Every honest article about cost segregation says the same thing: it defers tax, it does not eliminate it. That is true right up until the owner dies still holding the building.
Under §1014, property included in a decedent's estate generally takes a basis equal to fair market value at the date of death. The accumulated depreciation, including everything a study accelerated, is not recaptured on the heirs. The deferral stops being a deferral. Here is how that works in numbers, and where the argument is weaker than the people selling it suggest.
Key takeaways
- §1014 generally resets basis to fair market value at death, and the depreciation recapture that would apply on a lifetime sale does not carry to the heirs.
- That makes a cost segregation study's acceleration permanent rather than merely timing for an owner who holds to death, which is a different economic result entirely.
- Heirs receive the higher basis and can commission their own study on it, starting the cycle again.
- Refinancing, not selling, is how owners access equity in the meantime, because loan proceeds are not a taxable event and trigger no recapture.
- This is estate planning, not a tax trick. Estate inclusion, entity structure, and state law all matter, and Congress can amend §1014 at any time.
What §1014 Actually Does to Recapture
Start with the ordinary case. You sell during your lifetime. Gain up to the depreciation taken on reclassified 5-, 7-, and 15-year assets returns as ordinary income under §1245, at rates up to 37%. Depreciation on the structure produces unrecaptured §1250 gain taxed at a maximum 25%. The rest is capital gain. Our guide to depreciation recapture after a cost segregation study covers the mechanics.
Now do not sell. Hold until death, with the property included in your estate.
The heirs take a basis equal to fair market value. The built-in gain, including the portion created by depreciation, does not carry to them as income. There is no §1245 recapture event and no unrecaptured §1250 gain to report, because the gain that generated them is gone from the income tax system.
That is the whole argument, and it is a real one. It is also why advisors treat "hold to death" and "sell in five years" as economically different strategies rather than variations on a theme, once you understand what a cost segregation study does to your basis.
A Full Lifecycle, in Numbers
Example: a $3M apartment building held twenty years Purchase price $3,000,000, land at $600,000, leaving $2,400,000 of depreciable basis recovered over 27.5 years. A study reclassifies 25% of basis, or $600,000, into 5- and 15-year assets, all bonus-eligible at 100%.
Year one, the study produces $578,182 of incremental deduction, deferring roughly $213,900 of tax at a 37% rate. That is the $600,000 write-off less the $21,818 of 27.5-year depreciation the same basis would have thrown off anyway, shown here as a simplified full year; the mid-month convention makes the real first-year offset smaller. Twenty years later, accumulated depreciation is $1,909,091 and adjusted basis has fallen to $1,090,909. Fair market value is $4,500,000.
| Sell during life | Held until death, §1014 step-up | |
|---|---|---|
| Adjusted basis at exit | $1,090,909 | Heirs take $4,500,000 |
| Gain recognized | $3,409,091 | $0 for income tax |
| §1245 recapture, ordinary | $600,000 → ~$222,000 tax | $0 |
| Unrecaptured §1250 gain at 25% | $1,309,091 → ~$327,300 tax | $0 |
| Remaining gain at 20% | $1,500,000 → ~$300,000 tax | $0 |
| Approximate federal income tax | ~$849,300 | $0 |
Then the second act. The heirs own a building with a $4,500,000 basis, perhaps $3,600,000 of it depreciable after a fresh land allocation. They can commission their own study and reclassify roughly $900,000 into short-life property in their first year. Nothing about the parent's study limits them. Your result depends on your tax rate and the estate's specific facts.
One thing the table does not show is estate tax. Income tax and transfer tax are separate systems, and a large estate may owe estate tax on the same asset that escaped income tax.
Why "Buy, Borrow, Die" Is Really About Refinancing
The middle word does the work, and it is the one most often skipped.
If the plan is to hold until death, you still need liquidity. Selling defeats the strategy. Refinancing does not. Loan proceeds are not income, so a cash-out refinance pulls equity out of an appreciated building without recognizing gain and without triggering recapture on anything a study accelerated.
That is why these three tend to appear together. The study front-loads deductions and improves early cash flow. The refinance converts appreciation into usable capital without a taxable event. The step-up cleans up the basis at the end.
For owners who do want to transact during life, a 1031 exchange is the other tool that defers recapture rather than triggering it, and it stacks here because an exchanged property can itself be held to death. See cost segregation and 1031 exchanges for how basis carries across.
Where This Argument Gets Oversold
The step-up is not a reason to do a study. It is a reason a study you already had cause to do turns out better than modeled. If you cannot use the deduction this year, if the basis is too small to justify the fee, or if the property is not a long-term hold, §1014 rescues none of that.
Nobody should build a plan around a rule Congress can amend. §1014 has surfaced repeatedly in tax reform discussions, and a strategy that only works if one provision survives thirty years carries risk you cannot hedge. Structure so a change is survivable, not fatal.
Inclusion is a real requirement, and it is fact-specific. The step-up applies to property included in the decedent's estate. Ownership form, entity structure, prior transfers, trust terms, and state property law all bear on that, and some lifetime transfers made to cut estate tax surrender the step-up entirely. That trade-off belongs to your estate attorney.
Holding to death is a constraint, not a plan. A building you swore you would never sell has a way of becoming one you need to sell, and if the exit changes, rerun the math honestly, as we do in cost segregation when you are selling soon. And if the property has sat in your hands for years without a study, today's missed depreciation matters more than a step-up decades away. A look-back study captures it without amending a single return.
Frequently Asked Questions
Do my heirs owe the depreciation recapture I avoided?
Generally no. Where §1014 applies and the property is included in the estate, heirs take a basis equal to fair market value at death, and the recapture a lifetime sale would have triggered does not carry to them as income.
Can my heirs run a new cost segregation study?
Yes. They own property with a new basis and a new placed-in-service date for their ownership. A study on that stepped-up basis is a normal engagement, and one of the most commonly missed opportunities in inherited real estate.
If I gift the building during my life, do I still get the step-up?
No. Lifetime gifts generally transfer your basis rather than resetting it. That is the central tension here: moves that reduce estate tax exposure often surrender the income tax step-up, and which matters more depends on the size of the estate.
See What Your Property Would Yield
Every building is different, and the only way to know your number is to look at your building. Precision Cost Segregation provides a no-cost feasibility analysis: send us the property address, purchase price, closing date, and any improvements, and we'll model your likely reclassification and first-year benefit before you commit to anything.
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This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.