Family in their home after learning how to determine fair market value of inherited property.

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A Guide to Determining Fair Market Value of Inherited Property

Did you recently inherit property and have questions about its value? Learn more about determining fair market value of inherited property here.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Have you recently inherited an estate from your loved one? If the estate included a home or other real estate property, then you’ll need to find out its value as soon as possible. Determining the fair market value of inherited property is necessary for at least three reasons. For starters, the value is needed to inventory the asset in the estate, especially if it must go through probate. Second, if your inheritance is shared with other beneficiaries such as your siblings, then you’ll need to know the value so that the estate will be divided fairly. Last but not least, the fair market value is required to determine a taxable gain or loss if and when the property is eventually sold. Keep reading to find out how to determine the value of your inherited property.

How to determine the value of inherited property

According to the National Association of Homebuilders, homeownership is the primary driver of household wealth in America. This means that if an estate includes a home, then it’s likely the most valuable asset. Although you’ll likely want to find out the value of the property out of curiosity anyway, there are practical reasons for which the value is required, which we discussed above.

While there’s a chance that you’re privy to the home’s original purchase price, know that this likely does not represent the current market value of the property. Thanks to a fluctuating market and inflation, home prices rarely stay the same over long periods of time.  

Here are the best ways to determine the fair market value of inherited property:

  • Ask local real estate agents for an estimate

  • Get a formal appraisal from a licensed real estate appraiser

  • Put the property on the market

Ask local real estate agents for an estimate

You may not be planning to sell your inherited property any time soon. Perhaps you want to live in it yourself, or hold onto it and let it increase in value. If the estate must be probated, then it will take some time before you can sell the property anyway. 

Regardless, real estate agents will always be happy to help you estimate the value of your home with the hope of getting your business in the future. Ask a few real estate agents to conduct a walkthrough of the property and come up with estimates in writing. Local agents who know the ins and outs of the neighborhood market are your best bet. The reason for asking for several quotes is in case an agent gives you an inflated estimate with the hopes that you’ll be tempted to sell (and win you over as a client.)

They will conduct an analysis that compares your property with other similar properties in the neighborhood (called comps), while taking current market trends into consideration. You’ll likely get different estimates from your agents, so take the average to come up with a reasonable number. 

Get a formal appraisal from a licensed real estate appraiser.

If you want the most accurate number from a neutral party, work with a licensed real estate appraiser. This number is typically the most reliable and defensible. Because they aren’t vying for your business as a real estate client, they don’t have an incentive to inflate the value of the property. You’ll especially want to work with an appraiser if your property is a commercial or income-producing property. The value for these types of properties are much harder to compute relative to residential properties. 

If you’re wondering why someone wouldn’t opt for this route in the first place, it’s because the cost of getting a property appraised will cost several hundred dollars. However, it may be a necessary estate expense to get the most accurate valuation possible. Be sure to act quickly since real estate markets change constantly. 

Put the property on the market

If you plan to sell the property right away, then you can ignore the methods above. An appraised value of a property is subjective and is, at best, an estimate of what a property would sell for in the open market. In other words, there’s nothing more accurate than the true test of putting the property on the market. The Internal Revenue Service (IRS) typically accepts a property’s selling price as fair market value, but only if it is sold within six months to a year from the date of the original owner’s death. This value is used to calculate if there was a taxable gain or loss on the sale. This figure is also important when dividing the proceeds fairly amongst multiple beneficiaries. 

What is fair market value?

Fair market value, or “FMV” for short, is the price a home would sell in an open market. This home in theory should be sold in fair conditions. For example, both the buyer and seller share information symmetry regarding the home and are behaving in their own best interest. They haven’t been pressured into the sale and had ample time to complete the transaction. The transaction represents supply and demand of the local real estate market at a point in time, producing a valuation of the home’s worth at that time.

Understanding how fair market value works in the context of estate, inheritance, and tax planning is critical. Basis rules are applied to inherited property. When an heir inherits property, the base value is “stepped up” or “stepped down” from the original purchase price to its date-of-death fair market value. This new property value is used to calculate the estate value, taxes, and beneficiary distributions, rather than the original property value. Because real estate almost always increases in value over time, you’ll likely hear the term “step-up in basis” rather than “step-down in basis.”

Here’s an example to help illustrate. Sally inherits her grandmother’s house. Her grandmother originally purchased the home for $120,000 in 1980. Sally decides to sell the home, and it sells for $900,000 six months following her grandmother’s death. If the IRS didn’t have step-up in basis rules, then Sally would have owed a capital gains tax on the difference, which is $780,000. Luckily, the IRS allows Sally to use fair market basis rules since she sold the property within a year of her grandmother’s death. The base value of the property is stepped up from $120,000 to $900,000, meaning she may not owe any capital gains tax. Capital gains tax on any proceeds over $900,000 may be owed if she decides to hold off on selling the property longer than one year after her grandmother’s passing. Regardless, she won’t have to worry about making capital gains on the original purchase price of $120,000, which would be exorbitant. 

How do I find the FMV for an inherited property?

Finding the fair market value of an inherited property may require some professional help. The basis of the home is the value of the property at the time of the owner’s death. If some time has passed from this date, check to see if an appraisal was done as a part of the estate distribution process, especially if the estate went through probate. If an appraisal was not performed at the time, then you can work with either a real estate professional or a licensed appraiser to perform an analysis on your behalf. They will determine the fair market value by comparing the home to comparable sales of other homes in the same neighborhood. Any improvements made to the home will be factored into the value.

Make sure your property is protected - update your estate plan today

Determining the fair market value of inherited property is a critical part of the estate settlement process. Executors, probate judges, heirs, and tax agents alike all need to know the current value of real estate, each for their own reasons. Heirs might want to know what their inheritance is worth, and what they could potentially sell it for. Executors may need to know how much the home is valued at today so that inheritances can be distributed fairly. Tax agents will need the value to accurately assess any applicable taxes. 

We all know that the real estate market is competitive. It’s one of the most sound investments an American can make, since real estate generally accrues value in time. The shadow side to this advantage is that it can increase the burden of inheritances where taxes are concerned. Luckily, thanks to fair market basis value rules, heirs won’t be slammed with taxes with all capital gains made. The IRS allows the property value to be “stepped up” to the time of death of the owner.

Proper estate planning can ensure the success of your inheritance strategy. For instance, placing the home in a Trust can ensure that it doesn’t have to touch the probate process. Further, it can provide tax protection for both your estate and its heirs. 

Find out how you can protect your property or inherited property by setting up an estate plan. At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement  options today!

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