What Happens When You Die and Your S Corporation Owns the Rental?

You may own an S corporation with a rental property as its sole asset.

A common concern with this approach is what happens when the owner passes away, specifically regarding the step-up in basis.

I’m pleased to inform you that while technically the rental property itself doesn’t receive a step-up in basis upon your death, your heirs will achieve the same outcome. Here’s why:

• Your heirs inherit the S corporation stock at its stepped-up fair market value.

• When the S corporation sells the rental property, it recognizes a gain.

• The gain on the rental property increases your heirs’ basis in the S corporation stock.

• Upon liquidation of the S corporation, your heirs recognize a capital loss that offsets the earlier gain.

The result is that your heirs can potentially sell the property without incurring any tax liability, effectively achieving the same outcome as they would with a traditional rental property basis step-up.