IRS Guidelines for a Date of Death Appraisal

Determining Fair Market Value

IRS regulations define Fair Market Value (FMV) as the price at which property would change hands between a willing buyer and a willing seller, with neither being under any compulsion to buy or sell and both having reasonable knowledge of all relevant facts. This standard ensures the valuation reflects the true market worth on the date of death, not a forced sale price. The valuation must consider all relevant factors and elements of value as of the applicable valuation date.

The methodology for determining FMV changes based on the type of asset being valued. The executor of an estate must navigate different rules for assets like real estate, financial securities, and business interests. Each category has specific IRS guidelines that dictate how its fair market value should be established for tax purposes.

Real Estate

For real property, the valuation process involves a professional retrospective appraisal conducted by a licensed real estate appraiser. This establishes the property’s value as of the date of death. The primary method used is an analysis of comparable sales, where the appraiser identifies recent sales of similar properties in the same geographic area. Local property tax assessments are generally not acceptable unless they can be proven to represent the fair market value on the valuation date.

Publicly Traded Stocks and Bonds

The fair market value of a publicly traded stock or bond is the average of the highest and lowest quoted selling prices on the date of death, not simply the closing price. If the death occurred on a weekend or a holiday when the market was closed, the valuation is determined by averaging the high and low prices on the trading days immediately preceding and following the date of death.

Closely Held Business Interests

Valuing an interest in a closely held corporation or private business is more complex because there is no public market for the shares, requiring a specialized business valuation expert. IRS guidance in Revenue Ruling 59-60 outlines several factors that must be considered, including:

• The nature and history of the business
• The economic outlook for the specific industry
• The company’s book value and financial condition
• Its earning and dividend-paying capacity
• Whether the enterprise has goodwill or other intangible value

Tangible Personal Property

Tangible personal property includes items from household furniture and vehicles to valuable collections like art or jewelry. For general household items of modest value, an executor may make a reasonable estimate. However, for items or collections of significant value, a formal appraisal from a qualified appraiser specializing in that property is necessary. This appraisal provides documentation to substantiate the value reported to the IRS and is important for equitable distribution among beneficiaries.

The Qualified Appraiser and Appraisal Report

When an estate’s assets require a formal appraisal, the executor is responsible for selecting a competent professional. The credibility of the valuation depends on the appraiser’s qualifications and the report’s thoroughness. The IRS expects valuations to be supported by a “qualified appraisal” from a “qualified appraiser,” which are standards for creating a defensible estate valuation.

A “qualified appraiser” is an individual with verifiable education and experience in valuing the specific type of property. Per IRS guidance, such as Notice 2006-96, an appraiser must have a designation from a professional organization or meet minimum education and experience requirements. These include completing professional-level coursework and possessing at least two years of experience valuing the property. The appraiser must also be independent and cannot be the executor, a beneficiary, or a party related to the decedent.

The “qualified appraisal” is the formal document prepared by the appraiser. To be credible, the report must follow requirements in Treasury Regulation §1.170A and include:

• A detailed description of the property, its physical condition, and the specific date of valuation.
• The fair market value of the property and the specific basis for this valuation, such as comparable sales.
• The name, address, and taxpayer identification number of the appraiser, along with their qualifications.
• A signed declaration, under penalty of perjury, that the appraisal was prepared for tax purposes and that the appraiser is qualified.

The Alternate Valuation Date

Executors are required to value estate assets as of the decedent’s date of death. However, Internal Revenue Code Section 2032 provides an option to use the “alternate valuation date,” which is six months after the date of death. This can be a strategic choice if the value of estate assets has declined since the decedent passed away.

This election is governed by strict conditions. An executor can only choose the alternate valuation date if doing so decreases both the value of the gross estate and the amount of federal estate tax due. This provision is intended to provide relief to estates that would otherwise pay tax on value that has since been lost.

If the alternate valuation is elected, it applies to all assets in the gross estate; an executor cannot pick and choose which assets receive this valuation. Any property that is sold or distributed within the six-month period must be valued as of the date of its disposition. The decision to use the alternate valuation date is irrevocable once made on the estate tax return.

Reporting the Valuation to the IRS

After determining asset values, the executor must report these figures to the IRS on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This return is required for estates with a gross value exceeding the federal exemption amount for the year of death. The appraised values are detailed on various schedules attached to Form 706, such as Schedule A for real estate.

Form 706 must be filed within nine months of the decedent’s death, though a six-month extension is available by filing Form 4768. The values reported on this return establish the final figures for calculating any estate tax owed. The chosen valuation date must be consistently applied and documented on the return.

For estates filing Form 706, the executor must also file Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent. This form ensures consistency between the value reported by the estate and the cost basis used by the beneficiary in the future. The executor provides a Schedule A to each beneficiary, which lists the final estate tax value of the specific property they are inheriting.

This value becomes the heir’s cost basis for future capital gains calculations, and they cannot claim a higher basis than what was reported. Form 8971 and its associated schedules are due 30 days after the estate tax return is filed.