Disclaimer: Spiel Appraisal Services does not provide tax or legal advice. This information is provided for general informational purposes only and should not be considered tax or legal advice. Tax laws and individual circumstances may vary. Please consult with your tax adviser or attorney for guidance to your specific situation.
If you have inherited a home, its value on the previous owner's date of death can affect the tax you owe. Your tax adviser, attorney or CPA will likely request an appraisal documenting the value of the home as of the date of death.
Suppose your mother bought her house decades ago and it was worth many times more than that by the time she died. If you sell it, is all of that increase treated as your profit? Will you have to pay tax on that substantial gain? For inherited property, generally not, and a date-of-death or retrospective appraisal can help avoid a high tax bill.
Why the Value on That Date Can Matter to You
Let's start with how a sale gets taxed. The difference between today's sale price on a property and when it was originally purchased is called the gain. A gain on property like this is generally subject to capital-gains tax, which is the tax applied to the profit when the property is sold. The sale price by itself is not what gets taxed. The gain is.
The former purchase price of a property is called the basis, and it stands for the owner's original investment in the property.
For property you inherit, basis generally begins again at the home's fair market value on the date the previous owner died instead of working from the lower figure when the property was purchased. In the example of your mother's house, the increase in value during her lifetime generally is not included in your gain on a later sale when the higher inherited value establishes your basis. The sale would generally be measured from the value at the date of death instead. Measured that way, the gain is smaller than the same sale measured from her lower basis, and a smaller gain can mean less capital-gains tax for you.
This reset is called a step-up in basis, and becomes your new tax basis, which is used to calculate any capital gain when the property is eventually sold.
A Hypothetical Example
Suppose a woman who owned a home in Palm Beach County died in March, and her tax records for the property shows her purchase price years before at $120,000. In September, her son's CPA asks for an appraisal of the home as of that March date of death.
The appraiser inspects the property, researches how the home and the local market stood in March, analyzes sales of comparable properties from that period, and concludes the market value was $450,000 as of the March date.
A later sale by the son would be measured from the March value rather than from the mother's $120,000 purchase price years ago. This will significantly lower his gain and also lowers his owed capital-gains tax.
Getting Ready to Order the Appraisal
Start with two things: the property address, and the date your adviser recommends, which is usually the date of death unless they tell you otherwise. Some estates can use a different valuation date, so confirm which date applies with your estate or tax adviser before the appraisal begins.
Next, gather relevant information, such as photographs, a prior appraisal, and records of work done to the home before and after the date of death.
You do not need a complete historical file to start the conversation. The appraiser can review what exists and tell you where a gap might matter. Consult Spiel's guide to what to gather for a date-of-death appraisal for more information and identify the records that help.
Discuss an Inherited-Property Appraisal
If your CPA or attorney has asked for a valuation of an inherited home, contact Spiel Appraisal Services with the property address, the requested value date, and any documentation requirements your adviser has specified. Paul can discuss the assignment, what historical information is available, and expected turnaround time.
About Spiel Appraisal Services
Spiel Appraisal Services is led by Paul A. Spiel, SRA, a Florida State Certified General Real Estate Appraiser, license RZ2435. His residential appraisal work includes estate and date-of-death assignments in Palm Beach, Martin, St. Lucie, and Broward Counties.