Estate 1041 reporting sale of home - question on basis

The client: An estate filing a 1041 to report the sale of the decedent's home.

Feb 2017: Decedent dies.

April 2017: Date of death appraisal of home comes in at 700K.

Sept 2017: Home is sold for $800K.

There's a rule of thumb that fellow accountants have taught me: if an estate sells assets within 6 months, you can use the sale price as the cost basis, rather than the appraised value. This would result in $0 gain obviously.

However, IRS instructions don't seem to echo that rule of thumb. Instead I see instruction to use the appraised value.

1. Is there anything in the IRS regs that allows using the sale price rather than the appraised value?
2. If so, what if more than 6 months have passed from the date of death? In this case, 7.5 months passed.

It's not a rule of thumb. See §2032 and 2032A re alternate valuation date.

See page 2 of the form instructions. https://www.irs.gov/pub/irs-pdf/i1041sd.pdf

Section 2032

(c) Election must decrease gross estate and estate tax. No election may be made under this section with respect to an estate unless such election will decrease—
(1) the value of the gross estate, and
(2) the sum of the tax imposed by this chapter and the tax imposed by chapter 13 with respect to property includible in the decedent’s gross estate (reduced by credits allowable against such taxes).

An appraisal is just an educated guess. The sale within six months is sort of a rule of thumb that is valid only in a stable real estate market. The question you need to answer is what the real estate market in that area was doing in the 7.5 months. Easiest first step is to have client ask appraiser if he feels like changing his opinion given the sales price.

To Frankly and Nilodop. Thank you. But the "rule of thumb" I'm speaking about is different, although similar.

This isn't the alternate valuation under 2032. There are similarities between that and this rule of thumb, but it's different.

What Dennis2 said is similar to what I've always heard:

The sale within six months is sort of a rule of thumb that is valid only in a stable real estate market.

Another way I've heard it described, from a website called alllaw.com: "If you sell the property within six months or a year after the previous owner’s death, the IRS will usually accept the selling price as the fair market value at the date of death. That’s assuming, of course, that the sale was made fairly and on businesslike terms."

My question: is there a true IRS source on this rule of thumb?

No. You put a number on a tax return, they have the right to question and the ball is in your court.

So if 2032 doesn't work, then the date of death valuation applies. As was pointed out, client can pick a number that works for him and you take your chances.

And it can't hurt to think about section 6662.

I personally, based upon the OP facts, would trend the sales price based upon a reliable indicator of property value changes. I use Case Shiller. I would use the sales price and reduce the value by the increase over the 8 months. I definitely would not use the $700,000. Buyers determine value.

The only draw back is this is for larger cities.

I personally, based upon the OP facts, would trend the sales price based upon a reliable indicator of property value changes. I use Case Shiller.

Since there is no guidance in the code or regulations regarding using a basis other than that at the date of death, or the alternate valuation date defined in 2032, what is the point in using some arbitrary index that is not supported anywhere in the code, regs, or IRM?

If TP doesn't like the date of death number and decides to make up a different basis to avoid tax, it doesn't really matter how scientifically the number was derived. The purpose of the different number is to avoid tax. The methodology used to arrive at a meaningless number is no defense.

Similarly, if TP doesn't like the value determined by a licensed real estate appraiser, a home-brew method using an index that results on no tax is not likely to convince IRS that the appraiser got it wrong.

The methodology used to arrive at a meaningless number is no defense.

What is a better determination of value 8 months later than the purchase price of the property?

Buyers know value better than appraisers do. And we all know if you hired 2 different appraisers you would have gotten 2 different numbers.

Buyers paying $800,000 for a residence is not some home brew method of determining value.

not likely to convince IRS that the appraiser got it wrong.

unless the local market is such that the increase is realistic, the appraiser knows he got it wrong. In general you will not find an appraiser so wedded to his original opinion (which if adjusted no one will ever see) that he will essentially give up any hope of future business.
Picture the guy on the stand defending his opinion in a divorce proceeding when attorney waves this sucker in his face.

Actual sale is evidence he did not have and is fully entitled to use and earn another fee...♫

What is a better determination of value 8 months later than the purchase price of the property?

An actual sale price is the best determination of value... at the time of the sale. As was pointed out by Mr. Whistle, a licensed real estate appraiser uses all the evidence at his disposal to make a determination. New evidence. albeit 8 months later, may help him adjust his appraisal up or down, or no change. Neither a TP nor a tax practitioner can reliably make such a determination, elsewise what's the purpose of having an appraiser at all?

I'll bet that if the house sold for $600,000 the appraisal would have been used.

An actual sale price is the best determination of value...

Perfect, that is exactly what we have...

I would have a big issue with the original appraisal. It's wouldn't be right on the money but close to zillow.com and see what number it comes up with the research further and there will be a thread that shows it's value over a time span. The ratio what zillow says it was worth at date of death and the sale date will give you a value as of date of death that I would be comfortable with. (Zillow is OK with a cookie cutter subdivision but goes off the rails when the neighborhood is full of a hodge podge of homes like mine with new homes, very old homes, big homes and small homes with interspersed farmland)

An actual sale price is the best determination of value...

Perfect, that is exactly what we have...

You know you're taking the quote out of context. Not the first time. It does nothing to further your argument.

You know you're taking the quote out of context.

I am not. I am making reference that the best determination of value is sales price, not appraisals. But, nice try makbo.

I am making reference that the best determination of value is sales price, not appraisals.

The determination of value must be at the date of death, but in this case the property was held and appreciated during the ensuing 8 months before it was sold. The only way to determine value at a particular date when a sale did not occur on that date is through an appraisal.