What is stepped-up basis on inherited land?
Stepped-up basis means an heir's basis in inherited land is generally its fair market value on the date of death, not what the decedent paid. The IRS names exceptions, including an elected alternate valuation date, special-use value for farm real property and a qualified conservation easement exclusion. Inherited land is treated as held longer than one year, however soon it sells.
What a parent paid decades ago, set beside what the land was worth the day they died
Two values sit behind every inherited tract. One is the price a parent or grandparent paid when they bought it, often long ago. The other is what the same land was worth on the day they died. For an heir, the basis generally starts from the second one.
Basis is the starting number for figuring gain. The IRS describes it as generally the amount you paid for an asset. Inherited land is the exception to that everyday rule: Publication 551 says the basis of property inherited from a decedent is generally its fair market value at the date of the individual's death. When the land is worth more on that date than was paid for it, the basis steps up, which is where the name comes from.
| Land the owner bought | Land an heir inherited | |
|---|---|---|
| General starting basis | Generally what was paid for it | Generally its fair market value at the date of death |
| Holding period at sale | Generally long-term only if held more than one year | Treated as held longer than one year |
| Exceptions | Outside this page | Alternate valuation, special-use value, conservation easement exclusion, estate tax consistency |
The paperwork side of selling what was inherited, including heirs, qualification as executor and who signs the deed, is covered in how to sell land you inherited. How gain is then taxed, and at what rates, is on whether you pay capital gains when you sell land.
Four starting values the IRS names, and the estate choices behind two of them
"Generally" is doing real work in that rule. Publication 551 lists the values an heir's basis may start from, and which one applies can turn on choices made for the estate, not by the heir.
Fair market value at the date of death
The general rule.
Fair market value on the alternate valuation date
Used if the personal representative for the estate chooses alternate valuation.
Special-use value
The value under the special-use valuation method for real property used in farming or a closely held business, if chosen for estate tax purposes.
The decedent's adjusted basis, in part
The decedent's adjusted basis in land to the extent of the portion of the value excluded from the taxable estate as a qualified conservation easement.
The last two both reach land directly: one covers real property used in farming, the other land under a conservation easement. A working farm may have been valued for the estate on its farming use, and land under a conservation easement may carry part of the decedent's old basis rather than a full step up. How an easement shapes a tract and its taxes more broadly is explained in conservation easements, explained.
A consistency rule sits on top of the list. Publication 551 says Section 1014(f) requires the basis of certain property acquired from a decedent to be consistent with the value of the property as finally determined for estate tax purposes. So for the property that rule reaches, the heir's basis cannot float free of the value finally determined for estate tax.
An inherited tract counts as held more than a year, even if it sells within months
The second half of the inherited-land rule is about time. Ordinarily an asset held one year or less gives a short-term gain, and the IRS lists property acquired from a decedent among the exceptions.
If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.
IRS Publication 544, Sales and Other Dispositions of Assets
That removes one pressure from the decision to sell. Heirs who sell soon after an estate settles are not pushed into short-term treatment by the calendar, and heirs who hold the land for years are treated the same way on that point. When to sell becomes a question about the land, the family and the market for that kind of ground, not about crossing a one-year line.
The date-of-death value comes from a licensed appraiser, not from an opinion of value
A basis built on fair market value at the date of death needs someone to establish that value. For a tax file, the route for that number is a licensed appraiser, working with the estate's attorney or CPA.
A real estate licensee's number is a different document. Virginia lets a licensed broker or salesperson provide a valuation of real estate, and then limits it: under Va. Code 54.1-2010 A 1 the licensee "shall not hold himself out as a real estate appraiser, and the valuation shall not be referred to as an appraisal and shall not be used in lieu of an appraisal performed by a licensed appraiser." The glossary defines both a broker price opinion and an appraisal.
An opinion of value still has a place early on, before anyone orders an appraisal. Heirs deciding whether to sell land, divide it or keep it usually want a sense of what it is worth first, and that is what a free land valuation from Lowell is for: a number with the reasoning behind it, at no cost and no obligation, and never a substitute for the appraisal a tax file relies on.
Deciding whether to sell a tract you inherited?
Tell Lowell where the inherited tract lies. An opinion of value can help the heirs weigh selling, dividing or keeping it; the date-of-death appraisal and estate tax choices stay with the appraiser, attorney and CPA. No cost, no obligation.
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Questions this raises
Who decides whether an estate uses the alternate valuation date?
The personal representative. Publication 551 says an heir's basis is the fair market value on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation, and otherwise generally the value at the date of death. Whether that choice is available or makes sense for a given estate is a question for the estate attorney or CPA.
Is inherited farmland's basis always its full market value?
Not always. Publication 551 lists the value under the special-use valuation method for real property used in farming or a closely held business, if chosen for estate tax purposes, as one of the values an heir's basis can start from. Whether a farm was valued that way is in the estate's tax filings, which the estate attorney or CPA can read.
Does my basis in inherited land have to match the value finally determined for estate tax?
For certain property, yes. Publication 551 says Section 1014(f) requires the basis of certain property acquired from a decedent to be consistent with the value of the property as finally determined for estate tax purposes. Which property that rule reaches in a particular estate is a question for the estate attorney or CPA.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Publication 551, Basis of Assets: inherited property and Section 1014(f) consistency Internal Revenue Service
- Publication 544, Sales and Other Dispositions of Assets: holding period of inherited property Internal Revenue Service
- Topic 703, Basis of assets Internal Revenue Service
- Topic 409, Capital gains and losses: holding period and exceptions Internal Revenue Service
- Va. Code 54.1-2010, exemption for a licensed broker or salesperson's valuation, which is not an appraisal Virginia General Assembly