenant interactions.
• Do not raise rent or send notices yet. A fixed-term lease is binding on you, and even month-to-month notice periods vary widely by state and city. Read your state statute before you change any term.

Put insurance and the entity question in order

The prior owner's homeowner policy will not cover a rental, and it may lapse when the named insured dies. Bind a landlord policy in your name, or the estate's, the moment you can, because an uninsured gap on an occupied building is the kind of exposure that turns an inheritance into a lawsuit. If you are weighing how to hold title, read umbrella insurance vs an LLC before you rush to form anything. For an accidental landlord with one unit, adequate insurance often does more real protection per dollar than a hastily formed entity.

Start a fresh 27.5-year depreciation schedule

This is where the step-up pays you. You do not inherit the deceased owner's remaining MACRS schedule, and their accumulated depreciation is wiped out. You start over. Split your stepped-up basis between land, which is not depreciable, and the building, then depreciate the building straight-line over 27.5 years using the mid-month convention, reported on Form 4562. Publication 527 covers the rules for residential rental property.

Say the date-of-death appraisal comes in at $400,000 and the county allocates 20% of value to land. Your depreciable building basis is $320,000. Divided by 27.5 years, that is $11,636 of depreciation in a full year, a deduction that shelters rent the prior owner's much lower basis could never have produced. Place the property in service on the date you inherited it, and the first-year deduction is prorated by the mid-month convention for the month you started. You can sanity check the full-year figure with the depreciation calculator.

The honest sell-versus-keep math

Nobody selling you a 1031 replacement will tell you that the step-up makes selling an inherited rental cheap, sometimes free. Because your basis resets to date-of-death value, a sale soon after you inherit produces little or no capital gain, and there is no recapture on depreciation you never took. If you sell within a year of inheriting, the gain is generally treated as long-term regardless of how briefly you held it. So the decision is not clouded by a big tax bill on the way out, which makes it cleaner than most exits.

Run the keep case on its own merits. Take the net rent after a real vacancy and management allowance, divide by the equity you would walk away with if you sold, and compare that return to what the sale proceeds would earn elsewhere. The cap rate calculator and a candid look at when to sell a rental property will frame it. If the building cash-flows, sits where you can manage it, and the tenants pay, keeping it on a stepped-up basis is a strong hand, and it can be the unplanned start of a rental property portfolio. If it is a distant fixer with thin margins, the near-zero exit tax is a quiet gift, and there is no shame in taking it. For the mechanics of an arms-length exit later, see selling a rental property.

Set up the books so the first tax year is clean

The expensive mistakes on inherited rentals are bookkeeping mistakes: a lost appraisal, a depreciation schedule that never got started, a deposit liability nobody recorded. Decide where the date-of-death appraisal, the conveyed lease, and the insurance binder live before you collect the first rent, and pick a categorization that maps to Schedule E from the start.

This is the part rents.ai is built for: it computes the fresh straight-line schedule from your stepped-up building basis and in-service date, and stores the appraisal and lease against the property. It will not run probate or interpret your state's tenant-transfer rules, and the tax figures are estimates for your CPA to review, not advice. What it does do is keep the numbers from drifting in a spreadsheet across the first messy year, which is exactly when an inherited rental tends to lose track of itself.