Why a Surviving Spouse Should Get a Real Estate Appraisal After a Death
When a spouse dies, the surviving spouse typically inherits the family home, vacation properties, or investment real estate. In most cases, those assets transfer smoothly and without immediate estate, inheritance, or income taxes. That seamless process makes it easy to assume nothing urgent needs to happen.
One step, however, matters more than most people realize. Getting a professional appraisal of the jointly owned real estate as of the date of death may help establish a defensible tax basis, which could affect future capital gains.
The Key Reason: Establishing a New Cost Basis
Cost basis is essentially what you paid for an asset, plus the cost of any improvements. When you sell a property, the IRS calculates your taxable gain by subtracting your cost basis from the sale price. A higher cost basis means a smaller gain and a lower tax bill.
Those gains get taxed at capital gains rates, which are generally lower than ordinary income tax rates. But on appreciated real estate, they still add up fast. Anything you can do to reduce the gain reduces the tax. However, the extent of any tax impact will depend on factors such as ownership structure, holding period, applicable exclusions, and individual tax circumstances.
When a spouse dies, tax law allows the surviving spouse to reset, or “step up,” the cost basis on the portion of the property the deceased owned. For most jointly held property, that is 50%. The new starting point for that half becomes the fair market value at the date of death rather than the original purchase price.
A professional appraisal documents that value. Without adequate documentation, it may be more difficult to substantiate fair market value if the IRS reviews the reported basis.
A Primary Residence: What the Numbers Look Like
The following example is for illustrative purposes only and assumes certain conditions that may not apply in all situations, including eligibility for the primary residence exclusion.
Imagine a couple who bought their home in 1990 for $200,000 and made $300,000 in improvements over the years, giving them a total cost basis of $500,000. When the first spouse dies in 2023, the home is worth $800,000.
Without an appraisal, the surviving spouse carries the original $500,000 cost basis. When he or she sells the home in 2026 for $850,000, the gain is $350,000. The IRS allows single taxpayers to exclude $250,000 of gain on a primary residence sale, leaving $100,000 subject to capital gains tax.
With an appraisal, the step-up changes the picture entirely. The surviving spouse resets the basis on the deceased’s 50% share to the appraised value. Their new cost basis is $650,000: their own 50% of the purchase price and improvements ($250,000) plus 50% of the $800,000 appraised value ($400,000). When the surviving spouse sells for $850,000, the gain drops to $200,000, which falls entirely within the $250,000 exclusion and could result in no federal capital gains tax if all applicable requirements are met.
The appraisal cost is typically modest, though the potential benefit will vary depending on future sale price, applicable exclusions, and other tax considerations.
A Vacation Property: Higher Stakes
This example is for illustrative purposes only and assumes no changes in tax law or individual circumstances.
The step-up matters even more for vacation and investment properties, which do not qualify for the primary residence exclusion.
Consider a couple who bought a beach house in 2009 for $500,000. By 2023, when the first spouse dies, the property has appreciated to $1,500,000.
Without an appraisal, the surviving spouse carries a $500,000 cost basis. A sale at $1,500,000 produces a $1,000,000 gain subject to capital gains tax.
With an appraisal, the new cost basis becomes $1,000,000: 50% of the original $500,000 purchase price ($250,000) plus 50% of the $1,500,000 appraised value ($750,000). The taxable gain drops to $500,000, a reduction that may reduce the amount of gain subject to tax.
Why Timing Matters
After a death, families are focused on more immediate concerns. Real estate valuations often get pushed aside or overlooked.
But waiting can create problems:
- Memories fade
- Market data becomes harder to reconstruct
- Comparable sales may no longer be available
- The IRS may challenge a later estimate
Zillow estimates, county tax assessments, and informal realtor opinions don’t substitute for a formal appraisal. If the IRS questions the value, those informal figures may be subject to greater scrutiny than a qualified appraisal. In many cases, obtaining an appraisal is considered a prudent step in documenting value for estate planning and tax reporting purposes.
This Applies Even When There Are No Immediate Plans to Sell
Many surviving spouses assume that since everything passed directly to them, there is nothing to worry about. But circumstances change. The surviving spouse may eventually sell the property, convert it to a rental, gift it to family members, or pass it to heirs who sell it later. In every one of those scenarios, the cost basis established at the first spouse’s death matters. Without a documented, defensible value from that date, future tax reporting becomes difficult to substantiate.
A Practical Step Worth Taking
Arranging a real estate appraisal is not complicated, but it is easy to overlook during an already difficult time. It typically costs a few hundred dollars per property. The potential tax savings are variable and dependent on future events, including market conditions, holding period, and individual tax circumstances.
We encourage clients to treat a date-of-death appraisal as an important consideration in estate administration, particularly when accurate valuation may be relevant for future tax reporting. Getting it done promptly, while the data is fresh and documentation is straightforward, locks in a defensible value at a critical moment. For families who want to preserve wealth and avoid unnecessary costs, that is one step that may be worth evaluating.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
Angie M. Stephenson
Managing Partner / Financial Advisor
CFP®, CPA/PFS