Determining the “stepped up” FMV of an inherited home on the deceased person’s date of death that needs to be cleaned out and some repairs

[rdcoseril]

My question:  On the date of the person’s death, the inherited house in question still needed to be emptied out by a junk removal company (a semi-hoarding situation), professionally cleaned, a section of severely stained carpeting removed and repairs made (to a non-working water heater and replacing a section of flooring underlayment) before it was put on the market.  There was also not a working refrigerator in the home.

1. Should these tasks mentioned above be considered when determining the FMV of the house on the date of the decedent’s passing?  (The cost of the work to get the house ready to sell was about $6,500 and the house sold 7 months after the person’s death.)
2. In this scenario, is the FMV on the date of death considered to be lower than the actual price at which the house was sold because of the things that needed to be done to the house to make it more marketable?
3. More specifically, is the “stepped up” FMV at the time of the person’s death what the house could have been sold at in its actual condition on that date or is the “stepped up” FMV considered to be the what the house was sold at after the necessary pre-sale cleanup/repair preparatory work was completed? 

If the IRS has addressed this question, I was not able to find an answer in either publications 551 or 523.  If anyone knows where the IRS addresses the question of how to determine the FMV of an inherited house that needs some work before being sold, please provide me with a reference.

[DianeW777]

The stepped up basis, or fair market value (FMV)  is the amount the house would sell for on the date of death based on real estate sales of similar property in the area and in the condition of the inherited home.

The expenses to prepare the home for sale can be added to that FMV or included as part of your selling expenses, both of which would reduce or eliminate gain. Many of your repairs were capital improvements, and some maintenance. Capital improvements would definitely be added to the FMV (anything that is part of the structure including remodel) and maintenance costs would be selling expense. The end result of gain or loss will be the same using your total expenses.

• See IRS Publication 523 - Worksheet 2, Step 2 Selling Expenses 
  • For maintenance costs it would fall into the 'Other' category