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If you recently inherited a house, you may assume its tax value was fixed on the day your loved one died. For most people, that’s true. Estates that owe federal estate tax, however, may be able to use the home’s value six months later instead. If the property declined in value during that time, that election could reduce estate taxes. Missing the deadline means losing that opportunity.
Why the Home’s Value Isn’t Always Fixed
By default, an inherited home’s value is determined as of the owner’s date of death. For estates subject to federal estate tax, that value is generally used to calculate the estate tax. In many cases, it also becomes the beneficiary’s tax basis, which is why many people assume the home’s value is fixed once it has been appraised.
For estates that owe federal estate tax, however, the executor may be able to elect an alternate valuation date. This allows the estate to use the property’s value six months after the owner’s death, or its sale price if the property is sold during that six-month period. If the home’s value declines during that time, the election may reduce the estate’s federal estate tax.
The election is subject to important limits. It is available only if using the alternate valuation date reduces both the value of the gross estate and the federal estate tax owed. In addition, the election applies to all eligible assets in the estate. The executor cannot choose a different valuation date for just one asset.
Because of these rules, the decision belongs to the executor rather than an individual beneficiary. The alternate valuation date is only relevant for estates that are required to pay federal estate tax.
If you inherited a property, a financial advisor can help you evaluate the tax implications before making a decision.
The Cost of Missing the Six-Month Window
To see how much this rule can matter, assume you inherit a house worth $2 million on the date the owner dies. Six months later, the home’s value has fallen to $1.7 million, a decline of $300,000. The rest of the estate is worth $13.5 million, and the executor is deciding whether to use the alternate valuation date.
| Date-of-Death Valuation | Alternate Valuation (6 Months Later) | |
|---|---|---|
| Value of the house | $2,000,000 | $1,700,000 |
| Value of remaining estate assets | $13,500,000 | $13,500,000 |
| Total gross estate | $15,500,000 | $15,200,000 |
| Amount above the 2026 federal exemption ($15 million) | $500,000 | $200,000 |
| Estimated federal estate tax (40% top rate) | $200,000 | $80,000 |
In this example, using the alternate valuation date reduces the estate’s federal estate tax by $120,000. The difference comes from valuing the home six months after death instead of on the date of death.
That opportunity does not remain available indefinitely. If the executor does not make the election within the required time frame, the estate generally must use the date-of-death value instead. In this example, that means losing the potential $120,000 in tax savings.
The alternate valuation date is available only for estates that qualify, and the election must be made correctly and on time. Once that window closes, the estate generally cannot use the lower value later.
What You Can Do Before the Window Closes
If the estate qualifies, the executor must decide whether to elect the alternate valuation date before the filing deadline. The election is made on Form 706, which is generally due nine months after the owner’s death, although a six-month extension may be available. Once the election is made, it generally cannot be changed.
Before making that decision, the executor should compare the results using both valuation methods. Because the election applies to the entire estate rather than a single asset, it only makes sense if it reduces both the estate’s overall value and the federal estate tax owed.
Executors of taxable estates often work with an estate planning attorney, a tax professional or a financial advisor to calculate whether the election provides a benefit before the deadline passes.
Tips for Estate Planning
- Estate planning can be complicated, but a financial advisor may be able to help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Inheritance isn’t usually considered income, but certain types of inherited assets can have tax implications. Before you spend or invest your inheritance, read more inheritance taxes and exemptions.
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