Why Your Tax Preparer Is Asking for a Step-Up Basis Appraisal (And Where to Get One)

If you've recently inherited property and are now filing taxes, you might be surprised when your tax preparer and/or estate attorney asks for something called a "Step-Up Basis Appraisal." As a Certified Residential Real Estate Appraiser with over two decades of experience serving the Denver Metro area, I've helped countless families navigate this critical but often misunderstood aspect of property inheritance.

Let me explain what this appraisal is, why you need it, and how it could potentially save you thousands in unnecessary taxes.

What Exactly Is a Step-Up Basis Appraisal?

A Step-Up Basis Appraisal determines the fair market value of real estate as of the date the previous owner passed away. While similar to a Date of Death Appraisal, there is an important distinction. The difference is primarily in how the valuation is used: Date of Death Appraisals focus on estate settlement purposes, while Step-Up Basis emphasizes the tax benefits for heirs.

The term "step-up" refers to the tax benefit that occurs when inherited property receives a new tax basis equal to its fair market value on the date of death, rather than the original purchase price paid by the deceased.

Why Your Tax Preparer Needs This Document

Your tax preparer isn't just creating extra paperwork – they're actually trying to save you money. Here's why they're asking for this specific appraisal:

1. To Establish Your New Tax Basis

When you inherit property, the IRS allows what's called a "step-up in basis" to the fair market value at the date of death. This is one of the most significant tax advantages available to inheritors of real estate.

For example: Let's say your father purchased his home in Denver's Cherry Creek neighborhood in 1975 for $60,000. Over the decades, the property appreciated substantially, and at his passing in 2024, it was worth $850,000. Without a step-up in basis, if you sold the property, you'd potentially owe capital gains tax on the difference between $60,000 and the sale price – a massive tax bill!

However, with the step-up in basis, your new tax basis becomes $850,000. If you sell the property soon after for $850,000, you would owe zero capital gains tax. This is why documenting the precise value at death through a professional appraisal is crucial.

2. For IRS Compliance and Documentation

The IRS requires substantiation of the stepped-up basis. A professional appraisal provides the documentation needed to support the valuation if your tax return is ever questioned or audited. Tax assessments or online estimates typically don't meet IRS requirements – they want a qualified appraiser's opinion.

3. To Calculate Partial Exclusions

If you've held onto the inherited property for some time before selling, a portion of the appreciation since the date of death may be taxable. Your tax preparer needs the step-up basis value to calculate exactly how much of your proceeds might be subject to capital gains tax.

When to Order Your Step-Up Basis Appraisal

Ideally, you should order your Step-Up Basis Appraisal:

1. Soon after the date of death: This makes it easier for the appraiser to accurately determine the condition of the property and recent comparable sales from that time period.
2. Before filing taxes: Your tax preparer will need this document to accurately complete your return.
3. Before selling the inherited property: Understanding the stepped-up basis helps you make informed decisions about pricing and potential tax implications.

However, even if significant time has passed since the death, an experienced appraiser can still provide an accurate retrospective valuation by carefully researching historical data and market conditions.

The Bottom Line: Significant Tax Savings

While ordering a specialized appraisal might seem like just another expense during an already difficult time, the potential tax savings far outweigh the cost. I've seen clients save tens of thousands of dollars in capital gains taxes by properly documenting their stepped-up basis.

Even if you're not planning to sell the inherited property immediately, having this appraisal on file provides valuable documentation for future tax filings and peace of mind knowing you're in compliance with IRS requirements.