Date of Death appraisals

When someone dies, it is necessary to value all of the decedent’s assets, including real property such as real estate. As part of the valuation of assets at death by an estate tax appraiser, a date of death valuation determines the Fair Market Value of real estate as of the date that the owner died. This property valuation is used to determine if a federal estate tax return is due to the IRS, and the amount of estate tax, if one is owed. This is part of what is sometimes referred to as the death tax. The valuation of the property is also used to determine the new income tax basis for the decedent’s assets when they are passed on to the person’s heirs.Stepped-up basis is the basis of property that a taxpayer receives from a decedent under the Internal Revenue Code § 1014(a).

Stepped-up basis is the basis of property that a taxpayer receives from a decedent under the Internal Revenue Code § 1014(a).

Stepped-up basis (Example)

Under IRC § 1014(a) the general rule applied to property a beneficiary receives from a benefactor is that the beneficiary’s basis equals the fair market value of the property at the time the decedent dies. For example, Decedent owns a home they originally purchased for $35,000. Their basis in the home is equal to its cost, $35,000, assuming no adjustments under IRC § 1016. On the day Decedent dies, the fair market value of the home is $200,000. If Decedent bequeaths the home to Beneficiary, Beneficiary’s basis in the home will be the fair market value, $200,000. In contrast, had Decedent given the home to Beneficiary before their death, Beneficiary would receive a carryover basis, which would be equal to the decedent’s adjusted basis in the home, $35,000.

“Basis” is generally the amount you have invested in an asset. Thus, if you buy a house for $35,000, your “basis” is $35,000, in the very simple case.

“Gain” is generally the amount you receive when you dispose of an asset less your basis in the asset, again, in the very simple case. Thus, if you sold the house above for $100,000, your gain (what you might be taxed on) would be $65,000 (sales price of $100,000 less your basis of $35,000), if we ignore other factors for purposes of this example.

Normally, when you give an asset to someone, the person who receives the asset keeps the same basis in the asset that the donor (you) had. If you give this house to your sister Mary, after the gift, her basis in the house would also be $35,000, no matter what the fair market value (FMV) of the house was on the date of the gift. As you can see, this means that your sister is liable for the $65,000 gain if she were to sell the house at $100,000.

However, in the case of a beneficiary receiving an asset from a decedent through a bequest, the recipient’s basis in the asset is “stepped up” to the FMV on the date of the death. In this case, if you had a basis in the house before your death of $35,000 but the FMV of the house was $100,000 on the date of your death, then if you bequeathed the house to your sister, her basis would be $100,000, not $35,000.

The obvious impact of this rule is that if your sister, after your death, sells the house for $100,000, then she would not have to recognize any gain on the house, because the sales price ($100,000) less her basis ($100,000) would be zero.

See the explanation under “Rationale for stepped-up basis” (below) for an explanation of why the Tax Code would do this.

Stepped-down basis (Example)

Likewise, under § 1014(a), if a decedent’s adjusted basis in property is higher than the fair market value, the beneficiary’s basis will equal the fair market value of the property at the time the decedent dies. For example, Decedent owns a yacht whose adjusted basis is $150,000, but at the time of her death, the fair market value of the yacht is only $110,000. The beneficiary’s basis in the yacht will be the fair market value, $110,000.

The IRS has published an excellent page answering. Frequently Asked Questions on Estate Taxes

Fair Market Value is defined as: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” Regulation §20.2031-1.

(Please consult a tax attorney for complete information on the legal and tax implications of the valuation of assets at death. Although an alternative date may be used for a date of death valuation of assets in some circumstances, the selection and rules governing this alternate date are complicated and beyond the scope of this website. You should order the appraisal from an experienced Estate Tax Appraiser Sactown Appraisals after you have consulted with your attorney.)

A date of death valuation requires an Retrospective Appraisal, also known as a Historical Appraisal.

This type of appraisal determines the Fair Market Value of property as of a specific date in the past. Attorneys, accountants and executors and others rely on the real estate appraisal services of Sactown Appraisals for to help in the valuation of assets at death because of the familiarity and experience we have in performing residential real estate appraisals of this sensitive type.

The IRS has defined the appraisal standards that must be met along with verifiable minimum education, designation and experience requirements for an appraiser performing appraisals for estate tax purposes. The estate tax appraiser must have experience with IRS Real Property Valuation Guidelines. Treasury Regulation Section 20.2031-1(b) requires the residential appraiser to follow the valuation guidelines when preparing a real estate appraisal for tax purposes or retrospective date of death valuations. In addition, the real estate appraiser should be designated and qualified under IRS tax regulations Section 1.170A-17(a).

When you hire Sactown Appraisals as your estate tax appraiser, you can be confident that the appraisal professional that handles your case is qualified and licensed per all applicable regulations and guidelines.

In addition our opinion of value (appraisal) is prepared by a certified licensed residential real estate appraiser for valuing assets at death will be well supported by a detailed report as to how the we the appraiser arrived at our conclusions of the fair market value of the property. Your report will demonstrate to the user that the appraisal is well founded, substantiated, and meets with Treasury Regulations and state agency requirements. It is also wise to avoid submitting an appraisal that is more than two years old or an appraisal that does not meet other specific IRS guidelines for estate tax valuation of property.

In order to facilitate the appraisal of property as of a date in the past, you may need to provide records such as deeds, inspection records or photographs that can substantiate the condition of the property at the time the records were created. The appraiser will use this information, as well as historical market data (such as sales in the Multiple Listing Service (MLS)) and construction data (cost to build) to determine the fair market value of the real estate as of the date required, i.e., as of the Date of Death.

To ensure a comprehensive and accurate appraisal of a property as of a specific date in the past, it becomes imperative to furnish a variety of pertinent records that offer insights into the property’s historical context. Among these essential documents are deeds, which provide crucial information regarding property ownership and transfers over time, inspection records that shed light on the condition of the property, and photographs that serve as visual documentation capturing the state of the property at the time these records were created.

The appraiser relies on these tangible pieces of evidence to form a holistic understanding of the property’s historical development and condition. Deeds, for instance, not only establish the legal framework of property ownership but also contribute to unraveling the intricate web of its ownership history. Inspection records play a vital role in highlighting any structural or maintenance-related aspects that may have influenced the property’s value over the years. Photographs, being a visual time capsule, offer a tangible representation of the property’s physical state, providing a valuable complement to textual documentation.

In conjunction with these property-specific records, the appraiser taps into a broader spectrum of data sources to refine their assessment. Historical market data, drawn from sources like the Multiple Listing Service (MLS), offers a glimpse into past real estate transactions, enabling the appraiser to gauge market trends and fluctuations. Additionally, construction data, encompassing the cost to build at various points in time, serves as a pivotal factor in determining the property’s intrinsic value.

The culmination of these diverse data sets enables the appraiser to undertake a meticulous analysis, ultimately leading to the determination of the market value of the real estate as of the specific date required, such as the Date of Death. By synthesizing information from legal documents, visual records, market trends, and construction costs, the appraiser can paint a comprehensive picture of the property’s historical trajectory, thereby facilitating an accurate and well-informed appraisal.