Getting a professional appraisal for inherited property is crucial to support the increased value used for taxes, especially if the IRS investigates. Beneficiaries should be aware that they may qualify for substantial tax savings and are entitled to this step-up in value basis. The appraisal should aim to closely reflect the property’s fair market value at the time of the original owner’s death which may involve a “Retrospective Appraisal”. If the IRS is an intended user on an appraisal there is specific verbiage and additional information that is required to be in the report to make it compliant. These are unique assignments and should be completed by an appraiser with experience in these types of valuations.
A Step-Up in value basis is a valuation process that adjusts the initial cost basis of an inherited asset to its fair market value on the date of the original owner’s death. This adjustment is essential in determining the tax liability when the asset is eventually sold. The cost basis typically begins with the asset’s purchase price, with any subsequent expenses incurred to improve or maintain the asset added to it.
The “Step-Up” aspect occurs when the fair market value of the inherited asset at the time of the original owner’s death exceeds its initial purchase price. This provision in the tax code allows for an increase in the cost basis to this higher value, thereby reducing the capital gains taxes that may be owed if the asset is sold in the future.
Under the tax code of the United States, when a person (the beneficiary) receives an asset from a giver (the benefactor) after the benefactor dies, the asset often receives a stepped-up basis, which is its market value at the time the benefactor dies (Internal Revenue Code § 1014(a)).