The Importance of Accurate Real Estate Valuation in Tax Reporting

Real estate valuations have garnered increased attention in tax reporting over the last several years, driven by fluctuations in property prices and heightened oversight around how those values are reported. Whether a property is held for personal or operational use, an investment, or development, how it’s valued can directly impact taxable income, balance sheets, and financial outcomes. Inaccurate or outdated valuations can not only trigger regulatory scrutiny, leading to an audit or penalties, but it can also compromise the integrity of broader tax and financial reporting and result in misinformed decision-making across the board.

Having a credible valuation will keep you in compliance and better position you for estate planning strategies, support future lending or refinancing efforts, and provide clarity during business transitions or exit planning.

Where Real Estate Valuation Meets Tax Compliance

The number of scenarios where accurate valuations are required in tax reporting is greater than many realize. Outlined below are several key intersections where valuation and tax compliance meet within a real estate portfolio.

Estate Planning and Inheritance

When transferring property between generations, carefully documented valuations are needed to satisfy federal estate and income tax requirements. The IRS recently passed legislation late last year that also requires mandatory “basis consistency” rules; meaning, the fair market value reported on an estate tax return must match the basis used by beneficiaries when calculating gain or loss on a later sale. This rule was introduced to prevent discrepancies in cases where the estate undervalued assets to reduce estate tax, while beneficiaries claimed an inflated basis to minimize capital gains.

It's important to ensure accuracy, as valuation errors can cause gift tax issues, eliminate tax benefits for heirs, or activate “zero basis” penalties, where beneficiaries can be exposed to capital gains tax on entire sale proceeds.

With respect to trusts, any real property contributed to or distributed from the trust must be valued as of the transfer date. Future additional valuations may be necessary to respond to changes in beneficial ownership, sales that trigger tax obligations, or other similar events.

Property Tax Appeals

Real property valuations used for local tax assessments can affect annual cash flows, especially if the assessed value exceeds market value or doesn’t reflect deferred maintenance, vacancy, or functional obsolescence. And because assessed values directly determine property tax liabilities, its accuracy is essential for managing expenses but also for reliable financial reporting and budgeting.

From a tax perspective, overstated assessments magnify expenses and can skew income projections, affect pass-through entity allocations, or reduce distributions in real estate investment structures. If an assessment appears misaligned, consider filing a formal appeal within the date provided on the notice to challenge the assessed value, and be sure to include data-backed information to substantiate the claim.

Charitable Contributions

Donating real estate to charity can be a great way to support a meaningful cause while also reducing overall tax liability through a substantial deduction. However, these donations are highly scrutinized and must comply with IRS substantiation rules, including obtaining: 1) a contemporaneous written acknowledgment for any contribution of cash or property with a value equal to $250 or more, and 2) a “qualified appraisal” of the donated property from a “qualified appraiser” for any noncash contribution of more than $5,000.

Business Use

Real estate positioned for income generation, operational use, or strategic exchanges under §1031 depends on precise valuations to guide depreciation schedules, basis allocations, and gain calculations. For multifamily and commercial properties in particular, they also help substantiate income-based valuation methods and guide capital improvement strategies. Whether part of a long-term portfolio or allocated for near-term disposition, defensible appraisals are essential for compliance but also can support planning across ownership and investment cycles.

Investment Structure Transactions

For owners of partnerships, LLCs, or other passthrough entities, contributing or receiving real estate can carry complex tax implications. Accurate valuations are key to determining basis, allocating capital, and reporting gain or loss at both the entity and individual level. Without a well-supported valuation, owners risk inconsistencies that can surface in future reporting or prompt an IRS review. Establishing fair market value up front helps preserve consistency in tax treatment and supports proper reporting across the life of the investment.

Market Shifts Prompt Closer Look at Valuations

Given the run-up in prices, paired with changing interest rates and sector shifts, relying on book value or outdated comps introduces material risk to the accuracy and defensibility of reported values. In Arizona, the median price of a single-family home has increased by more than 50% since 2020. And commercial properties have seen uneven, less predictable recovery patterns, in part due to changing market demands and capital availability. In effect, relying on historical cost or broad market assumptions no longer provides a reliable basis for property valuation.

As expectations rise from regulators, auditors, and stakeholders alike, the numbers behind each valuation carry more weight.

Next Steps

Property owners should consider these important questions when determining next steps:

• When were professional valuations last performed on owned properties?
• Are current, defensible values being used for all tax planning and reporting, including depreciation, gain/loss recognition, and charitable deductions?
• Is proper documentation in place to support valuations if reviewed or audited?
• For inherited properties, were appraisals secured close to the date of death to establish basis and avoid retrospective valuation challenges?
• Are there any planned contributions, distributions, estate planning strategies, or §1031 exchanges that will require updated valuations?

Our team can help review existing valuations and appraisals, assess documentation readiness, and advise on valuation needs tied to your upcoming transactions or planning strategies. Contact us at (520) 881-4900 to discuss how we can support your compliance and reporting goals.