When a loved one passes away, their estate must be settled in compliance with federal and state laws, including tax regulations set forth by the IRS. One critical component in this process is obtaining a date of death appraisal, which determines the fair market value of the decedent’s real estate or other significant assets at the time of their passing.
Here’s what you need to know about IRS requirements for date of death appraisals:
1. Why Does the IRS Require a Date of Death Appraisal?
The IRS requires an accurate valuation of all estate assets to:
- Calculate estate taxes: For estates exceeding the federal exemption threshold ($13.61 million per individual in 2024), taxes are levied based on the total value of the decedent’s assets at death.
- Determine the step-up in basis: The appraised value becomes the new cost basis for heirs. If they later sell the property, capital gains taxes are calculated based on the difference between the sale price and the date of death value, potentially reducing their tax liability.
Without a professional appraisal, the IRS may challenge the reported value, leading to penalties, disputes, or unexpected tax burdens for beneficiaries.
2. What Defines Fair Market Value According to the IRS?
The IRS defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts. This requires:
- Considering market conditions on the date of death
- Using comparable sales data from the surrounding area
- Adjusting for property condition, location, and unique features
3. Who Should Conduct the Appraisal?
To comply with IRS standards, date of death appraisals should be performed by a qualified appraiser who:
- Holds appropriate state certification or licensing
- Has experience appraising properties for estate, probate, or tax purposes
- Provides a detailed written report with supporting data, analysis, and professional certification
Using an unqualified individual for valuation can result in IRS rejection and potential fines.
4. What Should Be Included in the Appraisal Report?
An IRS-compliant date of death appraisal report must include:
- The decedent’s name and date of death
- A complete property description
- Market analysis and comparable sales data
- Valuation approach used (typically sales comparison)
- Certification of the appraiser’s qualifications
- The appraiser’s signature and date
Proper documentation ensures the estate’s reported value is defensible during IRS review or audit.
5. When Should the Appraisal Be Conducted?
While the appraisal reflects the fair market value as of the date of death, it is usually conducted within a reasonable time afterward. However, it’s critical to:
- Order the appraisal before filing estate tax returns to avoid delays
- Ensure the appraiser uses market data and conditions reflective of the actual date of death, not the current market alone
6. Consequences of Non-Compliance
Failure to obtain an accurate date of death appraisal can lead to:
- IRS adjustments increasing estate tax liability
- Higher capital gains taxes for heirs upon property sale
- Potential fines, penalties, and interest charges for underreporting asset values
Date of death appraisals are not merely formalities—they are essential IRS requirements that protect estates and heirs from legal, financial, and tax complications. By working with a qualified appraiser and ensuring compliance with IRS standards, you can navigate estate settlement confidently and avoid unexpected tax burdens during an already difficult time.