When people inherit real property, it is important for them to determine not only what it is worth today, but what it was worth at the time of its owner’s passing. Knowing the market value as of the date of death will reduce their tax obligations when they later sell it or pass it on to their heirs.
A great tool for estimating value is an appraisal. This is a professional, unbiased opinion, given by someone who is licensed and is familiar with the neighborhood. And since the market value is for a date in the past, it’s called a “retrospective appraisal,” sometimes referred to by attorneys and accountants as a “historical” or “date-of-death” appraisal.
The reason a date-of-death is useful is because it establishes what the IRS refers to as a “step-up in basis,” or the “stepped-up basis.” This number is typically higher than the original purchase price was (when the owner first purchased the home). This is particularly important when the first spouse dies because no taxes are due at the time of death. The real estate is a “pass through” to the surviving spouse. When the second spouse later sells the property, capital gains due (based on the step-up from the market value at the time that the first spouse died).
Most of my work these days is estate work to establish a new basis of value as of the date of death of the owner for the IRS form 706. Here’s a real-world example of a date-of-death appraisal saving a beneficiary some money:
Currently I’m working on an assignment here in Alexandria City, Virginia where the deceased owner purchased a home in 1999 for $340,000. The owner’s wife (my client) sold the property last month (in 2022) for $1.4 million. This is a gain of $1,060,000.
Upon the advice of an estate attorney, she contacted me and requested an appraisal for the value of her property as of the date her husband died (in February of 2021). I determined that the value at that time was $1,350,000. This is the stepped-up basis. Therefore, the gain is now only $50,000. The surviving spouse exemption rule of the Internal Revenue Code (and her small gain) she won’t have to pay any taxes.
Disclaimer: I’m not a CPA, and when my clients raise tax-related matters, I recommend they consult with a tax professional or attorney specializing in wills, trusts, and estates.
The IRS provides some information about appraisers. Here is the code:
A qualified appraiser is an individual who has earned an appraisal designation from a recognized professional appraiser organization. This designation is awarded on the basis of demonstrated competence in valuing the type of property for which the appraisal is performed.
An individual can also become a qualified appraiser if they have met minimum education and experience requirements set forth by the IRS. One way an appraiser of property can demonstrate they have met these requirements is to become licensed or certified in the state in which the appraised property is located.
A qualified appraiser has also successfully completed college and professional-level coursework and has obtained at least two years of experience in the business of buying, selling, or valuing similar types of property.