Is an Appraisal Required for Inherited Property in North Carolina?
If you have inherited real estate, you probably have many questions regarding the property. Should I keep it? Should I sell it? What's it worth? And so forth. If you're an Executor in North Carolina handling an estate that has a home or other real estate, it's most likely the most valuable asset within the estate. It's your responsibility to know what it's worth, for several reasons: to report a taxable gain or loss on the eventual sale; for an inventory, if the estate goes through probate; and to fairly divide estate assets among heirs and/or beneficiaries, if that's what the will called for.
One important question you will have is "should I get an appraisal?" Well, generally speaking, a real estate appraisal is not required when you inherit property. However, it's highly recommended that you have an appraisal completed for two primary reasons.
First, future taxation on the property when it is sold is generally based on the value at the decedent's death. And the best way to prove that is a formal real estate appraisal in writing by a certified appraiser. The appraisal establishes value for a stepped up tax basis to reduce taxes for capital gains if the property is sold. This value will be the most reliable and defensible number for heirs if they were to be audited.
Although an appraisal for stepped up tax basis may be completed at any time after inheriting a property, the IRS expects the appraisal to be done in a timely manner. So, it's a good idea to have this done as close to the "date of death" as possible. It is easier for a real estate appraiser to complete the appraisal if you request it soon after inheriting the property. The report can be completed years after inheritance, but it is considered to be a retrospective forensic appraisal report at that point and may cost the heirs substantially more.
We spoke to Scott Cornelius, CPA, in High Point, NC. Scott said, "From a CPA’s perspective, it is important to have a certified appraisal of inherited real estate to establish the fair market value at the decedent’s date of death. When the property is sold, this appraisal will establish the cost basis used to determine the capital gain or loss for tax purposes."
According to Mr. Cornelius, The IRS is not obligated to accept any valuation other than a certified appraisal.
He said, "Contrary to what many people believe, the IRS does not accept county property tax value as fair market value unless you get a very kind and compassionate auditor. In the absence of a certified appraisal, the IRS will set the cost basis at $0 or the decedent’s documented cost basis."
Second, it's important for an heir or beneficiary to know the true value of any inherited asset. This is necessary to buy insurance, share with joint heirs, and to do your own estate planning. It's especially important if you want to sell or divide the property.
You will especially need an appraisal if the real estate is a commercial property or income-producing residential property like a duplex or apartment building. These type of assets are harder to value accurately than most residential properties, which, in most cases, have plenty of comparable sales.
What Type of an Appraisal is Required for Inherited Property?
When an appraisal is completed on inherited property or for estate purposes, it is retrospective in nature. The retrospective, or historical, appraisal has an effective date of the day the property is inherited. This is also known as the "date of death", which sounds rather dismal, but it's the date that the heirs take ownership of the property.
Does My Inherited Property Go Through Probate in North Carolina?
Inherited real estate generally doesn't go through probate in North Carolina. Two exceptions would be if the will dictates it, or proceeds are needed to pay estate debts . If the inherited property is in a self-directed IRA with a beneficiary noted, the property would not have to go through probate. Additionally, when a spouse dies, the inherited property of the living spouse does not go through probate.
Assets including vehicles, bank accounts, stocks and bonds, furniture, and jewelry are typically, but not always, handled through the estate probate administration process. These assets are called "probate assets".
Property in North Carolina that is held with a “right of survivorship,” which means it becomes the property of the last living owner, or property that has a named beneficiary who is living. Examples of these properties may include life insurance policies, retirement accounts (IRA, 401k, etc.), joint bank accounts, and annuities.
How to Save Capital Gains Taxes When You Inherit Real Estate
As we mentioned earlier, an appraisal is crucial in proving value to the IRS to receive a step up in basis, which saves capital gains tax. Consider the following example on how an appraisal could benefit heirs for tax planning.
Jimbo buys a house in Winston-Salem for $100,000 in 1975. Jimbo passes away on December 21, 2018. Jimbo leaves his house to his brothers Johnny and Bill. Johnny and Bill seek the advice of an attorney and a financial planner. They both advise that a real estate appraisal be prepared as of Jimbo’s date of death. The appraisal reveals that Jimbo’s property was valued at $550,000 as of December 21, 2018. Jimbo’s brothers decide to sell the house one year after they had inherited it and it sells for $650,000.
It’s a good thing that Johnny and Bill had an appraisal done because their tax liability is $120,000 for the gain from the time that they inherited Jimbo’s house ($670,000 sales price minus $550,000 home value as of date of inheritance=$120,000). The two brothers may have had capital gains of $570,000 if they did not complete the appraisal for stepped up tax basis. ($670,000 sales price minus the $100,000 price that Jimbo had paid for the house 23 years earlier).
What Happens to Our North Carolina Property if My Spouse Dies?
Concerning married couples, if one spouse passes away, the surviving spouse is eligible for a stepped up tax basis to reduce capital gains taxes. However, primary residences in North Carolina are not assessed a capital gains tax, so this would only apply to investment properties or second (vacation) homes.
The surviving spouse that has owned their North Carolina investment property for a long period would have a large increase in appraised value which would reduce capital gains taxes significantly when the home is sold.
This example shows how a spouse can reduce capital gains tax:
Mom and Dad buy their investment property for $50,000 in 2009. Dad passes away in 2022 and the property appraises at $250,000 as of the date Mom inherited the property. Mom assumes a stepped up tax basis of $250,000 and sells the house for $250,000 shortly after Dads passing. Mom owes zero in capital gains taxes. Consult your tax advisor for your given situation.
Estimating the Value of Inherited Real Estate in NC
With Baby Boomers and the Silent Generation owning over 50% of the real estate wealth, an estimated $13 trillion plus, there will be a Great Wealth Transfer in the coming years. Much of this inherited real estate will need to be appraised with an estimate of value for several reasons: to report a taxable gain or loss on the sale; for estate inventory if the estate goes through probate; and to divide estate assets among heirs. If you are in need of a North Carolina appraiser for estate and tax planning purposes of inherited property, don't hesitate to contact me, Tony Green, Certified General Appraiser (NC #8096). I am glad to help. I can be reached at (336) 701-2891 or through our online contact form.
*NOTE: Tony Green is not a Certified Public Accountant (CPA), and the preceding information should not be considered tax advice. Consult your tax advisor for your given situation.