Do I need a date of death appraisal for an inherited house?

The value on the date of death becomes your starting line

When you inherit a house, the IRS does not care what your parents paid for it in 1979. IRS Publication 551 says the basis of inherited property is generally its fair market value on the date of the person's death. Basis is the number you subtract from the sale price to figure your gain.

Here is a hypothetical. Say your mother bought a house decades ago for a small fraction of today's price. On the day she passed, it was worth $900,000. You sell it a year later for $930,000. Your gain is measured from $900,000, not from her old purchase price.

The IRS says the proceeds from selling inherited property are generally included in gross income, and if you sell for more than your basis, you have a taxable gain. A higher, well supported basis means a smaller gain. A guessed basis means you are hoping nobody asks.

Your parents' purchase price makes a great dinner story. It makes a terrible tax basis.

What fair market value means to the IRS

The estate tax regulations define fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither under any compulsion to buy or to sell, and both having reasonable knowledge of the relevant facts.

The same rule says fair market value is not a forced sale price. That matters. If the family dumps the house on the first investor who calls, that bargain price is not automatically the date of death value.

It also means the value is set by the market as it stood on that day. Not today. Not what the house will be worth after you paint it. An appraisal done for a past date is called a retrospective appraisal. I look at the sales that closed around the date of death, how the market was moving at that moment, and the condition the house was actually in.

That last part trips people up. If Dad's house had a 1974 kitchen and a roof held together by optimism, the date of death value reflects that, even if you remodeled it later.

When the estate files a return, and when it does not

Some estates are large enough that the executor must file a federal estate tax return, Form 706. In that case, Publication 551 says beneficiaries will generally receive a Schedule A (Form 8971) from the executor, and certain beneficiaries must use the value reported there as their starting basis.

Most families never see a Form 706. No Schedule A shows up in the mail. The basis rule still applies: it is still the fair market value on the date of death. The difference is that nobody hands you the number. You have to be able to show it.

That is where a date of death appraisal earns its fee. It is a written record, made by a licensed appraiser, of what the house was worth on the day that counts. When you sell years from now and your CPA asks how you got your basis, you hand over a report instead of a shrug.

The IRS does not accept "Mom always said it was worth a million" as documentation. It is not a form they recognize.

The alternate valuation date, in plain words

Publication 551 also allows the value on the alternate valuation date, if the personal representative of the estate chooses it. Under the tax code, that date is six months after death. If the property is sold or distributed before then, it is valued on the date of that sale or distribution.

There is a catch. The law only allows the election if it lowers both the value of the gross estate and the estate tax bill. In practice, it is a tool for estates that actually face estate tax. If the estate owes none, ask your CPA before assuming this option is on the table.

When the alternate date does apply, the appraisal needs to answer the right question. I can value a house as of the date of death, as of the six month date, or both. The report just has to say clearly which date it is answering.

What I see in the field

The most common mistake I see is heirs using an online estimate pulled up months later. It is the wrong date, it never saw the inside of the house, and it cannot tell you why it landed where it did.

The second mistake is waiting too long and assuming it is too late. It is not. Sales from around the date of death are still on record. An older sale can still be useful if it is adjusted to that date and to the house. What changes is how carefully the market trend has to be measured, so I read the trend in the most recent window the data supports instead of averaging a whole year and calling it good.

A good date of death report should teach you something. It should show the sales, explain each adjustment, and say why the value is what it is. If your report is a number and a signature, it will not help much if anyone ever questions it.

What to do if you inherited a house

1. Write down the date of death and get a copy of the death certificate.
2. Ask the executor or trustee whether a Form 706 is being filed. If so, wait for your Schedule A and talk to your CPA before ordering anything.
3. Order a retrospective appraisal from a licensed appraiser, as of the date of death. Do it before major repairs or a remodel if you can.
4. Gather what the house looked like then: photos, old listing pictures, inspection reports, repair bills and permits.
5. Tell the appraiser about any big changes since the death, such as new paint, flooring or a cleanout, so the report describes the house as it was.
6. Keep the report with your tax records for as long as you own the house and after you sell it.

This is general information. Tax treatment depends on your facts, so confirm your basis with a CPA or tax attorney.