Inherited house - cost basis, no appraisal

[kamckinley]

Hi Everyone. Client inherited a house from his father, put $12,000 of improvements in it, then sold it three months later. My question is regarding the cost basis. He did not get an appraisal after his dad passed away.

How do you substantiate cost basis when no appraisal was done? If he hadn't done the improvements, this wouldn't be an issue, I would just use the sale price for the cost basis. But since he did the improvements, do you just assume cost basis was $12K lower so he can take a loss for the cost of the improvements? Comparables and value estimates from real estate experts were all over the board, so that didn't really help.

Thanks!

[ATSMAN]

For step up in basis purpose only, I have used the county assessed value when a property appraisal is either too expensive or taxpayer is unable to do for any given reason. I do document how the cost basis was arrived including a copy of the tax valuation for the year of death. This is NOT the most accurate method but I have not seen IRS challenge it in my practice.

[Burke]

You can take an average of the comparables, (were they really on like properties and neighborhoods?) and compare those to the last tax assessment from the county/city to get an estimated value. If he sold it in 3 months, I would assume the $12K of improvements would increase the FMV at DOD at least at 100% of the expense, and would be represented by the sale price. Sometimes those "improvements" are just repairs. But a savvy buyer would have had those made or used as part of the negotiated purchase price.

[Lion]

If he sold it three months later, that was probably his cost basis. Unless the housing market is rising or dropping more rapidly where he is than the rest of the country. After only three months, his cost basis is the DOD value PLUS his $12,000 of improvements. His cost basis is most likely his selling price. He may have a small loss for selling commissions and fees.

[kamckinley]

Thank you everyone, I appreciate the responses!