Inheriting property, whether expected or unexpected, can raise some questions about what to do with it and what it’s worth. Specifically, you’ll need to know the property’s fair market value (FMV) to calculate your cost basis for tax purposes. How do you determine the fair market value of inherited property? There are a few ways that you can approach it. A financial advisor can help you decide on the best way to handle inherited property and other assets.
Understanding Fair Market Value
Fair market value is what an asset is worth given the current market conditions. In other words, it’s what you could expect to sell an asset for on the open market at any given time. When you inherit property, its fair market value is typically calculated at the time of the original owner’s death.
Why would you need to know how to find the fair market value of inherited property? There are a few reasons why it’s important.
- If the property is subject to probate, the deceased’s executor will need to know what it’s worth in order to complete the estate inventory.
- Fair market value must be established in situations where an inheritance is shared among multiple beneficiaries, in order to ensure that the division of assets is fair.
- Should you decide to sell an inherited property, you’ll need to know its fair market value in order to determine whether you’ll have a capital gain or loss to report to the IRS.
That last point is important as the federal tax code applies basis rules to inherited property when determining whether any taxes are owed on the sale of said property. Specifically, the basis is either stepped up or stepped down, depending on the fair market value at the time the original owner passed away. The stepped-up (or down) value is used to calculate what amount of capital gains tax, if any, is owed on the property’s sale.
So, assume that you inherit a home that the original owner paid $200,000 for. When the owner passes away, the property comes to you with a fair market value of $500,000. The step-up basis rule allows you to use the new, higher value, for determining capital gains tax should you decide to sell.
In that case, you’d only owe capital gains on the difference between the step-up basis and the sale price, not the home’s fair market value and its original purchase price. That could potentially save you thousands of dollars in taxes.
How Do You Determine the Fair Market Value of Inherited Property?
There are several ways to determine the fair market value of property that you inherit from someone else.
The one you choose may depend on your reasons for needing to establish fair market value in the first place.
Check Tax Records
Your first option for establishing the fair market value of inherited property is to review local tax assessment records. You can contact the tax assessor’s office in the county or locality where the property is located. Some tax offices offer online records, which you can search using the owner’s name, the property’s address or the parcel ID.
Tax records can give you a starting point for a property’s fair market value, though there are some limitations to keep in mind. Property tax assessments aren’t always conducted annually; instead, they may be done every three or five years. That could result in a skewed estimate of a property’s value if the most recent assessment occurred several years ago.
It’s also important to keep in mind that valuations based on tax assessments do not always accurately reflect what a property might actually sell for. It’s possible that tax value may be well below—or above—what you may be able to get for the property should you decide to list it for sale. If you’re not able to find recent tax records, you could use an online property tax calculator to get an estimate.
Real Estate Agents
Local real estate agents may be a more accurate source for determining the value of inherited property, assuming that they know the market well. Agents can look at the property, then offer an educated guess on its value based on what similar properties or “comps” are selling for in the area.
One thing to note is that this assessment of value can be entirely subjective. While one real estate agent may believe you could sell a home for $450,000 for example, another might say you could only get $375,000. Getting multiple estimates from different realtors or agents can give you a range of values to work with.
You can then look at the range to calculate the median and mean numbers. If you’ve also reviewed tax records, you could compare the different sets of numbers to see how closely they align.
Get an Appraisal
Hiring a professional appraiser may be the best way to determine the value of inherited property, as appraisers have special training and knowledge in valuation that real estate agents may lack. Paying for a home appraisal may cost you several hundred or even several thousand dollars, but it might be well worth it to get the most accurate number possible when calculating fair market value.
An appraiser can look at every facet of the home, including its size, age, location and overall condition. Appraisers are trained to identify factors that increase value and ones that detract from value, including any damage that exists or upgrades that have been made to the property.
Tips for Managing Inherited Property
When you inherit property, it’s important to think about what you want to do with it and where it might fit into your financial plan. In some instances, that decision may be made for you. For example, if you inherit your parents’ home jointly with three siblings then your parents might direct the four of you to sell it and split the proceeds equally.
If the property owner’s will doesn’t include any specific instructions about what to do with inherited property, it’s up to you to decide whether to keep it, pass it on to someone else or sell it. Should you decide to keep it, you don’t have to worry about any capital gains tax implications. You may, however, have to pay inheritance tax if you live in a state that imposes it.
Should you decide to pass the inherited property on to someone else, you’ll need to decide when you’d like to do it. For example, will you pass on the property during your lifetime or leave it to one of your heirs in your will? Should you decide to make financial gifts of inherited property while you’re still living, that could trigger gift tax implications for you. Talking to a tax professional and your financial advisor can help you decide on the best way to transfer inherited property to someone else.
Finally, if you plan to sell an inherited property, you’ll need to know its fair market value so you can choose an appropriate sale price. Once you have an idea of what you should be able to sell the property for, it’s a good idea to consider what that might mean from a tax perspective if you’ll have a capital gain to report to the IRS.
Determining the fair market value of inherited property is a necessary step when someone leaves a home, land or other assets to you. You might use one of the tactics outlined above or all three in order to get the most accurate number possible. The most important thing to remember about fair market value is that timing matters, as supply and demand can influence what a property is worth from one day to the next.
Estate Planning Tips
- If you own a home or other property that you’d like to leave to someone else, your financial advisor can help you build that into your estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When you’re on the fence about whether to keep or sell an inherited property, it helps to consider your goals. If you don’t have room in your financial plan for another physical asset and you’d rather have cash in hand, then it might make sense to sell. On the other hand, you may decide to keep the property and rent it out if you’re interested in creating a passive income stream.
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