Appraisal Costs for inherited property

[Aussie]

Can the cost of appraisal for inherited rental property be deducted on tax return? The appraisal was done to establish FMV at time of death.  The rental property had tenants at death and continued to rent after I took ownership.

Also can the cost of appraisals to establish cost basis be deducted for inherited non rental property on 2022 taxes if the properties were held and will be sold in 2023?  

How are these appraisals treated?  Just an expense incurred and cannot be included on tax return for any year? Or can they be added to cost basis, deducted or included as a type of expense?

[tagteam · Accepted solution]

The appraisal costs you mentioned (to determine FMV) would absolutely be deductible on an estate income tax return (Form 1041).

If you are not filing a 1041, you might want to simply add the fees to the basis of the property.

[Aussie]

Thank You for your quick reply!

I am not filing 1041 for this rental property. 

To clarify when you say I may want to add the appraisal fee to basis of the property, are you referring to the FMV basis which is used for depreciation schedule for the rental property? Or something else?

There are actually a few inherited properties involved here, one of which is the rental property in question above.  In addition on how to handle the appraisal fee for the rental property, for those properties that are not being rented but will be sold in 2023, are you saying the appraisal fee's can be included in the cost basis of the properties? I am not doing 1041 return as my father's trust did not earn any income as all assets were dispersed in 2022.  I was successor trustee as well as sole surviving beneficiary so his estate was easy to administer.  So one property was maintained as rental and the others are considered additional properties that are not being used for anything. One is up for sale with contract pending and I still need to clear out the homestead property.

Thanks in advance for your clarifications.

[tagteam · Accepted solution]

I mentioned the estate/trust aspect because a date-of-death appraisal in order to get an estimate of the FMV of the property is not a cost that would commonly be incurred by an individual (i.e., if held outside of the estate or trust).

Regardless, you should be able to add the cost to the basis of the property (for the rental in terms of the depreciable basis and to the "inherited" basis for the personal use property) since you need to know the FMV for when a sale occurs and to figure your depreciation deduction for the rental property.

[Carl]

Can the cost of appraisal for inherited rental property be deducted on tax return? The appraisal was done to establish FMV at time of death. The rental property had tenants at death and continued to rent after I took ownership.

Yes. Since you had the appraisal done for the primary purpose of determining FMV on date of death, that appraised value is what your cost basis is now. To that, you can add the cost of the appraisal. That will be your new cost basis for depreciation, as well as for determining loss or gain when you sell the property.

I note you use the word "deducted" quite a bit. But I'm assuming you understand how this works for depreciation, as well as determining loss/gain upon sale of the property.

[Aussie]

Yes, I understand now as I was unsure if the cost of the appraisals could somehow be reflected as an expense or deduction on my tax return. I understand now that the cost of the appraisals are not expensed or claimed as deduction, but rather added to FMV for depreciation of rental property and added to cost basis for other properties which will be used to determine capital gain or loss upon the sale of each property.  Do I have this right?