Taxation of portfolio upon spouse's death?

[Daniel Dietz]

Hello,

We are in talks to buy a portfolio of rentals from an individual who's spouse recently passed away. They are considering doing owner financing and we have been talking about possible benefits or drawback for each of us. I am wondering how accurate their tax person's advice is, since they are NOT a CPA and do not specialize in real estate taxes.

Some of the parameters;

• Portfolio worth about 1.25M
• Cost Basis about 750K
• Have taken about 250K in depreciation
• All properties are paid off
• Community property state

They are under the impression that both their capital gain of 500K and depreciation taken of 250K will NOT be taxed (make sense to me) and that ALSO their new basis will be 'stepped up' to the current market value of 1.25M. It is the part about the depreciation recapture being stepped up that seems odd to me. I thought there was basically no way of getting out of that? If the surviving spouse held the portfolio until their death, would that also apply to the heirs that would inherit it?

Maybe @Steven Hamilton II could chime in with a brief opnion?

Thanks, Dan Dietz