Step up value for inheritance question

[Mike S.]

I am a little bit confused about step up basis.

It is my understanding that when you die, your property transfers to your heirs with a step up value to the current market value, so if they sell the property for that same new market value, there is no capital gain.

What is happening, if they are keeping the property? Do they start depreciation from year 1 with this new value, like if they just bought it for that new value?

Now if the property was held into an LLC. If instead of transfering the property, it is the LLC that is inherited. In the book of the LLC, does the purchase value of the property stay the same with the same depreciation as before? Is it the contribution from the new owner that is recorded with a step up value?

Would it not then be more advantageous to transfer the property out of the LLC to the estate at the time of death, then transfer the property to the heirs directly? Or I am missing something?

[Ashish Acharya]

@Mike S., 

When someone Inherits LLC's interest (MMLLC), the partnership is valued based on the value of the property at the date of death. As a result, the value of the interest is increased, or stepped-up, to the date-of-death value with no capital gains tax on that increase. In addition, by making an election under Section 754, you can take depreciation on the stepped-up amount.

SMLLC is disregarded for tax purpose.The person holding the interest in the disregarded entity is deemed to hold the property held by the entity. For example, if a single member of a limited liability company transfers all interest in the limited liability company, the person will be deemed to have transferred the property held by the limited liability company.