The stepped-up basis is one of the most valuable tax benefits available to people who inherit real property. It is also one of the most misunderstood, and one of the most frequently lost due to a procedural delay that costs thousands in unnecessary taxes when the property eventually sells.
The appraisal is the document that makes the stepped-up basis real. And the window for getting it right is not indefinite.
What the Stepped-Up Basis Actually Does
When someone inherits real property, the IRS allows the heir to treat the property's fair market value at the date of death as the new tax basis, rather than the original purchase price the decedent paid, which may have been decades earlier and far lower. This is the step-up.
Here is what it means in practical terms. A decedent bought a home in 1985 for $180,000. The home is worth $875,000 at the date of death. The heir inherits the property with a new stepped-up basis of $875,000. If the heir sells the property for $950,000 six months later, the taxable capital gain is $75,000, not $770,000. The difference in tax owed could be $100,000 or more depending on the heir's tax situation.
Why the Appraisal Is Not Optional
To establish the stepped-up basis at $875,000, rather than at some number the IRS challenges or the heir cannot support, the estate needs a professional appraisal documenting fair market value as of the date of death. This is not informal. The IRS can question the basis on a later tax return, and without a professional USPAP-compliant retrospective appraisal, the heir has no defensible documentation.
Families who rely on a Zestimate, an agent's informal estimate, or a CMA from a real estate broker to establish the stepped-up basis are taking a documentation risk that can surface years after the estate closes.
The Delay Problem and What It Costs
There is no law requiring the date-of-death appraisal to be commissioned immediately after death. But delay creates practical problems that compound. Real estate markets move. Comparable sales from near the date of death become harder to analyze accurately as time passes. An appraiser reconstructing a retrospective value from two or three years ago has more uncertainty to work with than one working from recent data.
More importantly: heirs who sell quickly after inheriting often do so without commissioning an appraisal first, assuming the sale price is close enough to the basis. If the sale price is close to the date-of-death value, the capital gain is small. But if the market has moved significantly between the date of death and the sale, which in Greater Boston, a period of even six months can produce, the undocumented basis can cost the heir meaningfully.
The May Timing Advantage
For estates where the decedent passed in the fall or winter and the property is being considered for a spring listing, May is the natural moment to commission the date-of-death appraisal. The retrospective value is established before the listing is finalized, the stepped-up basis documentation is in the estate's file before the sale, and the capital gains analysis can be completed by the CPA before any proceeds are distributed.
Spring's active comparable sale environment also helps retrospective methodology. An appraiser working in May has access to current market evidence that helps calibrate adjustments to earlier date-of-death comparable sales, producing a more defensible opinion.
Ready to Get Started?
Whether you are a homeowner, estate attorney, realtor, or investor in Greater Boston, Adam Wiener and the Aladdin Appraisal team deliver USPAP-compliant appraisals you can rely on. Call today: (617) 517-3711 | info@aladdinappraisal.com | aladdinappraisal.com
