When a loved one passes away and leaves behind assets—such as real estate, stocks, or a closely held business—their heirs are often unaware of one of the most significant tax benefits available: the stepped-up basis. For high-value estates, especially those involving appreciated property, this tax adjustment can translate into major savings. But realizing those benefits often depends on a proper, well-documented appraisal.
What Is a Stepped-Up Basis?
The stepped-up basis is a tax provision that allows heirs to “step up” the cost basis of inherited property to its fair market value (FMV) as of the decedent’s date of death. This means that any appreciation in value during the decedent’s lifetime is not subject to capital gains tax when the asset is sold by the heir.
Example:
Imagine your mother bought a retail building in 1990 for $100,000. By the time she passed away in 2024, the property’s market value had increased to $600,000. Thanks to the stepped-up basis rule, your cost basis in the property becomes $600,000—the market value at the time of her death—not the original purchase price. If you later sell the building for $625,000, you would only owe capital gains tax on the $25,000 gain, not on the full $525,000 increase in value since 1990.
In contrast, if your mother had sold the property while she was still alive for $600,000, the $500,000 gain would have been subject to capital gains tax. For this reason, it’s often more tax-efficient for the original owner to retain ownership of appreciated assets until death, allowing beneficiaries to take advantage of the stepped-up basis and potentially minimize capital gains tax liabilities.
Why a Professional Appraisal Is Critical
For any asset that has increased in value, particularly real estate, a qualified appraisal helps establish the Fair Market Value (FMV)on the date of death. This is crucial for several reasons:
- Tax Reporting and Audit Defense: The IRS requires documentation to support the reported FMV. A professional appraisal prepared by a qualified appraiser ensures compliance and provides a defensible position in the event of an audit.
- Avoiding Underpayment or Overpayment of Taxes: Undervaluing an asset could lead to overpayment of capital gains tax later. Overvaluing it could expose the estate to audit risk or penalties.
- Estate Administration: Executors and fiduciaries have a legal duty to manage assets prudently. Accurate appraisals protect them from liability and ensure equitable distributions among beneficiaries.
When to Get an Appraisal
The appraisal should reflect the fair market value as of the date of death. Timing is key—while there’s no immediate IRS deadline for obtaining an appraisal, delaying could create complications if asset values are disputed or data becomes harder to verify.
In many instances, it would be wise to hire two professionals to each provide an indication of fair market value. The client of those appraisal services can simply retain the higher valued appraisal to minimize the capital gains tax expense.
Types of Assets That Commonly Require Appraisals
- Residential or commercial real estate
- Closely held businesses
- Partnership interests or LLCs
- Collectibles and antiques
- Farmland or timberland
- Restricted or illiquid securities
Who Can Perform a Stepped-Up Basis Appraisal?
The IRS requires that appraisals be conducted by a qualified appraiser, defined under Treasury Regulations. This typically means someone who:
- Has earned an appraisal designation from a recognized professional organization (e.g., MAI or SRA)
- Meets education and experience requirements as a real estate appraiser
- Regularly prepares appraisals for compensation for real estate transactions
- Is independent, objective and unbiased
For complex or high-value assets, it’s advisable to work with an appraiser who specializes in the asset class and is familiar with estate-related valuation standards.
Final Thoughts:
The stepped-up basis is a powerful tool for preserving generational wealth and minimizing capital gains tax. However, to take full advantage of this tax-saving provision, it’s essential to obtain a real estate appraisal report prepared by a Licensed or Certified General Appraiser, with the effective date set as the original owner’s date of death.
In today’s regulatory environment, relying on anything other than a qualified appraisal from a Licensed or Certified General Appraiser can lead to costly delays, legal complications, and increased attorney fees due to noncompliance with state and federal tax laws.
A professionally conducted appraisal not only ensures compliance—it safeguards the financial interests of heirs and supports a smooth estate administration process.
If you’re a beneficiary, executor, or estate attorney managing inherited property, don’t delay. Securing the necessary appraisals early can help avoid future tax burdens, protect the estate’s value, and offer peace of mind to all involved—ensuring more of the wealth stays with future generations.