How a date-of-death valuation can help establish the historical value of an inherited property
If you’ve inherited a home, you may hear two unfamiliar terms as you begin talking with your CPA, attorney or other professionals:
Step-up in basis and date-of-death valuation.
They’re related, but they don’t mean the same thing.
In very simple terms, a step-up in basis refers to the way the tax basis of inherited property is generally tied to its fair market value at the owner’s date of death rather than simply what the family originally paid for it.
A date-of-death valuation helps establish what the property was worth on that important historical date.
Understanding that connection can become very important when an inherited home is eventually sold.
And it’s one of those things I like my clients to think about early rather than discovering months—or years—later that they need information nobody gathered at the time.
What Does “Step-Up in Basis” Actually Mean?
As a general concept, when you sell a property, the gain for tax purposes is measured in part by comparing what you receive from the sale with what you paid for the property with your tax basis in the property. For a home you’ve owned for years, that basis often starts with what you originally paid for it plus allowable adjustments.
An inherited home can be different.
Instead of simply starting with what your parents or other family members originally paid for the property, the basis is generally tied to the home’s fair market value at the owner’s date of death.
That’s the basic idea behind what is commonly called a step-up in basis.
Here’s a simplified example.
Suppose your parents bought their home many years ago for $150,000. By the time the surviving owner passed away, the home was worth approximately $900,000.
If the property qualifies for the usual inherited-property basis treatment, the starting point for determining the heir’s basis would generally be the property’s value at the date of death—not the original $150,000 purchase price.
That difference can have an enormous effect on the potential capital gain when the inherited property is eventually sold.
Of course, individual circumstances can be different, and exceptions and additional rules may apply. I don’t determine your tax basis or provide tax advice as part of my real estate services. That’s a conversation to have with your CPA or other qualified tax professional.
What I can do is help you recognize why this question may be important and help gather the real estate information your tax professional may need.
Where Does a Date-of-Death Valuation Come In?
If your tax professional needs to know the fair market value of the home as of the owner’s date of death, someone needs to establish what that historical value was. That’s the purpose of a date-of-death valuation.
It isn’t an estimate of what the house is worth today.
It’s an opinion of what the property was worth in the market as it existed on the relevant date of death.
That historical value may become an important piece of information your tax professional uses when determining the property’s basis and how the step-up in basis rules apply to your particular circumstances and what the Estate will end up owing in taxes.
Getting the Right Information to Your Tax Professional Is Important
You don’t need to figure out your tax basis yourself. That’s what your CPA or other qualified tax professional is there to help you determine.
But they may need information about the property in order to give you the right answer.
That’s where I can help.
I can help gather relevant real estate information and property history, identify important dates and circumstances that may be worth discussing, and help you recognize the questions to bring to your tax professional.
For example, was the home owned by both parents? Did one parent die years before the other? How was title held? What was the property’s condition at the relevant time? Has the home been substantially improved since then?
Those details may or may not affect your particular tax situation—that’s for your tax professional to determine.
But making sure they have the information they need to make that determination is important.
My role isn’t to give you the tax answer. It’s to help make sure the appropriate questions get asked and that your tax professional has the relevant real estate information needed to give you good advice.
Sometimes There May Be More Than One Important Date
Family situations aren’t always as simple as one owner passing away and the heirs immediately selling the home.
For example, perhaps your parents owned the home together and were the original trustees of their trust. One parent died many years ago, the surviving parent continued living in the home, and the second parent passed away more recently.
In a situation like that, there may be questions about how the step-up in basis applies and which date—or dates—are important for determining the property’s tax basis.
That’s a question for your CPA or other qualified tax professional.
But you don’t necessarily have to know which questions to ask before we get started.
Part of the way I help is by recognizing when there may be questions that should be addressed by your tax professional and helping you gather the property information they may need to answer them and even occasionally when to reach out to them.
Your tax professional can then determine what applies to your particular situation and whether a date-of-death valuation—or perhaps more than one—is needed.
If a retrospective valuation is needed for an earlier date, I can research the real estate market as it existed at that time and prepare a valuation of the property as of that date.
What Is a Retrospective Valuation?
A date-of-death valuation is often a retrospective valuation because we’re looking backward in time.
The question isn’t:
“What is the house worth today?”
It’s:
“What would this property reasonably have sold for in the market as it existed on that particular date?”
To develop that opinion, I research the property and the market around the effective valuation date, including relevant comparable sales, location, size, features, condition and other factors buyers would likely have considered at the time.
That distinction matters.
Today’s market may be very different from the market six months, two years or ten years ago. A retrospective valuation takes us back to the appropriate market and looks at the property through that lens.
The Condition of the Home at That Time Matters Too
This is another reason I like to discuss a potential date-of-death valuation early.
Perhaps the family is planning to paint the house, replace flooring, update landscaping or make other improvements before selling.
That’s fine.
But the question for a retrospective valuation is generally what the property was worth as it existed at the relevant valuation date, not what it was worth after the family improved it.
When possible, it can be helpful to gather photographs, records and information about the property’s condition before substantial changes are made.
If the work has already been completed, that doesn’t necessarily mean a retrospective valuation can’t be prepared. It simply means we may need to do more homework to understand what the property was like at the earlier date.
Do I Need to Hire an Appraiser for a Date-of-Death Valuation?
Not necessarily.
The type of valuation or documentation you need can depend on your particular circumstances and what your CPA, attorney or other professional recommends.
That’s another reason I suggest asking the question early rather than automatically ordering an appraisal.
When I’m helping a client with the sale of an inherited home, I can prepare a formal retrospective valuation report documenting my opinion of the property’s fair market value as of the appropriate historical date. The extensive report includes property information, relevant comparable sales and market information supporting the valuation.
For many clients, that may provide the real estate valuation documentation their tax professional needs without separately hiring an appraiser and incurring that additional expense.
There are situations where your CPA, attorney or other professional may recommend or require a licensed appraisal instead. If so, that’s the direction you should take.
The goal isn’t to order more reports than you need. It’s to find out what your professional actually needs, gather the right information and then provide the appropriate documentation.
Don’t Wait Until Tax Time to Ask the Question
Imagine selling the family home and then, months later, sitting down with your tax professional and being asked:
“What was the property worth on the date your parent died?”
That’s not the ideal time to realize nobody ever established it.
The home may already have been sold. The contents may be gone. Repairs or improvements may have changed its condition, and memories about what the property was like at the relevant date may already be becoming less precise.
There’s another practical reason to address these questions early.
Families sometimes assume that when the inherited home is sold, the sale proceeds will simply be distributed to the beneficiaries.
But closing the sale of the house and completing the administration of a trust or estate are not necessarily the same thing.
There may still be tax returns to prepare, expenses or obligations to address, and other matters the trustee, attorney, CPA or tax professional needs to complete or consider before final distributions are made. In some situations, interim distributions may be appropriate; in others, funds may need to remain in the trust or estate for a period of time.
Those decisions belong with the trustee and the appropriate legal and tax professionals.
That’s another reason I like to have the real estate information ready early. If your tax professional is eventually going to need a date-of-death valuation or other information about the property, I’d rather help gather it while we’re already working on the home than have everyone waiting for it later.
Whenever possible, I like to have the real estate information, tax questions and other pieces moving concurrently rather than discovering at the end that one missing piece is holding everything else up.
If the property has already been sold, that doesn’t necessarily mean it’s too late. Retrospective valuations are specifically designed to look backward.
But when we have the opportunity to think about these questions earlier, I prefer to do so.
You Don’t Have to Figure This Out Before Calling Me
If you’re a successor trustee, executor or heir preparing to sell an inherited home, you don’t need to determine your tax basis before we talk.
You don’t even need to know whether you need a date-of-death valuation or how a step-up in basis may apply to your inherited property.
We can start by gathering the basic information about the property and its ownership history.
If there are questions that belong with your CPA, attorney or another professional, I can help you recognize them and gather the relevant real estate information for that conversation.
I work well with the team you trust and help fill the gaps when needed.
Then, once your professional determines what information or documentation is appropriate for your circumstances, we can make sure the real estate side of that information is addressed.
Your Next Step
If you’ve inherited a home in Los Angeles or Ventura County and aren’t sure how a step-up in basis may affect the property—or whether a date-of-death valuation should be part of the process—you don’t need to guess.
Ask your CPA or tax professional what they will need.
And if you’re working with me on the sale, let me know about the property’s ownership history and any earlier deaths that may be relevant. I’ll help gather the available real estate information, recognize questions that may need professional guidance and, when appropriate, prepare the retrospective valuation report.
The earlier we identify the question, the easier it usually is to gather the information needed to answer it.
A Note About My Background
In addition to being a California real estate broker, I am also a CTEC-registered California tax preparer. I don’t provide tax advice as part of my real estate services, but that background helps me recognize when a real estate decision may raise questions that should be discussed with your CPA or other qualified tax professional.
It also helps me understand the importance of gathering the right property information so your tax professional has what they need to advise you.
A Final Thought
Good planning isn’t about having all the answers yourself. Sometimes it’s simply recognizing the questions that should be asked early enough to get good answers.
— Janey Bishop
Independent Real Estate Broker
DRE #01838769