When you inherit anything, whether a house, a brokerage account, a business interest or a collection, federal tax law generally resets its cost to what it was worth on the date of death. That reset can erase decades of taxable gain, but only if you can prove the number. A date-of-death valuation is how you prove it, and it belongs in every estate that is settled.
It does not matter how the property reaches the heir. The same tax rule applies to an estate administered in probate, a trust settled by a successor trustee, and property that passes outside of court entirely. What differs is whether anyone is prompted to record what the property was worth on the day of death, and in many estates nobody is.
Every estate needs a date-of-death valuation
- Probate estates. Under section 473.233 RSMo, a Missouri personal representative must file an inventory and appraisement within thirty days after letters are granted. The statute does not require a formal appraisal of every item, and household goods need no detailed listing, so an inventory can be filed with values that would not hold up as tax basis. Where value is reasonably in doubt, the court may appoint an appraiser to determine fair market value as of the date of death.
- Trust administrations. A successor trustee needs date-of-death values to divide trust property fairly among beneficiaries and to account for it. No court reviews those values, so the trustee has to create the record.
- Non-probate transfers. A beneficiary deed under section 461.025 RSMo, a transfer-on-death registration on a brokerage account, and a payable-on-death bank designation all move property with no court and no inventory. This is where the valuation is most often skipped.
In each case the result for the heir is the same. The value on the date of death sets the tax cost of what they received, and a documented value is what lets them use it when they sell.
What “basis” is, and why the date of death resets it
Basis is the tax term for what an asset cost. When you sell, your taxable gain is the sale price minus your basis (and minus allowable selling costs). For property you buy yourself, basis is generally what you paid. For property you inherit, a different rule applies.
Under section 1014 of the Internal Revenue Code, the basis of property acquired from a decedent is generally “the fair market value of the property at the date of the decedent’s death.” This is commonly called the stepped-up basis. The rule is not limited to property that passes through probate or under a will. Section 1014(b)(9) extends it to property acquired “by reason of death, form of ownership, or other conditions” when that property is included in the decedent’s gross estate. A house received by beneficiary deed and an account received by transfer-on-death registration generally qualify.
The IRS states the same rule in its guidance for heirs: the basis of inherited property is generally its fair market value on the date of death, or on the alternate valuation date if the executor files an estate tax return and elects it. Inherited property is also treated as held for more than one year under section 1223(9), so a gain on its sale is taxed at long-term capital gain rates even if the heir sells it the following month.
A worked example
A parent bought a home decades ago for $250,000 and leaves it to a child, whether by will through probate, through a trust or by beneficiary deed. On the date of death the home is worth $1,000,000. Two years later the child sells it for $1,100,000.
With a date-of-death appraisal: the child’s basis is documented at $1,000,000. The taxable gain is about $100,000, before selling costs reduce it further.
Without one: the law still gives the child a stepped-up basis, but the child has to prove what the house was worth two years earlier. If the IRS questions the figure and the only firm number in the file is the parent’s $250,000 purchase price, the dispute is over a potential gain of as much as $850,000 instead of $100,000. The difference in tax can run well into six figures.
The appraisal does not create the step-up. It proves it.
This distinction matters. The stepped-up basis is not a benefit you apply for, and skipping the appraisal does not forfeit it. What the appraisal does is give you evidence. When you report a sale, the basis you claim is your number to support, and the IRS advises taxpayers in Publication 551 to keep records of everything that affects basis. A written appraisal by a qualified appraiser, valued as of the date of death and prepared close to that date, is the strongest record an heir can have.
Without it, the heir is left reconstructing value after the fact from county assessments, online estimates or a later sale price, none of which is a reliable measure of fair market value on a specific past date. That leaves the heir exposed in an audit, and it often leads heirs to under-claim basis out of caution, paying more tax than the law requires.
Where an estate is large enough to file a federal estate tax return, the rules tighten further. Section 1014(f) generally limits the heir’s basis to the value finally determined for estate tax purposes, and the executor reports that value to beneficiaries on Schedule A of Form 8971. Most Missouri estates fall below the federal filing threshold and Missouri has no estate or inheritance tax, which is exactly why the date-of-death value so often goes undocumented.
Why an appraisal near the date of death costs less and holds up better
An appraiser can value property as of a past date. This is called a retrospective appraisal, and it is routinely done. It is also harder, and usually more expensive, the further back the effective date sits. The appraiser has to establish the condition of the property as it was, which may have changed through repairs, cleanout or deterioration, and has to find comparable sales from a market that has since moved. The further from the date, the thinner and less persuasive the evidence becomes.
An appraisal ordered within weeks of the death avoids most of that. The property is in the condition it was in, the comparable sales are current, and the appraiser’s conclusion can be tested against a market everyone can still see. For more on how this plays out with real estate in particular, see our earlier post, The Inherited House Nobody Appraised.
Stocks and brokerage accounts get the same step-up
The rule is not limited to real estate. Shares of stock, mutual funds and other investments held in an ordinary taxable account generally take a basis equal to their value on the date of death, whether they pass by will, through a trust, or by transfer-on-death registration on the account. A parent who bought shares for $40,000 that are worth $400,000 at death can leave them to a child who could sell them shortly after for about $400,000 with little or no taxable gain.
Valuing publicly traded securities is simpler than valuing a house, because the date-of-death price is a matter of public record. The practical risk is different: brokerage firms do not always update cost-basis records correctly when an account is retitled to a beneficiary, and a Form 1099-B that reports the parent’s original cost, or no cost at all, can lead an heir to overpay. Ask the firm to confirm the stepped-up basis in writing, and keep a date-of-death statement for the account.
The major exception: IRAs, 401(k)s and other retirement accounts
Inherited retirement accounts do not receive a stepped-up basis. Section 1014(c) excludes “income in respect of a decedent” under section 691, and pre-tax retirement money falls in that category. As IRS Publication 590-B explains, beneficiaries of a traditional IRA must include taxable distributions in their gross income, taxed as ordinary income, regardless of what the account was worth at death.
Roth IRAs are treated differently again, and qualified distributions are generally tax-free. For these accounts, a date-of-death statement is still worth keeping, because it supports the estate’s records and any required distributions, but it does not reduce the tax on withdrawals the way an appraisal does for a house or a brokerage account. The same caution applies to annuities.
Jointly owned property with a spouse
Property that a married couple owns jointly with right of survivorship is generally treated under section 2040(b) as one-half included in the first spouse’s estate. Missouri is not a community property state, so as a rule only the deceased spouse’s half receives a new basis at the first death. The surviving spouse’s new basis is a blend of half the date-of-death value and half the original cost. A date-of-death appraisal is just as important here, because it documents the half that did step up.
What to do after a death
- Real estate: order a written appraisal from a state-certified appraiser with an effective date equal to the date of death, as soon as practical. Keep the full report, not only the value.
- Brokerage and investment accounts: request a date-of-death valuation statement from the firm, and confirm in writing that the cost basis was stepped up when the account was retitled.
- Business interests, vehicles, collections and other personal property: get a qualified valuation for anything of significant value.
- Retirement accounts: keep the date-of-death statement, and get tax advice before taking distributions, since the timing rules for beneficiaries are strict.
- Keep everything together: the death certificate, the beneficiary deed or account designation, and each valuation belong in one file you can hand to a tax preparer years later.
These steps belong in every estate settlement. In probate they support the inventory the court requires; in a trust they support the trustee’s division and accounting; and when property passes outside both, they may be the only record of value that exists. Our estate settlement, probate and trust administration pages describe how we help families through the period after a death, and our estate planning practice can build the valuation step into the plan before it is needed.
Helpful resources
26 U.S.C. § 1014, basis of property acquired from a decedent · Cornell Law School Legal Information Institute (nonprofit publisher of the U.S. Code).
26 U.S.C. § 691, income in respect of a decedent · Cornell LII.
IRS Publication 551, Basis of Assets · Internal Revenue Service (federal agency).
IRS Publication 590-B, Distributions from IRAs · Internal Revenue Service.
IRS FAQ: Gifts and inheritances · Internal Revenue Service.
Section 461.025 RSMo, beneficiary deeds · Missouri Revisor of Statutes (state agency).
Section 473.233 RSMo, probate inventory · Missouri Revisor of Statutes.
Related on this site: The Inherited House Nobody Appraised · A Missouri Executor’s Form 1041 Obligations · Comparing Missouri Estate Planning Tools
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This article is for educational purposes only and is not legal or tax advice. Reading it does not create an attorney-client relationship with Haake Law Group PC or Derek R. Haake. Tax and property laws change, and their application depends on the facts of each estate. Verify current rules with the IRS or a qualified tax professional, and consult an attorney about your situation.