# How the IRS values and audits inherited homes > Real estate makes up a third of what parents leave behind, but most heirs don't know the tax rules. - Title: How the IRS values and audits inherited homes · Kiplinger - Summary: Real estate makes up a third of what parents leave behind, but most heirs don't know the tax rules. Get a formal appraisal to document your inherited home's… - Keywords: inherited homes, stepped-up basis, estate tax, capital gains tax, home appraisal, irs valuation, fair market value, estate planning, tax basis, wealth transfer, property valuation, retrospective appraisal - Source: Kiplinger — https://kiplinger.com/taxes/how-the-irs-values-and-audits-an-inherited-home - Published: 2026-09-22T14:07:00+00:00 - Read time: 3 min - Topics: inherited homes, stepped-up basis, estate tax, capital gains tax, home appraisal, irs valuation, fair market value, estate planning, tax basis, wealth transfer, property valuation, retrospective appraisal ## The great wealth transfer is here Baby boomers are expected to pass tens of trillions of dollars to heirs in coming years. Real estate accounts for about one-third of what parents plan to leave behind. ## Most heirs are confused about taxes A Kiplinger survey found that 43% of parents and 33% of heirs don't know what tax bills they'll face when inheriting a home. ## The stepped-up basis rule When you inherit a home, its tax basis resets to fair market value on the owner's date of death. This protects heirs from capital gains tax on appreciation that happened before they inherited it. ## You need to document the value Heirs must document the home's date-of-death value to claim the stepped-up basis on future tax returns. Without proper documentation, you lose this tax advantage. ## Property tax assessments don't work Local assessments are usually much lower than actual market value and use outdated information or automated algorithms. Using them as your baseline exposes heirs to unnecessary capital gains tax. ## Real estate agent estimates fall short Comparative market analyses from real estate agents lack the formal, standardized methodology that federal tax law requires. The IRS may reject them during an audit. ## Get a formal appraisal The IRS gold standard is a formal appraisal by a licensed or certified real estate appraiser who specializes in date-of-death valuations. This is what will hold up in an audit. ## Retrospective appraisals work too A qualified appraiser can evaluate the home today and use historical market data and comparable sales to determine what it was worth on a specific past date, like the date of death. ## What makes an appraisal valid The appraiser must have professional credentials, follow the Uniform Standards of Professional Appraisal Practice, and include detailed scope with market comparisons and the home's physical condition at the time. ## Appraisals cost between 500 and 1500 Formal inherited home appraisals typically range from 500 to 1,500 dollars depending on area, size and property complexity. This is modest compared to potential tax penalties. ## Quick sales might skip appraisal If heirs sell within 6 to 12 months in an open-market transaction, the IRS often accepts the actual closing price as evidence of date-of-death value. A separate appraisal may not be necessary. ## IRS penalties are steep If audited and the IRS finds an unverified or inflated basis, penalties range from 20% for substantial misstatement to 40% for gross misstatement, plus compounding interest on back taxes. ## Start the conversation now Talk with your family about inheritance today. Identify a certified appraiser, organize home records, and explain how the stepped-up basis works to ease confusion later. ## Keep detailed records Maintain a folder with home improvement receipts, closing documents, property deeds, and appraisal fees. These documents help prove the home's tax basis if the IRS questions it. ## Estate planning is an act of care Properly protecting your home's value ensures your legacy remains the true gift you intended. You give heirs space to grieve without financial uncertainty. ## Key takeaway Get a formal appraisal to document your inherited home's date-of-death value and protect yourself from IRS penalties.