Inheriting property can be a complex process, with numerous factors to consider. Before you decide whether to keep, donate, or sell your inherited property, it’s important to understand the fair market value of the asset, which is its estimated worth on the open market.
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Is Fair Market Value Calculated at the Time of Death?
Yes, for tax purposes, the fair market value (FMV) of inherited property is typically calculated at the time of death.
If you sell inherited property, you may be subject to income taxes on any capital gains. This means that, if you sell the property for more than your “cost basis,” you will have to pay taxes on the difference. In most instances, the cost basis of inherited property will be its FMV on the date that the deceased person passed away.
What Is the Cost Basis of an Inherited House?
The cost basis of an inherited house is typically the home’s fair market value (FMV) on the date of death.
In some instances, the cost basis will be the FMV of the house on an alternate valuation date. However, this exception only applies if the executor of the estate submits an estate tax return to the IRS that uses an alternate valuation.
How Do You Calculate Gains on the Sale of Inherited Property?
In general, capital gains are calculated as follows: Gain = Selling Price - Original Cost Basis.
In other words, if you sell the property for more than its basis, you will have a taxable gain.
When someone purchases property and later sells it, their “original cost basis” will be the original purchase price. So, if someone buys an investment property for $100,000 and later sells it for $300,000, their taxable capital gain will be $200,000.
However, when you calculate gains on the sale of inherited property, you use a “stepped-up original cost basis” instead of the original purchase prices. This stepped-up basis is typically the fair market value (FMV) of the property on the date of the owner’s death or an alternate valuation date elected by the executor of the estate.
So if you inherit a property that was originally purchased for $100,000 and immediately sell it for its FMV of $300,000, you will not have any taxable gains. On the other hand, if you sell it for $350,000, you will have to pay income taxes on your $50,000 gain.
Does an Executor Sell Property at Market Value?
In general, executors must sell property at market value, or at least as close to market value as possible.
While the specific requirements placed on executors vary among states, executors always have a “fiduciary duty” to the estates they administer and their beneficiaries.This means they must always act in the best interests of the beneficiaries and deal in good faith.
For instance, under California law, a personal representative can typically sell real and personal property when:
The sale is necessary to pay debts;
The sale is advantageous to the estate and beneficiaries;
The will directs the property be sold; or
The will gives the executor the authority to sell the property.
However, the authority an executor has to sell property can be limited by the will and orders issued by the probate court, and, in all cases, they must abide by the fiduciary duty to the estate beneficiaries when making the sale. Typically, this means selling the property for at least 90% of the fair market value in order to avoid a potential surcharge for the difference.
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