Establishing Stepped Up Basis on Inherited Home

If you are in an area that is like a development, i.e. single homes on standard lots, but very similar, you should be able to get sale data from the local assessor's office. Recent sales are what appaisors use to gather this data. A site like Zillow.com will help you gather up details for your area, and probably get as close as you're likely to get with an appaisal.

Since data goes back for decades, you are always able to pull comp sales in the future, if the IRS claims you used a price too high.

(Getting a paid-for appraisal can't hurt, either)

Joe

Beware that the older the development, the less likely they are to be "very similar". I live where all the homes were identical when they were built, 60-some years ago, but not any more. Of course, a big chunk of house price is due to location, which would apply the same to homes close to one another regardless of their physical similarity.

Also keep in mind that homes re-sold every 5, 10 or 15 years are more likely to be kept up to market standards. A home where a parent lived for many decades may be valued well below market because of completely outdated wiring, plumbing fixtures, landscaping, insulation, etc, that the elderly parent never saw a need to alter, and especially due to deferred maintenance (termites, mold, lead paint, for example).

I'd frame this more as a last resort than a sure-fire way to defend yourself in an audit. In any case, to the OP: don't use this method as an excuse to neglect to obtain contemporaneous data as close to the actual basis event as possible. The longer you wait, the weaker your position. For example, you can't go back in time to obtain photos of the property's current physical condition, amenities, and so on (appraisers will take such photos).

Many real estate agents will provide a free "competitive market analysis" which I'd expect to be more reliable (and acceptable to the IRS) than do-it-yourself downloads from the internet. Of course, in exchange the agent hopes you will list with him or her someday, but I think that is less of a conflict of interest than the taxpayer "appraising" their own property. As Joe mentioned, a paid appraisal from someone trained and licensed is a small investment with potentially very large payoff in terms of avoiding both future taxes and future stress or anxiety.

-Mark Bole

The way you do it is to hire a licensed appraiser to give you a professional written appraisal. It's not that expensive. Any real estate agent can recommend an appraiser. This way it's well documented and very hard to dispute. It's much more authoritative than the do-it-yourself approaches that some other replies have recommended.

Bob Sandler

Careful about Zillow. It has been known to be really WRONG for some areas, especially in areas where the housing turnover is low. If the neighborhood in question has an average ownership turnover of 5 years, then the site may get close. However, in neighborhoods where ownership lasts 20-30 years on average and thus low turnover, the site is often wrong.

I withdraw my initial reply. I was too focused on the thought that there were 'developments' like Levittown Long Island, where entire neighborhoods were so homogeneous that one can actually know the going rate, give or take.

I'd suggest that "for the couple hundred bucks (last refince, I saw it cost $250), it's worth getting a paid for, professional appraisal" is the best route.

D - I agree with your hesitation regarding Zillow, but not your premise. I don't know how it's possible for a sufficiently large neighborhood to defy the numbers of average turnover. Certainly possible for a 4 house cul-de-sac, but not a larger area.

Joe

Does the IRS have some kind of official standard or guideline for what will constitute an acceptable cost basis? For example, is the standard to take the average of similar selling homes in the same city / same region / within two miles of home location, etc?

would a "free marketing analysis" form a real estate agent suffice?

I'll tell you how: I happen to live in a neighborhood where the turnover is low - usually when people die, although some move. Out of the 1,000 houses that are in my "immediate area," only about 25 change hands in a given year. As for my 4 immediate neighbors: Two are original owners from 1948, one changed hands from the original owner only last year, and the 4th was bought in 1980. I inherited my property in 1990, and my parents bought in the early 1950's (as second owners). In 2006, a house a block away within 2% of both lot size and house square-footage of mine sold for $1.95M, and my new neighbors bought for $1.5M. Zillow had most houses in the area listed for $1.1-1.3M; an error that at the lowest exceeds $200k (16%, and in the extremes, up to $800k, or 60%).

Meanwhile, one of my friends lived in a higher turnover neighborhood where houses are at or below the median price. About 10 houses (minimum) every month within a mile change hands. Zillow's prices appear to be relatively accurate there. Houses seem to change hands at about the same value as Zillow lists them for.

Note that I am in California - where property tax assessed value has nothing to do with current market value.

Asking price isn't necessary market price.

No, the IRS doesn't have standards like that. Here is what the IRS has to say in Publication 523 (pages 7 & 8).

"Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property."

"Home received as inheritance. If you inherited your home, your basis is its fair market value on the date of the decedent?s death or the later alternate valuation date if that date was chosen by the personal representative for the estate. If an estate tax return was filed, the value listed for the property generally is your basis. If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death for purposes of state inheritance or transmission taxes."

Bob Sandler

No. You get what you pay for. A marketing analysis from a real estate agent is not nearly as thorough, detailed, precise, and authoritative as an appraisal. It's basically the agent's best guess, and is probably colored by what he thinks he has to tell you to get you to list the house with him. And, as D. Stussy pointed out, you have to make sure you know whether the agent is giving you the price he thinks it will sell for or the price he thinks you should list it at. The listing price or asking price is of very little help in determining fair market value.

Bob Sandler

and marketing analysises (wow, what is the plural of analysis?) don't just give a suggested asking price. At least, not in my experience.

Will wrote: ...

Don't see how that could be a general rule--in my case that would be an average of 1.

analyses

And you have to attach a statement to your Schedule D explaining your basis if it is not cost.

-Mark Bole

It's always potentially subject to dispute, or until the statute of limitations runs out, whichever comes first.

But better than Zillow, no?

-Mark Bole

No, you don't.

You only have to prove basis if you're audited.

Let me re-phrase that: the IRS instructions for Schedule D tell you to attach an explanation if you don't use actual cost. However the IRS won't automatically reject your return if you do not follow this instruction.

-Mark Bole

The above was three alternative rules, and the level of generality you choose might depend on how many home sales each rule shows in your specific case:

1) Establish new cost basis of home based on comparable homes in the same city 2) Establish new cost basis of home based on comparable homes in the same region 3) Establish new cost basis of home based on comparable homes within some finite radius

If the IRS has no standard for this at all, then it looks like a very subjective process. If you had an assessment done that would probably be accepted, but in absence of an assessment, it looks like each auditor will in effect make up their own rules about what constitutes an acceptable cost basis.

In the case of an inheritance, I assume the taxpayer's incentive would be to build a case for the highest possible appraised value, in order to raise cost basis as high as possible?