How Date of Death Value Affects Your Tax Basis

When an individual passes away, the assets they leave behind are assigned a “date of death value,” which is the fair market value of each piece of property on the day the owner died. This valuation is a foundational figure for tax and estate administration. It is the starting point for the executor to determine the total worth of the estate and for beneficiaries to understand the tax implications of their inheritance.

The Role of Date of Death Value in Basis

To understand the date of death value, one must be familiar with “cost basis.” An asset’s cost basis is what an owner originally paid for it, including the purchase price and other costs. When an asset is sold, the owner pays capital gains tax on the difference between the sale price and the cost basis. Inherited assets, however, are treated differently under a “step-up in basis” provision.

This provision adjusts the cost basis of an inherited asset to its fair market value on the decedent’s date of death, meaning the beneficiary’s basis is the value when inherited, not what the original owner paid. For example, if someone inherits stock purchased for $10 per share that was worth $100 on the date of death, the beneficiary’s new cost basis is $100 per share.

If the beneficiary later sells the stock for $105 per share, they only owe capital gains tax on the $5 of appreciation that occurred after they inherited it. Without the step-up, they would have owed tax on a $95 gain. This rule erases the capital gains tax liability on appreciation that occurred during the original owner’s lifetime.

This treatment contrasts with assets transferred as gifts during the owner’s lifetime. Gifted assets retain the original owner’s cost basis, known as a “carryover basis.” If the stock in the previous example had been gifted, the recipient’s basis would be $10, and a sale at $105 would trigger a tax on a $95 gain.

Methods for Determining Asset Values

Establishing the fair market value (FMV) for each asset depends on the type of property. FMV is the price at which property would change hands between a willing buyer and a willing seller, where both parties have reasonable knowledge of the facts and neither is under compulsion to act. This valuation is a primary responsibility of the estate’s executor.

Publicly Traded Stocks and Bonds

For securities traded on an exchange, the fair market value is determined by averaging the highest and lowest selling prices of the stock or bond on the date of death. This information is publicly available from financial data providers or historical stock price websites.

Real Estate

Valuing real estate requires a formal appraisal from an independent, qualified appraiser to determine the property’s fair market value. The appraiser analyzes the property’s condition, location, and recent sales of comparable properties to produce a detailed report. This provides a defensible valuation for tax purposes.

Bank Accounts

The fair market value of a bank account is the exact amount of money in the account on the date of death. This includes any interest that had accrued up to that day but had not yet been paid or posted.

Tangible Personal Property

This category includes items like vehicles, artwork, jewelry, and collectibles. For items of high value, such as fine art or rare jewelry, a professional appraisal from a specialist is necessary. For common household goods with lower values, the executor can make a reasonable, good-faith estimate of their collective fair market value.

Business Interests

Determining the value of an interest in a privately held business is a specialized task, as there is no readily available market price. Consequently, a certified business valuation expert must be engaged. These professionals analyze the company’s financial health, assets, and earnings potential to arrive at a defensible fair market value.

The Alternate Valuation Date Election

Federal tax law provides an exception known as the alternate valuation date, allowing an executor to value estate property six months after the date of death. This election provides relief if the estate’s assets have decreased in value since the decedent’s passing.

To use this election under Internal Revenue Code Section 2032, two conditions must be met: the choice must decrease the total value of the gross estate and the amount of federal estate tax owed. If an estate is not large enough to owe federal estate tax, this valuation option is not available.

A special rule applies to assets sold or distributed during the six-month period after death. These assets are valued on their date of sale or distribution, not the six-month anniversary. For example, if real estate is sold three months after death, that sale price becomes its value if the alternate valuation is chosen.

The executor makes the formal decision to use the alternate valuation date on the federal estate tax return, Form 706. This election applies to all assets in the estate and cannot be applied selectively. Once made on the filed return, the election is irrevocable.