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An inherited building is valued at its fair market value on the date of death, the price a willing buyer and a willing seller would agree on with neither forced to act and both knowing the relevant facts. Under section 1014 of the Internal Revenue Code that value becomes the heirs' basis, or the value six months later if the executor makes that election and it qualifies, so the number has to describe the building as it stood that day: its rents, its leases and its condition.
- Treasury Regulation 20.2031-1(b) defines fair market value by a willing buyer and a willing seller, and it rules out a forced sale price.
- The executor may value the estate six months after the death instead, but only if that lowers both the gross estate and the estate tax.
- Where a married couple held the building as community property, the survivor's half can take the date-of-death value as well.
- If the estate must file an estate tax return, the executor also files Form 8971, and the heirs' basis may not exceed the value finally determined for that return.
- In a probate, the referee appraises the building for the inventory as of the date of death.
What value, as of which day
The definition is in Treasury Regulation 20.2031-1(b). Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. A forced sale price does not count, so a figure accepted under pressure is not the measure.
Section 1014 makes that value the heirs' income tax basis. The appraiser's work is to describe the building the way a buyer would have seen it that day, with the rents it collected, the leases it had, the repairs it needed and the sales that had closed nearby. A figure that comes in low costs the heirs when they sell. In the made-up case below, the building would have sold for $2,800,000 on the date of death, a hurried valuation put it at $2,600,000, and the heirs sell a year later for $2,850,000.
| Line | Valued correctly | Valued low |
|---|---|---|
| Heirs' basis | $2,800,000 | $2,600,000 |
| Sale a year later | $2,850,000 | $2,850,000 |
| Gain before selling costs | $50,000 | $250,000 |
The extra $200,000 of gain exists only because the valuation missed by $200,000.
The six-month alternate date
Section 2032 lets the executor value the estate as of six months after the death instead. The executor makes the election on the estate tax return, and once made it cannot be undone. The statute allows it only if it lowers both the value of the gross estate and the estate and generation-skipping transfer taxes, after credits. Property sold, distributed or otherwise disposed of within those six months is valued on the date that happened.
For a building, that can mean two valuations, one at the date of death and one six months later, or on the day it sold if that came first. It also means an estate that owes no estate tax cannot use the election to lower the building's value, since its tax cannot go down, however far the value fell in those months. When the election is made, the heirs' basis follows the alternate value, as IRS Publication 551 describes.
Community property and the whole building
If a married couple held the building as community property and one spouse dies, section 1014(b)(6) treats the surviving spouse's half as acquired from the one who died, as long as at least half of the whole community interest was includible in the decedent's gross estate. Both halves then take the date-of-death value, and IRS Publication 555 states the same rule for community property.
Run it with made-up numbers. A couple bought the building long ago, and after years of depreciation their adjusted basis is $400,000. It is worth $3,000,000 on the day the first spouse dies. As community property, the survivor's basis in the whole building becomes $3,000,000. Had only the decedent's half stepped up, the basis would be $1,500,000 for that half plus $200,000 for the survivor's, $1,700,000 in all, and a sale at $3,000,000 would carry $1,300,000 more gain.
How title was held decides which case applies. Publication 551 treats spouses who were the only joint tenants differently, including half the property in the estate, so only that half takes the new basis. Find the vesting deed before anyone runs the tax numbers.
Basis consistency and Form 8971
An estate large enough that the executor must file an estate tax return brings in section 1014(f). For property whose inclusion raised the estate tax, the heirs' basis may not exceed the value finally determined for estate tax purposes or, until then, the value reported to them on the statement section 6035 requires. That statement is Form 8971, with a Schedule A for each beneficiary. Under the instructions for Form 8971, the executor files it with the IRS and gives each beneficiary a Schedule A no later than 30 days after the return was due, extensions included, or 30 days after it was filed, whichever comes first.
So where the building raised the estate tax, the value finally determined for that tax is the most the heirs' basis can be. A low value saves estate tax now and leaves the heirs a lower basis and a larger gain when they sell, while a high value can cost estate tax now in exchange for a higher basis later. Whether the estate has to file at all, and what value it should report, are questions for the estate's CPA. Shaya is not a CPA, and his part is the market evidence, meaning the rent roll read the way a buyer would have read it that month and the sales that had closed nearby.
A retrospective appraisal
An appraisal can carry an effective date in the past. A retrospective appraisal values the building as of the date of death, however long ago that was, on what an informed buyer could have known that day. It is easier to support the sooner it is done. Tenants move out, rents change at turnover, a leak gets fixed, and each change makes the building on the date of death harder to show. Gather these while they still exist:
- The rent roll as of the date of death, with the leases, deposits and any concessions behind it.
- The trailing twelve months of income and expenses through that month, and that year's property tax bill.
- Photographs, inspection reports, repair invoices and permits that show the building's condition that day.
- Any orders or notices on file, such as a soft-story retrofit order or a code violation.
- For an RSO building, that year's Rent Registry filing with LAHD.
Shaya can pull the sales that had closed near the building by the date of death and read that month's rent roll the way a buyer would have, for the appraiser and the CPA to work from. An opinion of value and an appraisal answer different questions, and an estate that sells may need both.
The probate referee's value
If the building goes through probate, the court gets its own date-of-death figure. Probate Code section 8802 has the inventory and appraisal list each asset at its fair market value at the time of the death. The personal representative appraises cash and items like it, and section 8902 sends everything else, the building included, to the probate referee, whom the court designates from those the State Controller appointed for the county.
That figure comes back if the estate sells with court confirmation. Probate Code section 10309 requires an offer of at least 90 percent of an appraisal made within one year before the hearing, so a sale that reaches court more than a year after the inventory needs a newer appraisal.