Establishing Stepped Up Basis on Inherited Home


W

Will

If you inherit a home from your parents through a living trust, I understand
that you are currently allowed to step up the basis of the home to the
current market value. How does one establish this "current market value"
in a documented way so that if you sell the home in some future year the
cost basis for the gain or loss will not be subject to dispute?
 
J

joetaxpayer

Will said:
If you inherit a home from your parents through a living trust, I understand
that you are currently allowed to step up the basis of the home to the
current market value. How does one establish this "current market value"
in a documented way so that if you sell the home in some future year the
cost basis for the gain or loss will not be subject to dispute?
If you are in an area that is like a development, i.e. single homes on
standard lots, but very similar, you should be able to get sale data
from the local assessor's office. Recent sales are what appaisors use to
gather this data.
A site like Zillow.com will help you gather up details for your area,
and probably get as close as you're likely to get with an appaisal.

Since data goes back for decades, you are always able to pull comp sales
in the future, if the IRS claims you used a price too high.

(Getting a paid-for appraisal can't hurt, either)

Joe
 
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M

Mark Bole

joetaxpayer said:
If you are in an area that is like a development, i.e. single homes on
standard lots, but very similar, you should be able to get sale data
from the local assessor's office. Recent sales are what appaisors use to
gather this data.
Beware that the older the development, the less likely they are to be
"very similar". I live where all the homes were identical when they
were built, 60-some years ago, but not any more. Of course, a big chunk
of house price is due to location, which would apply the same to homes
close to one another regardless of their physical similarity.

Also keep in mind that homes re-sold every 5, 10 or 15 years are more
likely to be kept up to market standards. A home where a parent lived
for many decades may be valued well below market because of completely
outdated wiring, plumbing fixtures, landscaping, insulation, etc, that
the elderly parent never saw a need to alter, and especially due to
deferred maintenance (termites, mold, lead paint, for example).
Since data goes back for decades, you are always able to pull comp sales
in the future, if the IRS claims you used a price too high.
I'd frame this more as a last resort than a sure-fire way to defend
yourself in an audit. In any case, to the OP: don't use this method as
an excuse to neglect to obtain contemporaneous data as close to the
actual basis event as possible. The longer you wait, the weaker your
position. For example, you can't go back in time to obtain photos of
the property's current physical condition, amenities, and so on
(appraisers will take such photos).

Many real estate agents will provide a free "competitive market
analysis" which I'd expect to be more reliable (and acceptable to the
IRS) than do-it-yourself downloads from the internet. Of course, in
exchange the agent hopes you will list with him or her someday, but I
think that is less of a conflict of interest than the taxpayer
"appraising" their own property. As Joe mentioned, a paid appraisal
from someone trained and licensed is a small investment with
potentially very large payoff in terms of avoiding both future taxes and
future stress or anxiety.

-Mark Bole
 
B

Bob Sandler

If you inherit a home from your parents through a living trust, I understand
that you are currently allowed to step up the basis of the home to the
current market value. How does one establish this "current market value"
in a documented way so that if you sell the home in some future year the
cost basis for the gain or loss will not be subject to dispute?
The way you do it is to hire a licensed appraiser to give
you a professional written appraisal. It's not that
expensive. Any real estate agent can recommend an appraiser.
This way it's well documented and very hard to dispute. It's
much more authoritative than the do-it-yourself approaches
that some other replies have recommended.

Bob Sandler
 
D

D. Stussy

joetaxpayer said:
If you are in an area that is like a development, i.e. single homes on
standard lots, but very similar, you should be able to get sale data
from the local assessor's office. Recent sales are what appaisors use to
gather this data.
A site like Zillow.com will help you gather up details for your area,
and probably get as close as you're likely to get with an appaisal.
Careful about Zillow. It has been known to be really WRONG for some areas,
especially in areas where the housing turnover is low. If the neighborhood
in question has an average ownership turnover of 5 years, then the site may
get close. However, in neighborhoods where ownership lasts 20-30 years on
average and thus low turnover, the site is often wrong.
 
J

joetaxpayer

D. Stussy said:
Careful about Zillow. It has been known to be really WRONG for some areas,
especially in areas where the housing turnover is low. If the neighborhood
in question has an average ownership turnover of 5 years, then the site may
get close. However, in neighborhoods where ownership lasts 20-30 years on
average and thus low turnover, the site is often wrong.
I withdraw my initial reply. I was too focused on the thought that there
were 'developments' like Levittown Long Island, where entire
neighborhoods were so homogeneous that one can actually know the going
rate, give or take.

I'd suggest that "for the couple hundred bucks (last refince, I saw it
cost $250), it's worth getting a paid for, professional appraisal" is
the best route.

D - I agree with your hesitation regarding Zillow, but not your premise.
I don't know how it's possible for a sufficiently large neighborhood to
defy the numbers of average turnover. Certainly possible for a 4 house
cul-de-sac, but not a larger area.

Joe
www.blog.joetaxpayer.com
 
W

Will

joetaxpayer said:
If you are in an area that is like a development, i.e. single homes on
standard lots, but very similar, you should be able to get sale data
from the local assessor's office. Recent sales are what appaisors use to
gather this data.
A site like Zillow.com will help you gather up details for your area,
and probably get as close as you're likely to get with an appaisal.

Since data goes back for decades, you are always able to pull comp sales
in the future, if the IRS claims you used a price too high.

(Getting a paid-for appraisal can't hurt, either)
Does the IRS have some kind of official standard or guideline for what will
constitute an acceptable cost basis? For example, is the standard to take
the average of similar selling homes in the same city / same region / within
two miles of home location, etc?
 
1

123go

Bob Sandler said:
The way you do it is to hire a licensed appraiser to give
you a professional written appraisal. It's not that
expensive. Any real estate agent can recommend an appraiser.
This way it's well documented and very hard to dispute. It's
much more authoritative than the do-it-yourself approaches
that some other replies have recommended.
would a "free marketing analysis" form a real estate agent suffice?
 
D

D. Stussy

joetaxpayer said:
I withdraw my initial reply. I was too focused on the thought that there
were 'developments' like Levittown Long Island, where entire
neighborhoods were so homogeneous that one can actually know the going
rate, give or take.

I'd suggest that "for the couple hundred bucks (last refince, I saw it
cost $250), it's worth getting a paid for, professional appraisal" is
the best route.

D - I agree with your hesitation regarding Zillow, but not your premise.
I don't know how it's possible for a sufficiently large neighborhood to
defy the numbers of average turnover. Certainly possible for a 4 house
cul-de-sac, but not a larger area.
I'll tell you how: I happen to live in a neighborhood where the turnover is
low - usually when people die, although some move. Out of the 1,000 houses
that are in my "immediate area," only about 25 change hands in a given year.
As for my 4 immediate neighbors: Two are original owners from 1948, one
changed hands from the original owner only last year, and the 4th was bought
in 1980. I inherited my property in 1990, and my parents bought in the
early 1950's (as second owners). In 2006, a house a block away within 2% of
both lot size and house square-footage of mine sold for $1.95M, and my new
neighbors bought for $1.5M. Zillow had most houses in the area listed for
$1.1-1.3M; an error that at the lowest exceeds $200k (16%, and in the
extremes, up to $800k, or 60%).

Meanwhile, one of my friends lived in a higher turnover neighborhood where
houses are at or below the median price. About 10 houses (minimum) every
month within a mile change hands. Zillow's prices appear to be relatively
accurate there. Houses seem to change hands at about the same value as
Zillow lists them for.

Note that I am in California - where property tax assessed value has nothing
to do with current market value.
 
B

Bob Sandler

Does the IRS have some kind of official standard or guideline for what will
constitute an acceptable cost basis? For example, is the standard to take
the average of similar selling homes in the same city / same region / within
two miles of home location, etc?
No, the IRS doesn't have standards like that. Here is what
the IRS has to say in Publication 523 (pages 7 & 8).

"Fair market value is the price at which property would
change hands between a willing buyer and a willing seller,
neither having to buy or sell, and both having reasonable
knowledge of all necessary facts. Sales of similar property,
on or about the same date, may be helpful in figuring the
fair market value of the property."

"Home received as inheritance. If you inherited your home,
your basis is its fair market value on the date of the
decedent’s death or the later alternate valuation date if
that date was chosen by the personal representative for the
estate. If an estate tax return was filed, the value listed
for the property generally is your basis. If a federal
estate tax return did not have to be filed, your basis in
the home is the same as its appraised value at the date of
death for purposes of state inheritance or transmission
taxes."

Bob Sandler
 
B

Bob Sandler

If you inherit a home from your parents through a living trust, I
would a "free marketing analysis" form a real estate agent suffice?
No. You get what you pay for. A marketing analysis from a
real estate agent is not nearly as thorough, detailed,
precise, and authoritative as an appraisal. It's basically
the agent's best guess, and is probably colored by what he
thinks he has to tell you to get you to list the house with
him. And, as D. Stussy pointed out, you have to make sure
you know whether the agent is giving you the price he thinks
it will sell for or the price he thinks you should list it
at. The listing price or asking price is of very little help
in determining fair market value.

Bob Sandler
 
1

123go

D. Stussy said:
Asking price isn't necessary market price.
and marketing analysises (wow, what is the plural of analysis?) don't just
give a suggested asking price. At least, not in my experience.
 
D

dpb

Will wrote:
....
the average of similar selling homes in the same city / same region / within
two miles of home location, etc?
Don't see how that could be a general rule--in my case that would be an
average of 1.

--
 
M

Mark Bole

Bob said:
No, the IRS doesn't have standards like that. Here is what
the IRS has to say in Publication 523 (pages 7 & 8).
"Home received as inheritance. If you inherited your home,
your basis is its fair market value on the date of the
decedent’s death or the later alternate valuation date if
that date was chosen by the personal representative for the
estate.
And you have to attach a statement to your Schedule D explaining your
basis if it is not cost.

-Mark Bole
 
M

Mark Bole

It's always potentially subject to dispute, or until the statute of
limitations runs out, whichever comes first.


No. You get what you pay for. A marketing analysis from a
real estate agent is not nearly as thorough, detailed,
precise, and authoritative as an appraisal.

But better than Zillow, no?

-Mark Bole
 
D

D. Stussy

Mark Bole said:
And you have to attach a statement to your Schedule D explaining your
basis if it is not cost.
No, you don't.

You only have to prove basis if you're audited.
 
M

Mark Bole

D. Stussy said:
No, you don't.

You only have to prove basis if you're audited.
Let me re-phrase that: the IRS instructions for Schedule D tell you to
attach an explanation if you don't use actual cost. However the IRS
won't automatically reject your return if you do not follow this
instruction.

-Mark Bole
 
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W

Will

dpb said:
Will wrote:
...

Don't see how that could be a general rule--in my case that would be an
average of 1.
The above was three alternative rules, and the level of generality you
choose might depend on how many home sales each rule shows in your specific
case:

1) Establish new cost basis of home based on comparable homes in the same
city
2) Establish new cost basis of home based on comparable homes in the same
region
3) Establish new cost basis of home based on comparable homes within some
finite radius

If the IRS has no standard for this at all, then it looks like a very
subjective process. If you had an assessment done that would probably be
accepted, but in absence of an assessment, it looks like each auditor will
in effect make up their own rules about what constitutes an acceptable cost
basis.

In the case of an inheritance, I assume the taxpayer's incentive would be to
build a case for the highest possible appraised value, in order to raise
cost basis as high as possible?
 

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