5 Scenarios That Require Estate Appraisals
5 Scenarios That Require Estate Appraisals
Commonly asked questions about estate appraisals
Why do I need an estate appraisal? There are several reasons an estate or date-of-death appraisal may be needed. Here are a few scenarios that require a property valuation.
Probate. If you’ve been appointed by a probate court to serve as the executor of the estate, you will need to compile an inventory of the decendent’s assets. Part of that process will require a professional valuation of the property, which becomes part of the “Inventory and Appraisal” probate requirement.
Estate Taxes. When an estate owner dies (also known as a decendent), the executor of the estate will need an accurate valuation of all assets to determine whether the estate will be subject to either state or federal estate taxes.
The current federal estate tax exemption is $13.61 million. In other words, any estate with assets worth less than $13.61 million will not be subject to federal estate taxes. This tax exemption is scheduled to expire December 31, 2025, and will revert to its previous threshold of $5.6 million, adjusted for inflation; however, there is current speculation that it may be extended under the incoming Trump administration.
New Tax Basis. Any assets that are inherited will get a new tax base, which is the value as of the date-of-death. This value is important as it will determine how capital gains taxes will be calculated when the estate’s beneficiaries sell the assets.
The Step-Up Basis rule is a part of the U.S. tax code that can seriously affect how inherited assets are taxed. Without the Step-Up Basis rule, the capital gains tax would be calculated based on the original price of the property purchased by the decendent. When the property sells after the date of death, capital gains would be calculated based on that original value. For example, Steve buys a property for $79,000 in 1984. Steve retains ownership of the property until he passes away in 2023. The property is inherited by Steve’s son, Dave, who sells it in 2024 for $550,000. Without the Step-Up Basis rule, Dave would pay $61,230 in capital gains tax.
Since Dave is entitled to using the Step-Up Basis rule, the capital gains tax is determined by using the difference of the property value as of the date-of-death and the sales price. Let’s say Dave has a date-of-death appraisal done, and the value as of Steve’s death is $510,000, Dave would only pay $5,200 in capital gains.
Value as of the date-of-death: $510,000
Sales Price once property is sold: $550,000
$40,000
$40,000 x .13 (13% rate capital gains) = $5,200
The Step-Up Basis rule can be a wonderful advantage for beneficiaries who inherit property. Having an appraisal is one step in the process of taking advantage of the Step-Up Basis.
Division of Assets. When there is more than one heir or beneficiary, an appraisal will be needed to divide the proceeds equitably.
There are several scenarios that multiple beneficiaries might face. One scenario is where all beneficiaries agree to selling the property and collecting the proceeds equally after the sale. Or, if one beneficiary wants to keep the property, but the others want to sell, that beneficiary can buy out the other beneficiaries. An appraisal will be needed to determine fair market value of the property.
Overtime, Appraisals Becomes More Costly. Some scenarios would warrant an appraisal even if the above factors don’t apply. A homeowner whose spouse recently passed asked why they needed an appraisal if they planned on eventually passing on the property to their offspring. Well, at some point, the property will likely be sold by the heir and an appraisal will be necessary to determine what, if any, state or federal taxes are owed. This may occur years or even decades down the road. Keep in mind, retrospective appraisals get more costly as time goes on. If the home is sold by the heir in 2025, but the heir inherited the property in 2012, the assignment becomes more complex, and thus expensive. Data is most readily available when it is most current. The longer the gap between the current date and the retrospective appraised date, the more time and research is required for credible assignment results. Most legal professionals recommend having the valuation completed within two to nine months of the date of death.
One last piece of advice: make sure you are clear about what is needed when ordering an appraisal. If you are working with an attorney or CPA, confirm that you do in fact need an appraisal. Also, confirm that the appraisal date is the date of death (some beneficiaries require multiple valuation dates; know these dates upfront as this will save you an additional expense of having to add on a valuation later on). While I cannot advise whether you do in fact need an appraisal (your attorney/CPA can advise you on that), I hope the above information provides some insight into different scenarios that require one, and the reasons behind them.
This article is meant solely for informational purposes and should not in any form be taken as legal or financial advice. Interested parties should seek guidance from qualified legal or financial professionals pertaining to their individual situation.