Valuation of Real Property in Estate Planning

As anyone who has owned real estate in Virginia during the last decade knows, property values increased sharply for several years before experiencing the sharp market correction of five years ago. While some states were hit even worse, many of the Commonwealth's homeowners lost up to half of the equity in their homes. These events smashed an enduring piece of conventional wisdom: that real property never loses its core value.

What many Virginians may not have considered at the time is the disastrous effect that the real estate crash had on their estate plans. Consider the person whose home was valued at $500,000 with a $350,000 mortgage in 2005. Today that same property is appraised at $300,000 and the mortgage may only be paid down to $325,000. What was once a $150,000 ($500k – $350k) net asset, is now a $25,000 ($300k – $325) net liability. This dramatically changes the picture to an elderly couple who were planning to leave their residence to their children.

However, the decline has resulted in some federal tax relief for estate planners. For the purposes of federal estate taxes, a piece of real estate is appraised at fair market value at the time of death. However, the IRS doesn't require Form 706:"http://www.irs.gov/pub/irs-pdf/i706.pdf" to be filed for nine months. That would mean that in a declining real estate market, a beneficiary could settle his or her taxes based on a property value that is significantly higher than the current market. To remedy this situation, IRS rules allow for a delay of up to six months in the recorded date of death. This is known as the alternate valuation date. It's contained in Code Section 2032.

Example:

When an individual dies in March, he or she may leave a $500,000 home—based on current fair market value—to a beneficiary. However, when the executor files Form 706 nine months later (December), the value has declined to $400,000. By special valuation rule, the executor can change the date of death to one that's closer to the filing date (September).

Naturally, this practice wouldn't be beneficial in an ascending market, in which case the real estate's value at the actual time of death would be lower. If you have questions as to how to value property, or whether or not you should file an alternate valuation date, you should seek the services of a knowledgeable Virginia probate and estate planning attorney.