How Do You Determine the Fair Market Value of Inherited Property?

Inheriting property can leave you with an important question almost immediately: What is it actually worth? Fair market value can affect your cost basis, future capital gains taxes and decisions about whether to sell or keep the asset. The valuation process can differ depending on whether you inherit real estate, investments, a business or other property.

A financial advisor can help you decide on the best way to handle inherited property and other assets.

Understanding Fair Market Value

Fair market value is what an asset is worth given the current market conditions. In other words, it’s what you could expect to sell an asset for on the open market at any given time. When you inherit property, its fair market value is typically calculated at the time of the original owner’s death.

Why would you need to know how to find the fair market value of inherited property? There are a few reasons why it’s important.

If the property is subject to probate, the deceased’s executor will need to know what it’s worth in order to complete the estate inventory.
Fair market value must be established in situations where an inheritance is shared among multiple beneficiaries, in order to ensure that the division of assets is fair.
Should you decide to sell an inherited property, you’ll need to know its fair market value in order to determine whether you’ll have a capital gain or loss to report to the IRS.

That last point is important as the federal tax code applies basis rules to inherited property when determining whether any taxes are owed on the sale of said property. Specifically, the basis is either stepped up or stepped down, depending on the fair market value at the time the original owner passed away. The stepped-up (or down) value is used to calculate what amount of capital gains tax, if any, is owed on the property’s sale.

So, assume that you inherit a home that the original owner paid $200,000 for. When the owner passes away, the property comes to you with a fair market value of $500,000. The step-up basis rule allows you to use the new, higher value, for determining capital gains tax should you decide to sell.

In that case, you’d only owe capital gains on the difference between the step-up basis and the sale price, not the home’s fair market value and its original purchase price. That could potentially save you thousands of dollars in taxes.

How Do You Determine the Fair Market Value of Inherited Property?

Couple learning that they are inheriting property

The fair market value of inherited property is generally the price the asset could reasonably have sold for on the open market at the time of the previous owner’s death. For tax purposes, that value is important because it commonly becomes the beneficiary’s new cost basis, which can affect the amount of capital gain or loss recognized if the property is later sold.

For inherited real estate, one of the most common ways to determine fair market value is with a professional appraisal. An appraiser can evaluate the property’s condition, location, features and comparable sales near the date of death to estimate what a willing buyer and seller would likely have agreed to pay. Tax assessments or online estimates may provide useful reference points, but they may not be precise enough for estate or tax purposes.

Other inherited assets may require different valuation methods. Publicly traded stocks can generally be valued using market prices around the date of death, while closely held businesses, collectibles, jewelry and other specialized assets may require an independent valuation from a professional with experience in that type of property.

In most cases, inherited property receives a basis equal to its fair market value on the date of death. However, an executor may sometimes elect an alternate valuation date for federal estate tax purposes, which can change the value used for certain inherited assets.

Beneficiaries should keep copies of appraisals, estate tax documents and other records supporting the valuation. If a federal estate tax return was filed, certain beneficiaries may also receive Schedule A of Form 8971 and may be required to use a basis that is consistent with the value reported for estate tax purposes.

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Tips for Managing Inherited Property

When you inherit property, it’s important to think about what you want to do with it and where it might fit into your financial plan. In some instances, that decision may be made for you. For example, if you inherit your parents’ home jointly with three siblings then your parents might direct the four of you to sell it and split the proceeds equally.

If the property owner’s will doesn’t include any specific instructions about what to do with inherited property, it’s up to you to decide whether to keep it, pass it on to someone else or sell it. Should you decide to keep it, you don’t have to worry about any capital gains tax implications. You may, however, have to pay inheritance tax if you live in a state that imposes it.

Should you decide to pass the inherited property on to someone else, you’ll need to decide when you’d like to do it. For example, will you pass on the property during your lifetime or leave it to one of your heirs in your will? Should you decide to make financial gifts of inherited property while you’re still living, that could trigger gift tax implications for you. Talking to a tax professional and your financial advisor can help you decide on the best way to transfer inherited property to someone else.

Finally, if you plan to sell an inherited property, you’ll need to know its fair market value so you can choose an appropriate sale price. Once you have an idea of what you should be able to sell the property for, it’s a good idea to consider what that might mean from a tax perspective if you’ll have a capital gain to report to the IRS.

Bottom Line

Elderly woman discussing an inheritance with financial advisors

Determining the fair market value of inherited property is a necessary step when someone leaves a home, land or other assets to you. You might use one of the tactics outlined above or all three in order to get the most accurate number possible. The most important thing to remember about fair market value is that timing matters, as supply and demand can influence what a property is worth from one day to the next.

Estate Planning Tips

If you own a home or other property that you’d like to leave to someone else, your financial advisor can help you build that into your estate plan. Finding a financial advisor doesn’t have to be hard. Sma r tAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When you’re on the fence about whether to keep or sell an inherited property, it helps to consider your goals. If you don’t have room in your financial plan for another physical asset and you’d rather have cash in hand, then it might make sense to sell. On the other hand, you may decide to keep the property and rent it out if you’re interested in creating a passive income stream.