Inheriting an apartment building comes with a powerful tax advantage: the step-up in basis. Understanding how this works can help heirs make informed decisions about whether to hold or sell an inherited LA multifamily property.

The step up in basis for an apartment building is one of the most significant tax advantages in real estate. When you inherit property, this provision can eliminate decades of accumulated capital gains.

What Is the Step Up in Basis for an Apartment Building?

When you inherit real estate, the IRS allows the property’s tax basis to “step up” to its fair market value at the date of the decedent’s death. This eliminates all the capital gains that accumulated during the original owner’s lifetime.

A Practical Example

Consider this scenario:

• Original purchase price (1985): $400,000
• Value at owner’s death (2024): $3,200,000
• Accumulated gain: $2,800,000

Without step-up: If the original owner had sold, they would owe capital gains tax on $2,800,000—potentially $500,000+ in combined federal and California taxes.

With step-up: The heir’s new basis becomes $3,200,000. If they sell for $3,200,000, they owe zero capital gains tax.

Why This Matters for LA Apartment Owners

Los Angeles apartment buildings have appreciated dramatically over the decades. Many buildings purchased in the 1970s-1990s have gains of $1-5 million or more. The step-up in basis effectively erases these gains for the next generation.

The Depreciation Recapture Benefit

The step-up also eliminates depreciation recapture. If the original owner claimed $500,000 in depreciation deductions over the years, those would normally be “recaptured” and taxed at 25% upon sale. With the step-up, this liability disappears entirely.

When Selling Makes Sense After Inheritance

1. You Don’t Want to Be a Landlord

Managing an apartment building requires time, knowledge, and involvement. If you’re not interested in being a landlord—or live out of state—selling may be the practical choice.

2. The Property Needs Significant Work

Older buildings often need capital improvements: new roofs, plumbing, electrical upgrades, or soft-story retrofits. If you’re inheriting deferred maintenance, selling “as-is” to an investor may be preferable to funding repairs.

3. You Want to Diversify

Concentrating wealth in a single asset carries risk. Selling allows you to diversify into other investments—stocks, bonds, or multiple smaller properties.

4. Multiple Heirs Need Liquidity

When siblings or family members inherit together, one may want to keep the building while others need cash. Selling and splitting proceeds is often cleaner than buyouts or ongoing co-ownership.

5. The Tax Window Is Optimal

The step-up in basis is most valuable immediately after inheritance. If you hold the property and it appreciates further, you’ll owe taxes on the new gains. Selling soon after inheritance captures the full tax benefit.

What If You Want to Keep Real Estate Exposure?

Some heirs want to exit active management but stay invested in real estate. Options include:

• DST 1031 Exchange: Sell and exchange into a professionally managed Delaware Statutory Trust
• NNN Properties: Exchange into a triple-net lease property with minimal management
• REITs: Sell (tax-free due to step-up) and invest proceeds in real estate investment trusts

The Probate and Trust Process

Before selling, the property must go through probate or trust administration. This involves:

• Confirming legal authority to sell (Letters Testamentary or Trust Certification)
• Obtaining a date-of-death appraisal to establish the stepped-up basis
• Clearing any liens or title issues
• Court approval (for probate sales) or trustee authorization

Working with an experienced probate attorney and a broker familiar with trust/estate sales ensures a smooth process.

Common Mistakes to Avoid

1. Waiting Too Long to Get an Appraisal

The date-of-death appraisal establishes your stepped-up basis. Get this done promptly—it’s essential for tax planning.

2. Not Understanding Prop 13 Implications

If heirs keep the property, they may be able to preserve the low Prop 13 tax basis through parent-to-child exclusions. However, Proposition 19 (2021) significantly limited these exclusions. Consult a tax professional.

3. Assuming You Must Keep the Property

Sentimental attachment is understandable, but keeping a property that doesn’t fit your financial goals can be costly. The step-up in basis gives you a rare opportunity to exit tax-free.

Working with Heirs and Families

I regularly work with families navigating inherited apartment buildings. This includes coordinating with estate attorneys, CPAs, and appraisers to ensure the sale proceeds smoothly and tax-efficiently.

If you’ve recently inherited an LA apartment building and want to understand your options, request a confidential consultation. I’ll provide a current market valuation and walk you through the process.

The step-up in basis for your apartment building represents a significant tax advantage. Understanding how the step up in basis for your apartment building works can make a substantial difference in your financial outcome. This tax advantage is why many heirs choose to sell inherited properties shortly after receiving them.