What happens when a client buys one beach investment property per year for 12 years — and passes a legacy to their children 20 years from now.
The Three-Part Strategy
Simple in concept. Powerful in execution. Every year, one more property.
Each property's first year, the client logs 100+ hours of material participation — meeting the STR loophole threshold — and commissions a cost segregation study, unlocking accelerated depreciation that offsets W-2 income dollar for dollar.
A professional management company takes over at 18%. Passive losses carry forward and accumulate, building a growing tax shield. The client's time is freed to buy the next property.
At death, every property receives a stepped-up cost basis equal to fair market value. Decades of depreciation recapture and capital gains evaporate. The children inherit a cash-flowing portfolio — tax free.
The 12-Year Acquisition Timeline
One property per year, ranging from $750K to $1.575M as the portfolio grows and confidence builds.
The Portfolio at Year 20 — When the Kids Inherit
12 properties. 4% annual appreciation. 20 years of mortgage paydown. Here's what the estate looks like.
Property-by-Property Breakdown at Inheritance
Assumptions: 6.25% fixed rate · 20% down · 4% annual appreciation · 18% management · 3% gross revenue growth
| # | Property | Purchase Price | Yrs Held | FMV at Death | Remaining Mortgage | Net Equity | Gross Income/yr | Year 1 Tax Savings | Step-Up Tax Saved |
|---|
The Moment of Inheritance
Year 20. The phone call no one wants — but the estate no one saw coming.
The attorney reads the will. Twelve beach condos and Gulf-front properties in Gulf Shores and Orange Beach, Alabama. Twenty years ago, their parent bought the first one — a $750,000 condo — with a $150,000 down payment and a belief that beach real estate would keep going up.
Every year after that, another property. Each one a little more expensive as cash flow from the growing portfolio helped fund the next down payment. By Year 12, they were buying $1.575 million properties. By Year 20, the first property alone had grown to nearly $1.6 million.
But the real story isn't just the equity. It's what the IRS cannot touch.
The Most Powerful Wealth Transfer Tool in the Tax Code
Section 1014 of the Internal Revenue Code — the stepped-up basis at death — turns a lifetime of deductions into a tax-free inheritance.
Over 20 years, these 12 properties generated roughly in depreciation deductions (including Year 1 cost segregation). Every dollar of depreciation reduces the property's tax basis. At death, the IRS would normally demand a 25% recapture tax on all that depreciation — plus 20% capital gains tax on 20 years of appreciation. Step-up in basis eliminates both.
The heirs' new cost basis becomes the current fair market value. If they sell every property the day after inheriting, they owe zero in federal capital gains or depreciation recapture taxes.
The Income Stream They Inherit
At Year 20, 3% annual income growth has compounded across a portfolio generating over $1.7M in gross annual revenue.
Three Paths for the Heirs
The step-up in basis opens every option — with no tax penalty for choosing any of them.
The Numbers Behind the Numbers
What went in vs. what comes out.
Important Illustration Notice: This analysis is a hypothetical scenario prepared for educational purposes only. All figures — including property values, appreciation rates, rental income, mortgage balances, and tax savings — are estimates based on reasonable assumptions and are not guaranteed. Actual results will differ based on market conditions, individual tax circumstances, property management performance, and applicable tax law. The tax analysis assumes current federal rates and the Section 1014 stepped-up basis rules as of the date of this illustration; tax law is subject to change. This illustration does not constitute tax, legal, or financial advice. Consult a qualified CPA or tax attorney before making investment decisions.
RE/MAX of Orange Beach · Greg Foote, Investment Real Estate Specialist · (251) 504-9224