Learn The Value of An Inherited Home (Probate, Estates, Etc.) | Dolinski (2023)

Disposition of assets under a will or probate. Estate tax liability. Or, you plan to sell an inherited home. There are many situations where you need to know the value of an inherited home.

In this article, we’re going to explore a few common questions people have about determining an inherited home’s value, how you can get your home’s value, and the method professionals use to produce an accurate opinion of price that courts and the IRS expect.

Let’s get started.

Do I Need The Value of An Inherited Home?

As we’re not attorneys, lawyers, or Certified Public Accountants, we recommend that you seek professional and legal counsel in the state where the inherited property is located, if you’re wondering this question.

Every state has a set of different rules and laws when it comes to inherited property, the vehicle used to inherit the home, and for setting a cost-basis.

So, whether you’re required to get an opinion of price will depend on your situation.

However, there is a high probability you will, at some point, require an opinion of value for an inherited home.

For example, real estate inside of Michigan probate, even if there is a will, is going to require a valuation. You value a home in probate the same way you value any home. Again, seek legal counsel on this matter.

Cost-Basis Of An Inherited Home

Did you know special tax rules apply to selling a home that is inherited?

For an inherited home, you will need to know the cost basis, often called the stepped-up basis.

Rather than setting the basis at what the owner paid for a home, an inherited home’s stepped-up basis is the fair market value of the property at the date of the owner’s death.

In other words, if you inherit a home and later sell it, you pay taxes based on the profit or loss created from the difference in value of the property as of the date of death and the sale price.

For example, you inherit a home from your parents. Your parents paid $80,000 for the home back in 1974.

Upon the death of your parents, the home is passed to you. The home’s new cost basis is set based on the fair market value at the date of death for the last owner of the property.

Let’s say your property appraised for $225,000. You then sell the home one year later for $235,000. Your basis is the market value, or $225,000. Subtract that amount from the sale price to find your gain or loss for tax purposes.

In our example, there is a $10,000 gain.

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Can I Just Use The Zestimate (or Other AVM)?

It is tempting to use an automated value model platform, like Zillow’s Zestimate, for finding the value of an inherited home.

Avoid this temptation.

Automated value models can be wrong and unpredictable. There are often large margins of error between the real market value and what these fancy computer algorithms spit out.

For example, Zillow acknowledges and publishes their margin of error rate. According to their website, the median error rate of a Zestimate is 6.9 percent for off-market homes.

Learn The Value of An Inherited Home (Probate, Estates, Etc.) | Dolinski (1)

In statistical terms, this means that the average home falls within an error of 6.9 percent, either above or below a home’s true market value.

That doesn’t sound too bad…

On a $200,000 home, that is nearly a $12,000 margin of error. Not exactly a small number.

On top of that, only 50 percent of the homes fall within a 6.9 percent margin of error.

The other half are significantly higher in the margin of error.

If you’re one of the unfortunate homes outside the median, your Zestimate could be off by 20 percent or more for all you know.

Zillow acknowledges an accurate Zestimate is dependent on your area, data available, square footage, etc.

A rural area, for example, will likely have limited data on past home sales. Resulting in a margin of error that is astronomical and unreliable.

While steps have been made to improve the model over the years, it can’t keep up with the current conditions of our real estate market.

These automated models can’t do what the human element can.

Hire a professional.

The Consequences Of A Wrong Value

There can be some serious consequences for undervaluing or overvaluing an inherited home.

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From a tax perspective, if you overvalue a home, and therefore, give the home a higher stepped-up basis than it should be, you will underpay your taxes. The IRS won’t be happy about that.

If you undervalue an inherited home, you overpay on taxes. The IRS won’t care, but you will.

As an executor or personal representative of an estate, you have an obligation to value the home properly. A wrong valuation opens yourself up to litigation. Probably not something you want.

So while a 6.9 percent margin of error might seem small, don’t be fooled. It can come with some serious unintended consequences.

Protect yourself. Do it right. Work with a professional.

Who Can Find The Value?

Finding an inherited home’s value — really any home’s value — takes a specific skill set and knowledge.

There are generally two types of people who are qualified enough to provide an accurate assessment of what your home is worth. They are: (1) a licensed Real Estate Appraiser or (2) a certified Pricing Strategy Advisor Real Estate Agent.

The former is preferred, more qualified and may be required to determine the value of an inherited home. However, they also charge an appraisal fee.

Depending on the situation, an accurate opinion of value can be produced for free by a certified PSA real estate agent.

Learn The Value of An Inherited Home (Probate, Estates, Etc.) | Dolinski (2)

If you have a realtor perform a comparable market analysis, please, please make sure they are a certified pricing strategy advisor.

Your average real estate agent won’t have the skills and knowledge to offer an accurate opinion of value. Instead, you will receive a ballpark estimate with a wide margin of error.

A report and outcome that is equivalent to seeking out a home’s value using an automated value model, like the Zestimate.

The PSA real estate agent has a higher level of training and understanding when it comes to home valuation methods.

Much of the content taught while earning a PSA certification is equivalent to what appraisers do.

Find The Value of Inherited Property

You find the value of an inherited property the same way you find the value of any home. It doesn’t matter if you’re trying to find the value of a home in probate in Michigan or you’re a traditional seller looking to sell their home.

Let’s briefly look at the methods appraisers and a certified PSA agent uses to create an opinion of price for an inherited home.

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The most common method for a single-family residential property is the sales-comparison approach.
Appraisers will also explore the cost method, but often reconcile the opinion of value with the sales-comparison approach.

A sales-comparison method involves picking similar properties to the property you are trying to establish a value for, and then, making adjustments to each comparable property, as necessary.

Picking Comparables

The first step to successfully producing an accurate opinion of a home’s value is to find comparable homes.

In general, appraisers and agents will look for homes that sold in the last six months, are within one mile of the subject property, have a similar layout, square footage, and updates.

Of course, this isn’t always possible.

Location and market conditions will change the selection criteria.

For example, picking homes that sold in the last six months is common for a stable real estate market. In a hot seller’s market, where prices are climbing quickly, an appraiser may shorten this timeframe to three months.

It’s this selection criteria that separates the human element from the computer that spits out automated values. Algorithms are incapable of adjusting for these kinds of conditions.

In cases where perfect comparables can’t be selected — which is most of the time — it’s up to the appraiser or real estate agent to use their knowledge and training for selecting suitable properties.

Making Adjustments

Once you have selected your comparable properties, it’s time to make adjustments. You can make adjustments through a market-based or a cost-based approach.

All adjustments are made to the comparable properties rather than the subject property. This means value is added or subtracted from a comparable property based on the features of that home compared to the subject property.

For example, assume that your property has a fully finished basement. The comparable property does not.

The adjustment made is a subtraction in value of the comparable property. The subject property remains.

Learn The Value of An Inherited Home (Probate, Estates, Etc.) | Dolinski (3)

You follow this method for every adjustment and for every comparable.

Once complete, the next step is to reconcile the approach and determine the value of the home.

The sales-comparison approach conducted by a licensed real estate appraiser is the most accurate approach to finding your home’s value.

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Income Generating Real Estate

I would be remiss if I didn’t mention the method for valuing income generating real estate. There are some circumstances where people will inherit an income generating property, such as a duplex, a commercial property, or land.

For income generating real estate, the method used will vary based on the type of property and its use.

As an example, a single-family home that is rented can be considered income generating real estate. However, the most common valuation method is still a past sales comparison approach.

On the opposite end is a commercial strip mall with multiple leases and tenants. In this case, you will need to use an income-based approach.

Here you will look at the net income produced by the property and multiply it by different variables, like the cap rate.

Gray area is introduced when the property falls between the two opposite ends. For example, a quad-plex may use a past sales comparison or income approach.

It will be dependent on the circumstances and available data.

Value At Date of Death

Whether it’s for probate, taxes, or some other reason, there are times where you need to know the value of a property from some time ago.

For example, when trying to establish a cost-basis for estate tax liability purposes, you will need to understand the value of an inherited home at the “date of death”. You need to know how much the home was worth on the day of a decedent’s death.

Unlike other asset classes, like stocks, it can be hard to access historical data on a home’s value. Automated value models only give you a real-time current opinion of value.

In this case, your only option is to contact a real estate professional or appraiser. They will be able to provide a historical opinion of a home’s value.

Exactly what you will need for the tax authorities and courts.

Sell An Inherited Home in Michigan

At the Dolinski Group, we specialize in helping clients sell their inherited homes. That might mean a home going through probate, a home that was passed through a trust, or a home that was inherited through a quitclaim deed.

The vehicles for inheriting a home are vast. Whatever method, we can help you sell your inherited home in Michigan.

From our traditional program to our cash-offer program, we have an option that can fit your goals and objectives.

Get in touch with us today to get started with the process and learn the value of your inherited property.


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