Alternative Valuation Method for Inherited Property

An Alternative Valuation Method is Available for Inherited Property

Once the amount of any gain or loss is determined, the taxpayer must decide whether or not it is long-term or short-term.

The capital gain or loss is long-term if the investment property is held for more than one year.

The capital gain or loss is short-term if the property is held for one year or less.

 Pretty simple.

But what happens when the property is inherited?

When investment property is inherited, the capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss.

This is true regardless of how long the taxpayer held the property. (For more information, read Publication 551, pages 9–10). This is a huge benefit when a beneficiary sells an inherited building or property.

For 2021, the gross estate is valued at the date of death unless an alternate valuation method is elected.

The gross estate includes all property in which the decedent had an interest (including real estate or property owned outside the United States). It also includes:

  • Certain transfers made during the decedent’s life
  • Annuities
  • The included portion of joint estates with the right of survivorship
  • The included portion of tenancies by the entirety
  • Many life insurance proceeds, even if they were paid to beneficiaries other than the estate.

Under the alternate valuation method, the value used to determine the basis of the property is not the value at the date of the decedent’s death, but it is the value at the date six months after death. Therefore, the alternative valuation method can be a massive advantage if the Estate Attorney chooses this option.

The alternative valuation date is only valid if the property is not sold, distributed, or otherwise disposed of within six months after the decedent’s death. If the property is sold, the value used in determining the basis is the property’s value at the date of sale.

VERY IMPORTANT: the alternate valuation date cannot be elected unless the election will decrease both the value of the gross estate and the sum of the estate and GST.

Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.