Alternate Valuation Date and Step-Up in Basis

When a person inherits property, the asset’s cost basis is adjusted to its fair market value on the owner’s date of death. This principle, called a “step-up in basis,” can reduce the capital gains tax owed by the beneficiary when they sell the asset. However, federal tax law provides an alternative. Under Internal Revenue Code Section 2032, an estate’s executor can choose to value the assets six months after the date of death, known as the alternate valuation date (AVD). This election offers a strategy for managing tax liabilities, particularly when asset values change.

Requirements for Electing the Alternate Valuation Date

The option to use the alternate valuation date (AVD) is subject to limitations, and an executor must meet two specific conditions for the election to be valid. If either requirement is not satisfied, the estate must use the date-of-death values for all assets.

The first condition is that the total value of the decedent’s gross estate must be lower on the AVD than it was on the date of death. The election cannot be applied to select assets; it must encompass the entire estate. This ensures the rule is applied consistently across all of the decedent’s property.

The second condition is that the election must decrease the total federal estate tax and generation-skipping transfer (GST) tax the estate must pay. This rule provides relief to estates facing a large tax bill based on temporarily inflated asset values. It also prevents the AVD from being used only to give beneficiaries a higher cost basis when no estate tax is due.

This second rule is directly affected by the federal estate tax exemption, which is $13.99 million for an individual in 2025. Estates valued below this amount do not owe federal estate tax and therefore cannot meet the condition of reducing tax liability, making the AVD election impermissible. This means the AVD is only relevant for large, taxable estates.

For example, consider an estate valued at $20 million on the date of death. If six months later the total estate value drops to $17 million, the first condition is met. Because the estate’s value exceeds the exemption, this reduction also lowers the federal estate tax, satisfying the second condition. In this case, the executor could elect the AVD.

Information and Decisions for the AVD Election

Before deciding to elect the AVD, an executor must gather and analyze detailed information. This involves a comparison of asset values and tax outcomes on two separate dates.

The primary task is determining the fair market value of every asset in the gross estate on both the date of death and the AVD six months later. This requires formal appraisals for non-cash assets like real estate and business interests. For publicly traded securities, values can be found using market data for those dates.

With both sets of valuations, the executor must perform two parallel calculations. The first determines the gross estate value and resulting federal estate tax using date-of-death values. The second repeats this process using the AVD values. Comparing these outcomes confirms if the AVD election is permissible and financially advantageous.

How to Make the Alternate Valuation Election

After completing the comparative analysis, the executor makes the formal election on Form 706, the U.S. Estate (and Generation-Skipping Transfer) Tax Return. To make the election, the executor checks the “Yes” box for the question in Part 3, Section A, asking, “Do you elect alternate valuation?”. The return must then be completed by reporting all estate assets at their AVD values.

The deadline for filing Form 706 is nine months after the decedent’s death. Executors can file Form 4768 for an automatic six-month extension, making the final deadline 15 months after death. The AVD election must be made on a return filed within this timeframe.

The alternate valuation election is irrevocable. Once the filing deadline, including extensions, has passed, the decision cannot be changed. The values established on the alternate date become final for estate tax purposes and establish the cost basis for the beneficiaries.

Special Rules for Valuing Certain Assets

While the general rule is to value assets six months after death, there are exceptions for certain situations.

The first special rule applies to any asset sold, distributed, or otherwise disposed of during the six months after the date of death. These assets are valued as of their disposition date. For instance, if an estate sells real estate four months after the owner’s death, that property is valued using its sale price on that date, while other assets are valued at the six-month mark.

The second special rule concerns assets whose value changes due to the passage of time, such as patents, annuities, and life estates. To prevent an artificial reduction in the estate’s value, these assets must be valued as of the date of death, even when the AVD is elected. However, adjustments can be made for value changes not due to the mere lapse of time.