Question

FMV of inherited real estate sold within 6 months of death

Forum|Forum|4 years ago
November 7, 2021
1 reply
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This question relates to the sale of inherited real estate and the acceptable methods for determining capital gain/loss treatment on an estate's 1041 return. I understand that a property's basis for cap gains purposes is fair market value as of the date of death, which is usually determined by an appraisal or through tax assessment. But, I recall reading somewhere that if the property is sold within six months, the IRS would consider the purchase price as FMV. Is this true and can anyone point me to the source of this guidance?

A

Anonymous_

Employee

Generally, if the property is sold within a short period of time after death, the sale prices is typically considered to be the same as the fair market value on the date of death (provided the sale is to an unrelated third party).

You, I believe, are making reference to the alternate valuation date set forth in Section 2032 of the Code which provides for an election by the executor to value estate property as of the date of death or six months thereafter.

The alternate valuation election of Section 2032 applies only if the election would both decrease the value of the estate and decrease the amount of estate tax owed. Since most estates owe no estate tax (i.e., neither file nor owe tax on Form 706), the alternate valuation election does not apply to most estates.

R

Romni22Author

There won't be a 706 needed here, unfortunately. But let's say I have an appraisal within a few months of death and an actual arm's length sale within six months - and the figure from the sale is more favorable from a tax standpoint (i.e., higher). Any reason you can see why I couldn't use the sales price as fmv? Thanks for your help!

O

Opus 17

Employee

@Romni22

If you have an appraisal from the date of death, and the home sells for more money six months later, that is a taxable capital gain. You are asking if you can avoid the tax by using the sales price as the estimate of what the fair market value was six months previously.

There is no right answer to your question, it will depend on the facts and circumstances of your particular situation, the home in question, and the real estate market. If it is a very hot market, it might be entirely reasonable for the value to increase in six months. Alternatively, the real estate appraiser may have been overly conservative. If you are audited, the burden of proof is on you to show that rejecting the appraisal was reasonable in your situation.