Heirs and personal representatives of estates frequently ask: “Why can’t we use the free market analysis report from the local real estate agent to determine the fair market value of the real property in the estate?”
A free market analysis by a local real estate agent is a valuable service, if you are thinking of listing the property for sale. However, we do not recommend it for estate valuation purposes.
Generally, the income tax basis for any real property owned by a decedent receives a tax basis adjustment equal to the fair market value of the property as of the date the decedent died. This valuation rule is slightly different for 2010 estates, although Congress is expected to make some changes in the next few months. Those rules will be discussed in a later blog article.
The date of death fair market value information is important for several reasons.
- First, this is the value that generally must be reported if an estate tax or inheritance tax return is required to be filed.
- Second, this is the information that determines the adjusted income tax basis for the real property of the decedent.
- Third, if the estate has multiple beneficiaries, the value of the real property may play a role in determining how much distribution each beneficiary is to receive.
- Last, if the asset is subject to probate, it is information that must be reported on the probate inventory.
Even though a free market analysis may provide a market value very similar to an appraisal report, there are a number of reasons why the analysis will not be sufficient.
- First, the market analysis is generally based on current market data and is not specifically focused on the fair market value as of the date of death.
- Second, the agent providing the free market analysis is generally not licensed as an appraiser; and, therefore, is not in a position to defend the values provided in the market analysis in the event an auditor or a disgruntled heir questions the market analysis.
- Third, because the free market value analysis is not a qualified appraisal, government auditors are likely to reject the report as not being qualified, and thus if the value is challenged in an audit, the personal representative will need to get an appraisal anyway.
- Last, disgruntled heirs could claim that the personal representative did not fulfill his or her fiduciary duty to the heirs of the estate by failing to obtain a qualified appraisal.
During the current economic downturn, the income tax savings will likely be reduced. As a result, disgruntled heirs could be further disgruntled. In this circumstance, a qualified appraisal is essential.
For these reasons, we generally recommend that the representative of the estate obtain appraisal reports from qualified appraisers for all estate real property. In the case of residential property, the cost is a few hundred dollars. In the case of commercial property, it is a few thousand dollars. Since most, but not all, properties have a higher value, the potential income tax savings is well worth the appraisal expense.
