When you inherit property, do you need to have a real estate appraisal done on it

Attorney Tom Olsen: Chrissy, we were often asked this question, that it is that when mom and dad pass away and the children inherit their home, do they need to get an appraisal from that home? We want to start by first saying this is that there is a good provision left over the Internal Revenue Code called the step-up basis.

The step-up basis says that when mom passes away and the children inherit their home, their basis for capital gains tax purposes is the value at the date mom's death. On the date mom passes away, and the kids inherit the home, and the home is worth $500,000, and they turn around and sell that home for $500,000, they're going to pay absolutely no capital gains taxes. If they're going to hold onto the home for a couple of years and then they sell it for $525,000, they're going to pay capital gains on their $25,000 profit.

Back to the issue, do they need to get an appraisal done if the intention is to sell the home within say nine months of mom passing away? No, they don't need an appraisal because as far as IRS is concerned, we can assume that what they sold it for is what it was worth when mom and dad passed away. If they're going to hold onto the home for a year or more, then they would want to get an appraisal done so that they could prove to the IRS what the home was worth when mom passed away.

Attorney Chris Merrill: Right and you're correct that we know when speaking to clients, if and only if they think that they are going to hold onto it, would an appraisal be necessary? Like you said, if they know that they're going to be selling. Do you think Tom that that magic number is less than a year?

Tom: I think about nine months. Nine months to a year.

Chrissy: If only if the adult children feel like they are going to keep it beyond that for whatever reason, that's when you would want to think about getting an appraisal done.

Tom: Yes and by the way, if you're going to go through that, if you're going to get an appraisal done, you would tell the appraiser to say, ''Look, I want it to appraise on the high side,” because ultimately the higher the house appraises for, the less they're going to pay in capital gains taxes down the road. If you don't tell that to the appraiser, the appraiser may be thinking the opposite. The appraiser may think, “Hey, they want it to appraise low so there’s not going to be any estate, death taxes, inheritance taxes on it,” which is a whole nother issue, but that's not going to be the case so they want it to appraise as high as it can.

As far as what the home is really worth, the home is worth what somebody's willing to pay for it in an arm’s length transaction. What it appraises for is not necessarily what you may be able to sell it for. But again, this is the evidence that you're going to need to show the IRS someday when you do sell it. That appraiser, some people say, “Well Tom, can I just get the value off the property appraiser's website?”

Chrissy: No.

Tom: No. The value on the property appraiser’s website is not an accurate value of a piece of property. It's typically going to be much lower, and at least 20% lower than the real market value.

Chrissy: Correct. Than the fair market value.

Tom: Yes. Exactly.

Chrissy: Thank you for that explanation because I think that a lot of people do wonder because they immediately think that they must get an appraisal the minute that mom or dad pass away. What you are explaining is the answer is no, you do not have to get an appraisal the minute that they pass away. You only have to get an appraisal if you intend to keep it more than nine months or a year.

Tom: Yes and by the way, this step-up basis, this is a good thing left over the Internal Revenue Code. It applies to all kinds of assets, a piece of property, or stock investments that mom and dad had, or the painting hanging on the living room wall.

Chrissy: Exactly.

Tom: As far as a stock account is concerned, that's easy. They take the value of the stock account before the date of death. The day after the date of death, they average those two numbers so it's easy to figure out what the cost basis is or the step-up basis is on stock accounts.

Chrissy: Because there's already a number set in time-

Tom: Exactly, yes.

Chrissy: -where that's not the case on real estate.

Tom: Exactly. That's a good provision left over. It's called the step-up basis. It serves you. Now every once in a while you hear about Congress talking about getting rid of the step-up basis. I suppose there's a possibility somewhere down the road but at this moment in time, the step-up basis is still available and you can see how important it is to get the step-up basis on any asset that's got a very low basis and has a high value.

I often talk to people when they come to see us and they do their estate planning. We have to go take a look for their deed and look at their property on the property appraiser's website and we can see what they paid for their property. Often I look at them, “Boy, you did buy a house back in the good old days.” I guess I'm stuck in the good old days because I say people bought a house back in the good old days for $50,000 in Orlando. Yes, there was such a time in Orlando when you could buy a home for $50,000.

Chrissy: Well, also we had a client recently that sold their home. They bought it for $10,000-

Tom: Oh boy.

Chrissy: -in Winter Park.

Tom: Good for them. Yes and by the way, we have a title company here and so we monitor the number of closings that are happening and we see that the real estate market is softening somewhat. That makes me happy just for people that want to buy their first home.

Chrissy: Right.