What Happens to Cost Basis if you Inherit a Seller Financed Note?

[Christopher Freeman]

I'm wondering what the tax implications are for the heirs of a seller who dies while carrying the note on a seller financed deal.

For example, suppose a seller has a fully depreciated asset with a $50k cost basis from the value of the land. They sell for $250k. In a cash or bank financed deal, they show a capital gain of $200k.

My understanding is that if the seller were to carry the note, they would be able to spread the capital gains tax.

My question is: What happens if the seller dies before the note has been fully repaid and the note passes to the seller's heirs? Do the heirs receive a stepped up basis in the asset with which the note is collateralized, or will they continue to pay the gain on behalf of the decedent?