IRS Form 706 & Estate Tax Appraisals: Valuation for Federal Returns

When someone passes away, their estate may owe federal estate taxes. The tax is based on the total value of all assets as of the date of death. Real property valuation is often the single largest item. An accurate and defensible appraisal is essential to the IRS Form 706 (estate tax return) and can save the estate tens of thousands in unnecessary taxes.

This guide explains what an IRS estate appraisal is, when it's required, and how it protects the estate.

The Stepped-Up Basis Rule

The most important concept in estate appraisals is stepped-up basis. This is a significant tax benefit for heirs.

How It Works:

If your parent bought a house in 1985 for $80,000 and it's now worth $450,000: - During their lifetime: If they sold it, they'd owe capital gains tax on $370,000 ($450,000 − $80,000) - After death: If you inherit it, your basis steps up to $450,000 (the fair market value at death) - If you sell it immediately: You owe capital gains tax on $0 (you get a $450,000 basis for $450,000 proceeds)

The tax savings can be enormous. This is called the "step-up in basis" and it is one of the few remaining large tax benefits for inheritors. But it only works if the property was reported correctly on the estate tax return (Form 706).

When IRS Form 706 Is Required

A Form 706 (U.S. Estate Tax Return) must be filed if the gross estate exceeds the federal exemption:

• 2024–2025: $13.61 million per person (indexed annually)
• 2026+: Expected to drop to ~$7 million (unless Congress acts) due to sunset of the 2017 Tax Cuts and Jobs Act

Your estate includes: - Real property (home, land, rental properties) - Financial accounts (bank, brokerage, retirement) - Business interests - Life insurance proceeds - Personal property (vehicles, collectibles, jewelry)

Even if you think your estate is below the threshold, file if you're anywhere close. Understating the estate can trigger IRS audits and penalties. The cost of a proper appraisal ($500–$1,500) is cheap insurance against an IRS audit costing tens of thousands.

When Real Property Must Be Appraised

An appraisal of real property is required on Form 706 if:

1. The gross estate exceeds the exemption — all real property in the estate must be appraised and reported
2. There is any question about value — if the property is unique, rural, has unique improvements, or market value is unclear, an appraisal supports the reported value
3. The estate is audited — the IRS may demand an appraisal to substantiate the value you reported. Having one before the audit is far better than having the IRS hire an appraiser during the audit.

Example: An elderly person owns a 5-acre parcel in rural Georgia, bought 30 years ago for $15,000. Current value? Unknown. The estate files Form 706 claiming a value of $50,000 based on a quick guess. The IRS audits and hires its own appraiser, who values it at $120,000. The family now owes estate taxes on $70,000 of additional value they never reported, plus interest and penalties.

A professional appraisal upfront would have prevented this.

The Date of Death Valuation

Critical rule: Real property is valued as of the date of death, not the date the estate is settled or the property is sold.

Date of Death Example: - Person dies on March 15, 2026 - Estate is settled and property sells on September 15, 2026 for $500,000 - The estate tax return reports the property at its fair market value on March 15, 2026, not $500,000

Why? The IRS's position is that at the moment of death, the person's assets have a certain value. That value, not the eventual sale price, is what's subject to estate tax.

The appraisal must be as of the date of death, even if it's months in the past when the appraisal is ordered.

Appraiser Qualifications for Estate Appraisals

Not every appraiser is qualified for estate work. The appraiser must:

• Be licensed and certified in the state where the property is located
• Meet ASA or Appraisal Institute standards for professional credentialing
• Have experience with estate appraisals — some appraisers only do mortgage work and lack the rigor needed for tax-facing valuations
• Be prepared to defend the appraisal if audited. The appraiser may be called to testify or provide a rebuttal if the IRS challenges the value.

Hint: If the appraisal is only for the executor's information (internal use), any licensed appraiser works. If it's going to be reported on Form 706 and potentially audited, hire an appraiser with estate appraisal experience and strong USPAP credentials.

What the IRS Looks For

On audit, the IRS will scrutinize:

1. Comparable sales — Were the comps in the same market? Similar size and condition? Recent?
2. Adjustments — Did the appraiser adjust for lot size, condition, location? Are the adjustments reasonable?
3. Market analysis — Did the appraiser account for market conditions at the date of death?
4. Cost approach — For unique or specialized properties, did the appraiser use the cost approach as a check?
5. Professional independence — Is the appraiser a disinterested third party, or someone with a stake in the outcome?

Common Estate Appraisal Scenarios

Scenario 1: Farm or Acreage

Challenge: A 150-acre farm in rural Georgia. Limited comps. Value is unclear.

Appraisal approach: - Income approach (what would a tenant farmer pay to lease it?) - Market approach (other rural land sales) - Cost approach (replacement cost of improvements) - May also consider conservation easements or agricultural zoning restrictions

The appraiser's job is to synthesize these to reach a defensible value, documented well enough to withstand IRS scrutiny.

Scenario 2: Waterfront Property

Challenge: A lakeside cabin. Unique location. Comparables are limited.

Appraisal approach: - Market approach with careful adjustment for waterfront premium - Analysis of view, access, and seasonal demand - Careful documentation of why adjustments are made - Cost approach as a secondary check

Scenario 3: Unique or Historic Property

Challenge: A historic property or unusual home that doesn't fit standard categories.

Appraisal approach: - Detailed analysis of special features - Market search for similar historic or unusual properties - Expert understanding of how those features affect value - Careful documentation of methodology to survive IRS scrutiny

The Appraiser's Report for Estate Purposes

An estate appraisal report must include:

• Identification of the property — address, legal description, tax parcel number
• Date of death — the date the valuation applies to
• Detailed inspection — photos, measurements, condition assessment
• Market analysis — comparable sales with detailed adjustments
• Three approaches to value — sales comparison, cost, and (if applicable) income
• Reconciliation — the appraiser's reasoning on which approach is most reliable
• Final opinion of value — a single number, or a range
• Appraiser's certification — swearing that the opinion is unbiased and follows USPAP
• Assumptions and limiting conditions — what the appraisal is based on

The report must be detailed enough to serve as evidence if the IRS audits and the estate must defend the value in tax court.

Tax Considerations: Stepped-Up Basis in Action

Example Estate Scenario:

Person A dies with an estate of $11 million: - Primary home (inherited by daughter) - Rental property (to be sold) - Securities and bank accounts

The home: - Bought for $200,000 in 1990 - Appraised at $1.2 million at date of death - Daughter inherits; her basis is $1.2 million - If she sells it for $1.3 million in 2 years, she owes capital gains tax on only $100,000 - Without step-up, she'd owe tax on $1.1 million if she inherited the basis from her parent's 1990 purchase

The rental property: - Bought for $400,000 in 2000 - Appraised at $850,000 at date of death - Estate sells it 6 months later for $850,000 - Estate owes no capital gains tax (sale price = stepped-up basis) - If the property had been sold while the original owner was alive, and sold for $850,000, the original owner would have owed capital gains tax on $450,000

The stepping-up is not automatic. It only applies if: 1. The property is reported on Form 706 at its fair market value 2. The fair market value is accurately appraised and documented 3. The estate is handled correctly (stepped-up basis does not apply to community property or certain transfers)

Understating or miscalculating the appraisal means the beneficiary loses the benefit of the step-up.

Scott D.W. Wiley's Estate Appraisals

I provide professional appraisals for estate tax returns (Form 706) and probate administration. My appraisals are USPAP-compliant, detailed, and defensible to the IRS. I work with executors, attorneys, and tax professionals to ensure accurate valuations and compliance.

Request an Estate Appraisal

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FAQs: IRS Form 706 & Estate Appraisals

Do I always need an appraisal for Form 706?

If the gross estate exceeds the federal exemption ($13.61 million in 2024), yes — all real property must be valued. If you're below the threshold but close, or if property value is unclear, get an appraisal anyway. It's far cheaper than an IRS audit.

How is date-of-death value determined if the property hasn't sold?

A professional appraisal estimates the fair market value as of the date of death, based on comparable sales from around that time, market conditions, and the property's condition at that moment.

What if the property sells for much more or less than the appraisal?

The estate tax is based on the appraised value (at date of death), not the sale price. If the sale price differs significantly, document why in the estate files. Market changes between death and sale are expected.

Is an appraisal an opinion? Can it be wrong?

Appraisals are professional opinions, not exact figures. An appraiser's opinion can differ from another appraiser's, or from the eventual sale price. But a USPAP-compliant appraisal is defensible to the IRS, which is the standard that matters for tax purposes.

What's the difference between estate appraisal and mortgage appraisal?

Mortgage appraisals value the property for lending purposes and are ordered by the lender. Estate appraisals value the property as of a specific date (date of death) for tax purposes. They use different methodologies and standards. An estate appraisal is more detailed and comprehensive.

If the IRS audits, can they challenge my appraisal?

Yes. The IRS may hire its own appraiser or argue that your value is too low. If your appraisal is USPAP-compliant and well-documented, it carries much more weight in a dispute than a guess or rough estimate.

Can the same appraiser do the appraisal and represent us in an audit?

No. The appraiser's role is to provide an independent value opinion. If the IRS challenges the value, your tax attorney or CPA represents you. The appraiser can testify or provide a written rebuttal, but cannot be an advocate.

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Need an estate appraisal for Form 706? Request an appraisal for estate tax and probate administration.