When you inherit a home, one important financial question is what value will be used to calculate a gain if you later sell it. The amount the previous owner paid decades ago may be very different from what the property was worth when you inherited it.
That is where step-up in basis comes in. An appraisal helps document the property’s value at the relevant date, giving your tax adviser evidence to use when determining your inherited tax basis.
What Does Step-Up in Basis Mean?
Basis is your investment in a property for tax purposes. It is part of the calculation used to determine a gain or loss when the property is sold.
For inherited property, basis generally becomes the property’s fair market value as of the owner’s date of death, subject to applicable rules and exceptions. When that value exceeds the previous owner’s adjusted basis, the increase is commonly called a “step-up in basis.” The adjustment can also go downward if the property’s value has declined. IRS Publication 551 explains these general basis rules.
A Simple Example
Suppose a parent’s adjusted basis in a home was $150,000. At the parent’s death, the home’s fair market value was $450,000.
Assuming the entire inherited property qualifies for a basis adjustment, the heir’s starting basis would generally be $450,000. If the heir later sold it for $475,000, the difference would be $25,000 before selling expenses, subsequent basis adjustments and other applicable tax provisions.
This simplified example shows why documenting the value at inheritance matters. The appraisal supports the $450,000 valuation. The tax adviser determines the basis and calculates the tax consequences. The IRS provides additional guidance on inherited property and subsequent sales.
What Does the Appraiser Determine?
For this type of assignment, the appraiser develops an independent opinion of the property’s fair market value as of a specified date.
Fair market value generally reflects the price a willing buyer and willing seller would agree upon, with both reasonably informed and neither compelled to act. It is not automatically the original purchase price, an asking price or a figure chosen to produce a particular tax outcome.
The appraisal explains the property characteristics, market evidence and reasoning behind the value conclusion. Your CPA or attorney determines how that conclusion applies to your circumstances, including any ownership or trust issues.
Why the Valuation Date Matters
A home’s value changes with market conditions and the property itself. A current appraisal may therefore answer a different question from the one your adviser needs addressed.
When the assignment concerns value as of the owner’s death, it is commonly called a date-of-death appraisal. If that date is in the past, the appraiser performs a retrospective valuation.
The appraisal can be completed after the valuation date. For example, an inspection in September can support an opinion of value as of a death in March, provided sufficient reliable information is available about the property and market at that earlier date.
Certain estates may qualify for an alternate valuation election. Your estate or tax adviser should confirm the appropriate date before the appraisal begins. It is not simply a date selected because it produces a preferred value. IRS guidance on inherited basis explains the general date-of-death rule and alternate valuation provision.
Reconstructing the Home’s Earlier Condition
A retrospective appraisal considers the home as it existed on the effective date of value.
Suppose a family replaced the roof and remodeled the kitchen after inheriting the property. Those improvements should not be treated as though they existed on the date of death. Similarly, damage that occurred afterward must be distinguished from the home’s earlier condition.
To understand the property at the relevant date, the appraiser may review historical photographs, previous listings, permits, repair records and information from people familiar with the home.
An inspection today helps identify the property’s current features. Historical records help establish which features and conditions existed when the value must apply. When information is incomplete, the appraiser evaluates whether the available evidence is sufficient and explains material assumptions or limitations.
How Comparable Sales Support the Value
The appraiser researches sales that help explain how buyers valued similar properties in the market relevant to the effective date.
Nearby sales are not automatically comparable. Differences in location, size, condition, renovations and other features can affect what buyers were willing to pay.
For an oceanfront condominium in Broward County, for example, the analysis might consider view, floor level, building characteristics and interior condition. A renovated unit with an unobstructed ocean view may provide useful evidence, but its sale price cannot simply be applied to an original-condition unit with a limited view.
The appraiser analyzes these differences and supports any adjustments used. The final conclusion reflects the strength and relevance of the evidence rather than a simple average of sale prices.
What the Written Appraisal Provides
The report connects the value conclusion to the research behind it. It identifies the property, the ownership interest being valued, the effective date, relevant property characteristics and the evidence supporting the opinion.
That ownership detail matters. An appraisal of the entire property does not automatically resolve an assignment involving a partial interest. The appraiser and your adviser should understand what needs to be valued before work begins.
A well-supported report gives its intended readers a way to follow the analysis. It does not guarantee acceptance by a tax authority or determine whether a particular basis adjustment is available.
What to Gather Before Ordering an Appraisal
Start with the property address and the valuation date requested by your adviser. Gather any available photographs, prior appraisals, listing information, renovation records and details about changes made before or after that date.
You do not need a perfect historical file to begin the conversation. The appraiser can review what is available and identify where additional information may be needed.
Spiel’s guide to what to gather for a date-of-death appraisal offers practical help preparing those records.
Discuss an Inherited-Property Appraisal
If your CPA or attorney has requested a valuation for an inherited home, contact Spiel Appraisal Services. Share the property address, requested valuation date and your adviser’s documentation requirements. Paul can discuss the assignment, available historical information 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.