One of my Wheat Ridge estate assignments involved an old Victorian on a large lot, with an accessory dwelling unit (ADU) attached to the rear of a detached garage. The appraisal was for stepped-up basis.
The lot and the Victorian drove the value as much as the ADU. Separating those influences was the difficult part. A higher sale price for a property with an ADU does not, by itself, show how much buyers paid for the ADU.
For an estate attorney or CPA, the report needs to explain how those features were considered in the property’s value as of the date of death.
Valuing the ADU as part of the whole property
An ADU usually can’t be separated from the property it sits on, so it is valued as part of the whole. When sales show what buyers paid for an ADU, the report relies on them. When they don’t, the support can come from what the ADU would cost to build, less depreciation.
The comparison gets more difficult when the main house and lot are also distinctive. A comparable property might have an ADU but a smaller lot or a substantially different house. The price difference cannot all be attributed to the ADU.
On the Wheat Ridge assignment, the ADU was only part of the valuation problem. The large lot and the Victorian needed just as much attention.
Comparable sales help establish how buyers responded to those features. When few sales share the same combination, the report needs to explain the differences, the evidence available and the limits of what that evidence supports. The conclusion should be something the attorney or CPA can follow back to the analysis.
Establishing what existed on the date of death
A date-of-death appraisal addresses the property as of that date. Because the report is written after the death, it is also a retrospective appraisal.
The property’s current appearance may not tell the whole story. For an ADU, the relevant questions include:
- What was there? Where the unit was located, how it was configured and what condition it was in.
- What use was allowed? What the zoning permitted and what the permit records established at the time.
- How was it used? Whether it was rented, occupied by family or unoccupied.
- What changed afterward? Whether later work altered the unit’s size, condition or use.
Photos, old listings and permit records can help establish the earlier condition. Improvements completed after the date of death should not be treated as though they were already finished on that date.
The Wheat Ridge unit was not rented on the date of death. That fact alone does not establish what the unit contributed to value. Where rental information is relevant, it can be considered alongside the other market evidence.
The ADU rules in effect at the time
Wheat Ridge’s ordinance allowing ADUs took effect on August 15, 2022. The city also established a process for owners of existing units to seek legal status. Its guidance recognizes that some units may qualify as they are, some may need modifications and others may not qualify as independent dwellings (City of Wheat Ridge).
For a retrospective appraisal, today’s zoning rules do not establish what was allowed on the date of death. The rules applicable then and the property’s own permit history need to be considered together.
An ADU should not be assumed to have been an approved dwelling simply because it existed. The report needs to explain how its status was addressed and how any unresolved information affects the analysis.
A supported value for the basis calculation
Fair market value reflects the price a willing buyer and willing seller would agree on, with neither compelled to act and both reasonably informed. That is the standard described in Treas. Reg. 20.2031-1(b).
Inherited property generally receives a basis tied to fair market value at the date of death, subject to applicable exceptions under IRC 1014. An error in the appraised value can affect the basis calculation and the gain or loss reported on a later sale.
My role is to provide a supported appraisal conclusion for the agreed property interest and effective date. The CPA determines how that conclusion applies to the taxpayer’s basis and subsequent reporting, including any later adjustments to basis.
For a property with an ADU, that means accounting for the ADU within an analysis that also gives the main house and lot their due. My stepped-up basis article explains more about the appraisal’s role.
Discussing an estate appraisal with an ADU
Send the property address and date of death, note that there is an ADU and identify who will rely on the report. Let me know whether you need the whole property valued, the decedent’s interest or both.
Call me at 720-432-0474 or request a consultation.
Charles E. Volk, SRA, is a Colorado Certified Residential Appraiser with 24 years of residential experience across Denver Metro and Boulder County, and a member of the Board of Directors of the Colorado Chapter of the Appraisal Institute. VolkHaus Appraisals works with community banks and credit unions on lender assignments, and directly with estate attorneys, CPAs, fiduciaries, and private clients. Colin O’Connor, our Senior Appraiser and a Certified Residential Appraiser, handles assignments alongside him.