Step-Up Basis and the Date-of-Death Appraisal

When a client inherits real estate, one number follows that property for as long as they own it: the fair market value on the date of death. Under IRC Section 1014, that value becomes the heir's stepped-up basis, and every future gain or loss calculation is built on top of it.

Most CPAs know the rule cold. The question is what is actually sitting in the file to support the number.

The exemption went up. The basis question did not go away.

With the federal estate tax exemption at $15 million per person for 2026, the overwhelming majority of estates will never file a Form 706. It is tempting to conclude that valuation rigor only matters for taxable estates. The opposite is closer to the truth.

For a non-taxable estate, there is no 706 on record establishing the date-of-death value. The first time anyone scrutinizes the basis may be years later, when the heir sells the property and reports the gain, or when the IRS questions it. At that point, the supporting documentation is whatever was gathered at the time, or whatever can be reconstructed after the fact.

Arizona has no state estate or inheritance tax, so for most of your clients the date-of-death value exists for exactly one purpose: substantiating basis. That makes the quality of the valuation the whole ballgame.

What usually ends up in the file, and why it is thin

In practice, basis support for inherited residential property tends to be one of these:

• A Zillow or Redfin estimate printed near the date of death

• A realtor's comparative market analysis, often prepared for a possible sale rather than as a valuation

• The county assessor's value, which in Maricopa County is a mass-appraisal figure that routinely sits well below market

• Nothing at all, reconstructed from memory when the property sells

Each of these has the same weakness: none is an opinion of value from a credentialed, independent professional applying a recognized methodology. An automated estimate cannot explain its comparable selection. A CMA is a marketing document. An assessor's value answers a different question. If the basis is ever examined, the difference between "a printout from a website" and "a signed appraisal from a certified appraiser" is the difference between an argument and an answer.

Accuracy-related penalties under Section 6662 attach to substantial misstatements, and the burden of substantiation sits with the taxpayer. The cheapest insurance against that conversation is contemporaneous documentation that was credible the day it was created.

The retrospective problem

The other recurring scenario: the estate was settled informally, the property was kept, and now, three or five or ten years later, the heir is selling and someone has to establish what it was worth on the date of death.

This is a retrospective appraisal, and it is routine work for a certified appraiser: the value is developed as of the historical effective date, using only closed sales and market data from that period. It is not routine work for an algorithm. Automated estimates cannot be run "as of" a past date, and the further back the date, the fewer shortcuts exist. A certified retrospective appraisal turns an unsupportable number into a supported one, even years after the fact.

What a desktop appraisal is, and why it fits this work

A desktop appraisal is a USPAP compliant appraisal performed by a certified appraiser without a physical inspection, using MLS sales data, public records, and GIS imagery. For date-of-death work this format fits unusually well, for a practical reason: the appraiser could not inspect the property as it existed on the date of death anyway. The valuation is necessarily built from market data as of the effective date, which is exactly what a desktop analysis does.

The result is a signed, certified report with comparable sales, adjustments, reconciliation, and the appraiser's certification, delivered in 24 hours for a flat $149 plus a $50 historical-date fee. Compare that to the two to three weeks and $500 to $700 a full appraisal often runs, for an assignment where the inspection adds nothing.

One more point CPAs tend to appreciate: under USPAP, the appraiser's value conclusion is independent and final. It cannot be steered toward a number that would be convenient for the return. That independence is precisely what makes the report worth putting in the file.

A simple standard for the file

A reasonable practice standard for inherited Arizona real estate: every date-of-death value that will support basis gets a certified appraisal, ordered when the estate is administered, not when the property sells. The cost is small, the report arrives in a day, and the file is closed on the question permanently.

If you have estate clients with Maricopa County property, see how a date-of-death desktop appraisal works, or review a sample report at nextdaydesktops.com.

Mark Ragno is an Arizona Certified Residential Appraiser (#22283) with more than 24 years of valuation experience. Next Day Desktop Valuations provides USPAP compliant desktop appraisals for estate, divorce, and litigation use throughout Maricopa County. This article is general information for tax professionals, not tax advice.