Why the IRS Cares So Much About What Your Inherited House Was Worth

When you inherit a house, the number that matters most isn’t what your parents paid for it decades ago. It’s what it was worth on the day they died — and Kiplinger reports that getting this figure wrong, or leaving it undocumented, is what triggers IRS penalties and unexpected capital gains bills for heirs.

The stepped-up basis mechanism

Here’s the rule that makes this so consequential. Under current tax law, an inherited asset gets a “stepped-up basis” — its cost basis resets to fair market value on the date of death, wiping out decades of appreciation for tax purposes. If your mother bought a house for £40,000 in 1985 and it’s worth £500,000 when she dies, your basis is £500,000, not £40,000. Sell it soon after for £510,000 and you owe capital gains tax on £10,000, not £470,000.

That’s the good news. The catch is that the £500,000 figure has to be defensible. It’s not what an estate agent guesses over the phone, or what a property portal’s algorithm spits out. The IRS expects a proper appraisal, ideally one commissioned close to the date of death, and it can challenge a number that looks convenient rather than evidenced.

Why the sale price isn’t the whole story

This is where families get caught out. If the estate reports a low valuation to minimise estate tax exposure, but the heirs later sell for significantly more, the gap between the reported basis and the sale price looks like unreported gain — and that’s exactly the kind of discrepancy that draws scrutiny. Conversely, an inflated valuation can understate capital gains at sale but overstate the estate’s value, creating problems the other direction if the estate is large enough to owe estate tax.

The safest path is consistency: the value used on any estate tax filing (Form 706, if one is required) should match what’s later used as basis, and both should trace back to a documented, professional appraisal rather than an estimate pulled together after the fact.

What to actually keep

For anyone likely to inherit a property, the practical move is boring but effective: get a written appraisal dated as close to the death as possible, keep it with the estate paperwork, and don’t rely on memory or an old listing price when the house eventually sells. That single document is what stands between a heir and years of arguing with the IRS over a number nobody wrote down.

Reported at Kiplinger; analysis ours.