IRS rules for house appreciation, re: estate income?

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percy
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IRS rules for house appreciation, re: estate income?

Post by percy »

Parent died, I'm selling the house. I understand that there is potential estate income tax if the house sells for more than it was worth at time of parent's death. I understand that, but I'm getting conflicting information from professionals, about what the IRS considers a legit appraisal to determine any appreciation.

My realtor ran comps 5 months after date-of-death; accountant and estate lawyer said that should be fine. Tax lawyer says to get a house/property appraiser to establish date-of-death fair market value.

Anyone know if there's a definitive answer to this, regarding IRS rules? And if I go with a house appraiser, any tips on finding one? Any other suggestions?
secondcor521
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Re: IRS rules for house appreciation, re: estate income?

Post by secondcor521 »

From Pub 551, under inherited assets: "If a federal estate tax return doesn't have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes." (https://www.irs.gov/pub/irs-pdf/p551.pdf page 10)
bsteiner
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Re: IRS rules for house appreciation, re: estate income?

Post by bsteiner »

There is no definitive answer.

The rule of thumb is that if you sell within a year, you can generally use (and the IRS will generally want to use) the sale price.

However, sometimes the sale price doesn't reflect the date of death value. The market could change. Apartments in lower Manhattan were worth much less on September 12, 2001, than they were on September 10, 2001. Suburban NYC area residential real estate increased in value substantially in 2021, and decreased in value substantially between spring 1990 and fall 1990. A buyer of an adjacent property may pay more than fair market value. In one case, a buyer wanted a large apartment in a particular building since he previously lived in that building, and there was only one such apartment available, so we used the appraised value rather than the sale price on the estate tax return. A buyer may overpay for reasons not known to the seller. A seller may want a quick sale and be willing to sell for less than fair market value.

The lawyer handling the estate should be able to advise you, and should be able to recommend a suitable appraiser if he/she thinks you should get an appraisal.

As to whether a letter from a broker is sufficient, that depends on the situation. Our preference is to get an appraisal, but sometimes the executor isn't willing to get one, and the best we can do is a letter from a broker, or in places where the real estate tax valuation is a good indicator of value, sometimes we use that.

Whatver you do, the taxing authorities may disagree with the value.
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percy
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Re: IRS rules for house appreciation, re: estate income?

Post by percy »

secondcor521 wrote: Fri May 13, 2022 1:07 pm From Pub 551, under inherited assets: "If a federal estate tax return doesn't have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes." (https://www.irs.gov/pub/irs-pdf/p551.pdf page 10)
I meant "house appraisal," not appreciation in title. I understand the above, my question specifically is about rules for appraisal: what's acceptable and what's not.
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percy
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Re: IRS rules for house appreciation, re: estate income?

Post by percy »

Thanks for the reply; I guess this issue is really not cut and dried.
bsteiner wrote: Fri May 13, 2022 1:45 pm There is no definitive answer.

The rule of thumb is that if you sell within a year, you can generally use (and the IRS will generally want to use) the sale price.

However, sometimes the sale price doesn't reflect the date of death value. The market could change. Apartments in lower Manhattan were worth much less on September 12, 2001, than they were on September 10, 2001. Suburban NYC area residential real estate increased in value substantially in 2021, and decreased in value substantially between spring 1990 and fall 1990. A buyer of an adjacent property may pay more than fair market value. In one case, a buyer wanted a large apartment in a particular building since he previously lived in that building, and there was only one such apartment available, so we used the appraised value rather than the sale price on the estate tax return. A buyer may overpay for reasons not known to the seller. A seller may want a quick sale and be willing to sell for less than fair market value.

The lawyer handling the estate should be able to advise you, and should be able to recommend a suitable appraiser if he/she thinks you should get an appraisal.

As to whether a letter from a broker is sufficient, that depends on the situation. Our preference is to get an appraisal, but sometimes the executor isn't willing to get one, and the best we can do is a letter from a broker, or in places where the real estate tax valuation is a good indicator of value, sometimes we use that.

Whatver you do, the taxing authorities may disagree with the value.
ncbill
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Re: IRS rules for house appreciation, re: estate income?

Post by ncbill »

Didn't do an appraisal on my late relative's home, instead used comps provided by the Realtor.

House was in a revocable living trust, it sold for significantly less than the listing price, so the trust passed on that loss to the beneficiaries (LTC loss) via the final K-1s issued by the trust to the beneficiaries.
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Re: IRS rules for house appreciation, re: estate income?

Post by Gill »

ncbill wrote: Fri May 13, 2022 3:53 pm Didn't do an appraisal on my late relative's home, instead used comps provided by the Realtor.

House was in a revocable living trust, it sold for significantly less than the listing price, so the trust passed on that loss to the beneficiaries (LTC loss) via the final K-1s issued by the trust to the beneficiaries.
You got away with one IMHO. The listing price is meaningless. If you sold it within a reasonable time after date of death that selling price would best reflect fair market value on DOD except for the rare situations such as after 9/11 as cited by bsteiner. In other words, you would have no gain or loss other than the selling expenses.
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Re: IRS rules for house appreciation, re: estate income?

Post by Lee_WSP »

Any appraisal is an estimate of fair market value. They by definition, cannot be exact.

As Bruce alluded to, you're just going to have to accept the fact that you may have to defend the valuation you write down.

Any appraisal is not definitive. It's just one person's opinion.
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percy
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Re: IRS rules for house appreciation, re: estate income?

Post by percy »

Lee_WSP wrote: Fri May 13, 2022 7:50 pm Any appraisal is an estimate of fair market value. They by definition, cannot be exact.

As Bruce alluded to, you're just going to have to accept the fact that you may have to defend the valuation you write down.

Any appraisal is not definitive. It's just one person's opinion.
I see; so it doesn't really matter if it's done by a property appraiser vs a realtor using comps? Just get what you can, and prepare for a challenge? I understand it's not an exact science, but trying to do the best I can up front to avoid hassle down the line.
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Re: IRS rules for house appreciation, re: estate income?

Post by Lee_WSP »

percy wrote: Fri May 13, 2022 8:27 pm
Lee_WSP wrote: Fri May 13, 2022 7:50 pm Any appraisal is an estimate of fair market value. They by definition, cannot be exact.

As Bruce alluded to, you're just going to have to accept the fact that you may have to defend the valuation you write down.

Any appraisal is not definitive. It's just one person's opinion.
I see; so it doesn't really matter if it's done by a property appraiser vs a realtor using comps? Just get what you can, and prepare for a challenge? I understand it's not an exact science, but trying to do the best I can up front to avoid hassle down the line.
By prepare, I mean be ready to back up whatever number you ultimately decide upon.

If you can't find good comps, going with the lowest available comp is safe, but you'd be giving up some basis.

Even a professional appraisal is just a series of comps plus their opinion as to why this price range is appropriate. I'd suggest reading a sample appraisal to see what I'm saying. They always hedge their numbers.
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Re: IRS rules for house appreciation, re: estate income?

Post by secondcor521 »

Lee_WSP wrote: Fri May 13, 2022 8:40 pm
percy wrote: Fri May 13, 2022 8:27 pm
Lee_WSP wrote: Fri May 13, 2022 7:50 pm Any appraisal is an estimate of fair market value. They by definition, cannot be exact.

As Bruce alluded to, you're just going to have to accept the fact that you may have to defend the valuation you write down.

Any appraisal is not definitive. It's just one person's opinion.
I see; so it doesn't really matter if it's done by a property appraiser vs a realtor using comps? Just get what you can, and prepare for a challenge? I understand it's not an exact science, but trying to do the best I can up front to avoid hassle down the line.
By prepare, I mean be ready to back up whatever number you ultimately decide upon.

If you can't find good comps, going with the lowest available comp is safe, but you'd be giving up some basis.

Even a professional appraisal is just a series of comps plus their opinion as to why this price range is appropriate. I'd suggest reading a sample appraisal to see what I'm saying. They always hedge their numbers.
Indeed I agree that an appraisal is just a professional guess. But if the IRS says "get an appraisal" and one does, then the IRS audits and says "How'd you come up with this FMV?" and I say "I got an appraisal like your pub says" I guess I don't see what the IRS' retort or complaint is going to be at that point.
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Re: IRS rules for house appreciation, re: estate income?

Post by Lee_WSP »

secondcor521 wrote: Fri May 13, 2022 9:08 pm
Lee_WSP wrote: Fri May 13, 2022 8:40 pm
percy wrote: Fri May 13, 2022 8:27 pm
Lee_WSP wrote: Fri May 13, 2022 7:50 pm Any appraisal is an estimate of fair market value. They by definition, cannot be exact.

As Bruce alluded to, you're just going to have to accept the fact that you may have to defend the valuation you write down.

Any appraisal is not definitive. It's just one person's opinion.
I see; so it doesn't really matter if it's done by a property appraiser vs a realtor using comps? Just get what you can, and prepare for a challenge? I understand it's not an exact science, but trying to do the best I can up front to avoid hassle down the line.
By prepare, I mean be ready to back up whatever number you ultimately decide upon.

If you can't find good comps, going with the lowest available comp is safe, but you'd be giving up some basis.

Even a professional appraisal is just a series of comps plus their opinion as to why this price range is appropriate. I'd suggest reading a sample appraisal to see what I'm saying. They always hedge their numbers.
Indeed I agree that an appraisal is just a professional guess. But if the IRS says "get an appraisal" and one does, then the IRS audits and says "How'd you come up with this FMV?" and I say "I got an appraisal like your pub says" I guess I don't see what the IRS' retort or complaint is going to be at that point.
I think there's some confusion. I said be prepared, not it's going to happen.

If they have a question about the valuation method, they'll send the letter. You send the evidence. If you didn't choose the highest value possible, you'll probably be fine.
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Re: IRS rules for house appreciation, re: estate income?

Post by Joey Jo Jo Jr »

Cost benefit analysis. If you are an independent executor and it’s no skin off your nose to get an appraisal then sure, why not. If getting an appraisal means less money in your personal pocket then you might want to use less expensive supporting data for your estimate. You can always get a retroactive appraisal if needed, though admittedly they are seen as less reliable than a contemporaneous appraisal although the IRS ain’t going to have a contemporaneous appraisal either.
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Re: IRS rules for house appreciation, re: estate income?

Post by secondcor521 »

Lee_WSP wrote: Fri May 13, 2022 9:17 pm I think there's some confusion. I said be prepared, not it's going to happen.

If they have a question about the valuation method, they'll send the letter. You send the evidence. If you didn't choose the highest value possible, you'll probably be fine.
Right, understood that not everyone is audited. But in the case one was, I find it puzzling that an appraisal per the IRS pub would ever potentially be unacceptable to them. (I also agree that if one uses an FMV based on something other than an appraisal - comps, contemporaneous sale, whatever - then there is some risk, perhaps small, of unacceptability.)

Thanks for the reply.
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Re: IRS rules for house appreciation, re: estate income?

Post by Lee_WSP »

secondcor521 wrote: Fri May 13, 2022 11:15 pm
Lee_WSP wrote: Fri May 13, 2022 9:17 pm I think there's some confusion. I said be prepared, not it's going to happen.

If they have a question about the valuation method, they'll send the letter. You send the evidence. If you didn't choose the highest value possible, you'll probably be fine.
Right, understood that not everyone is audited. But in the case one was, I find it puzzling that an appraisal per the IRS pub would ever potentially be unacceptable to them. (I also agree that if one uses an FMV based on something other than an appraisal - comps, contemporaneous sale, whatever - then there is some risk, perhaps small, of unacceptability.)

Thanks for the reply.
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Re: IRS rules for house appreciation, re: estate income?

Post by carolinaman »

The issue I ran into selling my mother's house after her death was there were very few real estate transactions in her town and it was hard to determine value. We used the sales price which was within 6 months of her death.
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Re: IRS rules for house appreciation, re: estate income?

Post by NerdJock »

Generally speaking just do diligence.
That means find out from the agency in charge what they want.

We wanted to buy a piece of land to build a house on.
It abutted the great meadow so there were conservation concerns about run off.
We went to town before we bought it and asked them about it.
They sent us to then conservation committee.
They were very impressed that we did this before we bought the land.

They told us what they wanted we negotiated with the excavator and everything went very easy.
After each piece of the project I told then what we did and if they wanted to look at it.
Eventually they stopped coming.

The fact that you are asking questions pretty much guarantees that you will get to where you want to be.
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