Determining current value for real estate for inheritance purposes

Question

It's my understanding that when someone dies the person who inherits their property has the value of that property reset for capital gains purposes. That is, if the property was purchased for $10,000 and now has a value of $1,000,000 that the original value, for capital gains purposes, becomes $1,000,000 at the time of death. That is, instead of having to pay capital gains on $990,000 income you pay capital gains on $0.

How is this new value determined? Does it go off of the tax appraised value? Should you, prior to your death, get an independent appraiser to appraise the value of the property and include that assessment of the properties value with the will or something?

Answer 1

My question is... how is this new value determined?
Does it go off of the tax appraised value?

The tax assessors values are based on broad averages and are not very useful in determining actual home value. The most defensible valuation outside of a sale is a professional appraisal, real-estate agents may or may not give you reasonable estimates, but their opinions are less valuable than that of a professional appraiser. Additionally, agents hoping to land you as a client (even if you tell them you're not trying to sell) could be motivated to over-estimate. In many instances a few opinions from agents will be good enough, but if there is any contention a professional appraisal will be better.

Should you, prior to your death, get an independent appraiser to appraise the value of the property and include that assessment of the properties value with the will or something?

The real-estate market fluctuates too much to make having an appraisal done prior to your death a practical approach in most circumstances. You could make arrangements so that an appraisal would be scheduled after your death.

Here's a good resource on the topic: Estimating the Value of Inherited Real Estate

Answer 2

There are multiple ways of determining the value of an inherited property. If you aren't planning on selling it, then the best way would be to have a real estate agent do a comp on the property (or multiple real estate agents).

Answer 3

how is this new value determined?

According to Publication 551:

Inherited Property

The basis of property inherited from a decedent is generally one of the following.

• The FMV of the property at the date of the individual's death.

• The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.

• The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.

• The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

FMV is Fair Market Value - which is the price that a willing buyer would pay for the property with reasonable knowledge of all the facts of the property.

The rest generally apply to farmland or other special-purpose land where the amount of income it generates is not properly reflected in the market value.

One or more real estate professionals will run "comps" that show you recent sales in the same area for similar houses to get a rough estimate of fair market value.

Does it go off of the tax appraised value?

Tax assessment may or may not be accurate depending on tax laws (e.g. limits to tax increases) and consistency with the actual market.

Should you, prior to your death, get an independent appraiser to appraise the value of the property and include that assessment of the properties value with the will or something?

That should not be necessary - another appraisal will likely be done as part of the estate process after death. One reason you might do one is if you are distributing different assets to different heirs, and you want to make sure that the estate is divided equitably.