Hiring the right appraiser can be a difficult task. Whether it’s phone consultations or meetings, be sure to have specific questions prepared
If you’re the beneficiary of an estate, the executor, or just a loved one in mourning that has been thrown into the probate process, it’s more than likely you’ll need to obtain an appraisal.
Whether for estate or gift tax purposes, filing a federal estate tax return, or just trying to reduce the
burden of your real estate taxes, a real estate appraisal is often necessary when dealing with an estate that contains real estate assets.
The IRS and the United States government have endless amounts of complex rules and regulations regarding estate taxes, the tax basis for them, and the methods regarding a decedent’s estate. As such, there are estate lawyers, tax professionals, and real estate appraisers required at different stages of this difficult time.
We’re going to focus on the real estate appraisal process and how it affects other aspects of untangling a decedent’s estate. With this knowledge, you’re sure to be more confident whether you’re dealing with an estate currently or in the estate planning process.
A Date of Death Appraisal
The date of death appraisal is requisitioned no later than six months after the decedent’s time of death. This type of appraisal is necessary for any estate that has real estate holdings. It is an accounting of the properties included in the estate at the time of death, attempting to provide a contextual monetary value for the holdings.
Generally, estates can include monetary holdings, personal property, and even trusts that have tax implications based on easily assigned values. The same cannot be said for a real estate property, which has a value that is not so easily determined. This is because, unlike other items included in the decedent’s gross estate, real estate value is dependent on the condition of the market in which it exists.
A surviving spouse, beneficiary, or estate administrator will obtain an appraiser to establish the fair market value for a property or properties for estate tax purposes. It is the job of a commercial or residential appraiser to determine the value of the real property based on the market conditions which existed at the time of death, the property itself, and comparable properties.
The date of death appraisal and a conclusive inventory of the estate’s holdings becomes the basis of several key pieces of estate business:
- The worth of the estate’s holdings,
- The foundation of tax implications,
- Assets included and if they’re substantial enough to pay either the taxes or any creditors owed,
- The remaining amount available for distribution in the form of inheritances bestowed on beneficiaries.
Thus, the date of death appraisal is crucial following a decedent’s death. Though the process may not be timely, any property is valued at the time of the decedent’s death. That information is then compiled in an appraisal report and utilized in the estate settlement process.
Hiring an Appraiser
It is the responsibility of the estate, through the estate’s executor or trustees, to obtain an appraisal. That being said, you should never hire a professional licensed real estate appraiser based on your first search engine hit. The IRS has strict requirements for property appraisals for tax purposes so your appraiser should come highly recommended.
Any financial institution, real estate agent, or estate tax attorney will have relationships with appraisers. Utilize those who have experience with your circumstances to recommend an appraiser they trust.
Above all, seek an appraiser that is:
- Licensed: In the property’s state
- Qualified: Check for extra certifications and designations
- Experienced: How many years of experience, whether it’s primarily residential or commercial
Hiring the right appraiser can be a difficult task. Whether it’s phone consultations or meetings, be sure to have specific questions prepared. This is potentially an expensive and time-intensive process - you want to be confident in your appraiser and their abilities.
What Is Needed For a Date of Death Appraisal
Even though it may be unfamiliar to you, a date of death appraisal is a common practice in estate settlements. An experienced appraiser will clearly lay out for you what documents and information they’ll need to conduct the appraisal.
To expedite the process, be sure to provide this information:
- The date of death so they can obtain the corresponding sales and market data,
- Your timeline or due date of the date of death appraisal
- Documents like deeds, photographs, inspection reports, or prior appraisals,
- Documentation for any modifications since the date of death.
- The percentage of ownership in the property since any ownership, less than 50%, will require a Minority Interest Letter which reflects the discounted market value impacted by the minority interest of the proportionate share owned.
The market and sales data can be accessed by the appraiser so do not concern yourself with conducting that research. The difference between commercial and residential properties is distinct in the appraisal process, as they both require different variables that could impact the valuation.
For instance, a commercial property could have income and cost variables that a residential property does not. If the property is commercial, an appraiser may ask for additional documentation like lease information, income revenue generating data, and more.
When researching your appraiser and the appraisal process, know that details like timelines and prices can fluctuate. Do not hesitate to reach out to appraisers, ask them questions, and consult them about how long it will take to generate an appraisal report and how much it will cost.
Generally, date-of-death appraisals can be more research-intensive because they are considered retrospective appraisals. They are usually a few thousand dollars for a commercial property, depending on the property type, and can take a few weeks to a month. One- to four-family dwelling appraisals will cost materially less.
The Difference Between Date of Death Appraisals and Other Appraisals
When consulting real estate appraisers, be sure to verify they have experience specifically with date-of-death appraisals, as they are different from traditional real estate appraisals.
The date can make all the difference - the difference of a few months could mean the difference in thousands of dollars in market value. The real estate market, especially in times of volatility, has a substantial impact on the fair market value of a property. For instance, alternative valuation date methods are sometimes used to change the date of death appraisal to one six months following. Your estate attorney may consider it if the market and comparative property data are more favorable at a later date.
Using historic data and comparative property sale prices, a date of death appraisal is a retrospective appraisal. It uses a past date and previous market trends, not current ones, to determine value.
The property appraised and the worth assigned to it is considered a historic appraisal used to determine the monetary value of an estate, specifically at the decedent’s time of death.
The cost, methodology, and even the timeline of a date of death appraisal vary from a traditional real estate appraisal. Be sure to take that into consideration when requisitioning a date of death appraisal - make sure it’s appropriate for your situation.
Examples of when it may be called for:
- The estate tax liability and income tax of an estate are in question
- The value of real estate holdings in a trust or estate is uncertain
- Settling estate matters in probate
Do not hesitate to ask any appraiser you consult to advise whether this type of appraisal is appropriate for your situation.
Next Steps
The grieving process is emotionally complex enough without piling on estate taxes, exorbitant tax fees, and more probate proceedings on top of it. Knowing as much about the appraisal process and its tax implications may help, but you’re sure to navigate the process much more confidently if you have the right real estate appraiser at your side.
An accurate, factually detailed, and reliable real estate appraiser could mean the difference between a profitable future sale or steep capital gains taxes inflicted on an unwitting beneficiary. The tax implications of real estate assets in trusts, wills, and estates are difficult to untangle but not an insurmountable obstacle with the right advisor on your side.
Reach out to WestRock today by filling out this form to start today.