FMV of inherited real estate sold within 6 months of death

[Romni22]

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?   

[Anonymous_]

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.

[Romni22]

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!

[Opus 17]

@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.

[Anonymous_]

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@Romni22 wrote:

Any reason you can see why I couldn't use the sales price as fmv?

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Yes, there is a reason. If you are audited, the IRS will generally accept an appraisal from a qualified (licensed) appraiser as the fair market value as of the date of death (as the basis for the sale). 

Unfortunately, the appraisal is lower than your selling price and, therefore, you have a gain. You cannot presume that the IRS will accept the selling price as the fair market value as of the date of death, particularly when you are aware that it is not (per the appraisal).

[Romni22]

That's what I would have guessed. Actually the market cooled a bit in those six months, and I do think the appraisal was conservative. It seems like the rationale for using the actual sales price is sound but I would feel better if there was more specific guidance on the issue. I would imagine in this market I'm not the only one with this issue. Anyway, thanks!   

[Anonymous_]

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@Romni22 wrote:

It seems like the rationale for using the actual sales price is sound but I would feel better if there was more specific guidance on the issue. 

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If you feel the appraiser was not following generally accepted appraisal standards, then you should get another appraiser to do an appraisal as of the date of death.

Otherwise, the IRS has articulated standards with respect to charitable donations and they would apply, generally, to appraisals for other purposes.

See https://www.law.cornell.edu/cfr/text/26/1.170A-17

[Romni22]

That's helpful. I realize we're getting into the weeds but the charitable donation rules might help inform my situation. Those rules require appraisals for donations to have a valuation "effective date" no earlier than 60 days before and no later than the date of the donation. That makes sense because, in the absence of a market transaction, you would want an appraised value temporally close to the relevant date for tax purposes. 

In my situation, the appraisal was done more than two months after death, and it estimated market value as of the date of the appraisal (not death). Therefore, it's not clear to me that it's a preferable means of the FMV as opposed to an arms' length transaction only two months later. I thought there was some kind of informal guidance that said sales within a certain period of time (6 months?) could be used to establish the estate's basis in the property. In any case, thanks again!    

[Anonymous_]

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@Romni22 wrote:

.....I thought there was some kind of informal guidance that said sales within a certain period of time (6 months?) could be used to establish the estate's basis in the property.  

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There is nothing that has been articulated (formal or informal) in terms of a time frame, other than the 6-month alternate valuation date (which does not apply here and which some people also confuse with sort of a general rule the IRS follows, which is not the case).