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I have been told that there are (at least) two methods to determine the value of real estate at death, for cost-basis step-up purposes:

(1) the value given by an accredited appraiser

(2) the value given on the most recent assessment for real estate tax purposes

If these two methods disagree, can the inheritor choose the higher number to report to the IRS when he sells, or is there a rule as to which he must choose, or a rule about when he cannot use the assessment?

Addition in response to comments: I give up. The comments and answer persist in making the Q about estate taxes, of which there are none, because the inheritor is a spouse. I am no longer interested an answer to this question. I'd delete it if I could.

  • Is the real estate involved in a business or rental situation? I'm not aware of your second claim, but there is a alternate valuation date available but affects all assets. – Morrison Chang May 1 at 19:12
  • @Morrison Chang Added sentence to Q saying Q is about a principal residence. Never a rental; never a business. – ab2 May 1 at 21:52
  • In most places in the US, the real estate tax assessment is only a fraction of the market value. For instance, the assesed value of my house is less than half of what a nearly identical house down the road is listed at. – jamesqf May 2 at 3:40
  • @jamesqf This is not the case where I live. – ab2 May 2 at 3:43
  • @ab2: Even if the assessment aims at actual market value, it's not a real time estimate, is it? Market value can change considerably over the course of a year or two. So unless you have a falling real estate market, you'd be better off going with an appraisal. (Which per the answers seems to be what the IRS requires, anyway.) – jamesqf May 2 at 17:23
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From IRS Pub 559 Survivors, Executors, and Administrators

Basis of Inherited Property:

  • The FMV of the property on the date of the individual's death.
  • The FMV on the alternate valuation date (discussed in the Instructions for Form 706) if elected by the personal representative.

So the valuation of the property must be the Fair Market Value. I don't see how a local property tax assessment can be used for valuation, given that there is a time lag between when a local tax assessment is made and billed.

The executor/administrator can however use a different valuation date: 6 months after the date of death, however all assets still held must be valued with the same date, and the valuation of the estate must be lower than the date of death valuation.

From IRS Instructions for Form 706

You may not elect alternate valuation unless the election will decrease both the value of the gross estate and the sum (reduced by allowable credits) of the estate and GST taxes payable by reason of the decedent's death for the property includible in the decedent's gross estate.

If alternate valuation is elected, value the property included in the gross estate as of the following dates, as applicable.

  • Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent's death is valued on the date of distribution, sale, exchange, or other disposition. Value this property on the date it ceases to be a part of the gross estate; for example, on the date the title passes as the result of its sale, exchange, or other disposition.
  • Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued as of 6 months after the date of the decedent's death.
  • Any property, interest, or estate that is affected by mere lapse of time is valued as of the date of decedent's death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first. However, you may change the date of death value to account for any change in value that is not due to a "mere lapse of time" on the date of its distribution, sale, exchange, or other disposition.

There are other valuation adjustments that the administrator of an estate can take, but from my understanding apply to family farms and businesses.

A professional real estate appraiser will provide formal comparisons to other real estate sales in the area at the time to provide evidence of valuation.

Update

OP asks:

can the inheritor choose

NO: The administrator/executor chooses what evaluation value is given to the IRS, as it is administrator attesting to the valuations on the estate paperwork.

Administrators are to provide IRS Form 8971 to the beneficiaries listing out basis valuations for their respective distributions.

If I have both, which I will have, can I choose the most advantageous?

Assuming the "I" is an Administrator/Executor:

The IRS is interested in a Fair Market Valuation on the date of death. As long as the valuation is done at arms-length, i.e. as administrator you didn't make up a number, that position should be satisfied. By using a formal professional evaluation is for legal liability if the IRS or another heir/beneficiary contests the valuation. For example if the higher valuation on the real estate property results in additional estate tax liability, that may acceptable for Federal exclusion limit, but may exceed the exclusion at the state level resulting in additional state estate taxes owed.

If you are the only heir and there is no change in estate tax liability from the various arms-length evaluations, then I believe, its the administrator's choice.

However if there are additional beneficiaries, then how the estate is divided among the heirs comes in to question and would fall under the instructions in any will and/or local probate laws.

As always you may wish to get advice from an estate tax accountant familiar with your locality.

Addendum to Answer in Response to Belated Information from the OP:

Had the OP provided the information that the (sole) inheritor is a spouse at the start the assumptions in my answer would have been slightly different and would have resulted in a shorter answer. Apologies to anyone who got this far. Regardless, as there appears to be no estate tax issue, there nothing wrong with executor (assuming you are the executor) picking higher step-up basis value so long as valuation is done at arms-length.

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