How to Document the Step-Up in Basis for Inherited Arkansas Property

The most valuable and most frequently neglected task for any Arkansas executor is documenting the date-of-death fair market value of inherited assets before the evidence becomes stale. The step-up in basis is automatic under federal law — every inherited asset acquires a new cost basis equal to its fair market value on the date of death. But the IRS does not record what the property was worth when it changed hands. If a beneficiary sells inherited Arkansas property years later and the IRS challenges their claimed basis, the burden of proof falls on the taxpayer. Without contemporaneous appraisals, assessor records, or comparable sales data obtained promptly after death, that defense fails — and the beneficiary pays capital gains on appreciation that should have been wiped out.

This page explains exactly how to document the step-up in basis for the types of assets most commonly inherited in Arkansas: residential real estate, farmland, timberland, mineral rights, investment accounts, and business interests. Each asset type requires a different documentation approach.

Why This Matters More in Arkansas

The step-up in basis applies in every state. Arkansas has three characteristics that make proper documentation especially consequential here:

Agricultural land. Arkansas has over 13 million acres of farmland and timberland. Families passing agricultural property across generations frequently hold land that was purchased decades ago for a fraction of its current value. A farm bought for $50,000 in 1975 might be worth $800,000 at death. Without a documented stepped-up basis of $800,000, heirs selling that farm owe capital gains on $750,000. With documentation, they owe capital gains only on appreciation above $800,000.

Severed mineral rights. Arkansas has significant oil, gas, and timber production. Mineral rights are often severed from surface ownership and inherited separately, with values that are difficult to determine without a specialist. Heirs who do not document their basis frequently sell these interests without realizing the tax cost of their inheritance has already been reset.

Heirs' property. When property passes through multiple generations informally — without probate, without a clear title chain — the basis documentation for prior transfers is often absent. The current heir may need to establish basis not just for the date of the most recent death, but for a chain of prior transfers that were never formally recorded.

When to Act

Every week that passes after the date of death makes basis documentation harder. Here is why:

• Appraisers need access to comparable sales data from around the date of death. For rural Arkansas land and farmland, this data is sparse and grows thinner over time. A retrospective appraisal done two years after death is harder to defend than one done within 90 days.
• County assessor records reflect assessed values as of the assessment date, which may or may not correspond to the date of death. Pulling current assessor records immediately after death preserves evidence of value at that point; waiting several years means the assessor records reflect changed conditions.
• Investment account statements showing the date-of-death balance and per-share prices are generated automatically on the date of death by most custodians but are often purged from online access after 18 months.
• Comparable sales for residential and commercial property come from public records, which persist, but identifying and documenting the relevant comps is easier when memory of local market conditions is fresh.

The practical guidance is this: treat basis documentation as a Day 1 task, not a later task. The probate inventory filing (due within two months of the executor qualifying with the court) requires you to list all estate assets with their fair market values anyway. The documentation you gather for the inventory is the same documentation you need for basis.

Step-by-Step: How to Document Basis for Each Asset Type

Residential Real Estate

What you need: A formal appraisal from a licensed Arkansas appraiser, or a Broker Price Opinion (BPO) combined with county assessor records.

The formal appraisal is the strongest evidence for IRS purposes. The appraisal should state clearly that it is a retrospective valuation as of the date of death (not the current date), and the appraiser should sign and certify the report. For residential property, a qualified residential appraiser can typically prepare this for $400-$600.

County assessor records are useful supplementary evidence but are not sufficient on their own because they reflect assessed value, not fair market value, and Arkansas assessments are often below market. Pull the county assessor records for the date of death immediately. These are public records available through the county assessor's office or online portal.

Comparable sales from within six to twelve months before and after the date of death, for similar properties in the same area, should be documented even if you have a formal appraisal. If the appraisal is ever challenged, comparable sales are the primary methodology the appraiser used, and having your own file of comps supports the appraiser's work.

What to avoid: Relying solely on the county assessor's value, using a Zillow or automated estimate as your basis record, or waiting until you decide to sell to obtain any documentation.

Agricultural Farmland

What you need: A formal appraisal from an appraiser with specific experience in Arkansas agricultural land. National residential appraisers frequently lack the expertise to value cropland, pasture, and timberland at the component level required for basis documentation.

Special use valuation (IRC § 2032A) consideration. For qualifying family farms, the estate may elect to value land based on its agricultural use rather than highest-and-best-use market value. If this election is made, the basis the heirs take equals the special use value, not the full fair market value. This reduces the initial capital gains exposure but creates a 10-year recapture trap: if the heir changes the property's use within 10 years of the original owner's death, a rollback tax recaptures part of the valuation benefit. Discuss this election with the estate's CPA or attorney before the estate return is filed — it cannot be made retroactively after the nine-month filing deadline for Form 706 has passed.

What the appraisal should cover: For farmland, the appraiser should value the land separately from any buildings, equipment, irrigation systems, and improvements. This allocation matters for depreciation on continued farm operation and for gain calculation on partial sales.

USDA records showing the farm's base acres, yield history, and crop insurance history can support the appraisal's income capitalization methodology. Pull these from the local Farm Service Agency office soon after death — the farm's participation in federal programs may be relevant to valuation.

Timberland

What you need: A timber cruise (inventory) performed by a registered forester, combined with an appraisal of the land component.

Why timberland is different: The value of a timberland tract has three components — the bare land value, the value of the standing timber, and the value of any improvements. For basis purposes, these must be allocated separately because they have different tax treatment:

• Land is not depreciable or depletable
• Standing timber can be recovered through depletion deductions as it is harvested (if the basis is properly documented by component)
• Improvements (roads, drainage, structures) are depreciable

If you receive a single appraisal value for the whole tract without component allocation, you lose the ability to claim timber depletion deductions going forward.

The residual method is the standard approach: start with the total appraised value of the tract, subtract the value of the land (established by comparable bare land sales), and the remainder is allocated to standing timber and improvements. A qualified timber appraiser or registered forester can perform this allocation.

Volume documentation. The timber cruise establishes the volume of merchantable timber on the property as of the date of death. Combined with current market prices for that timber type (hardwood, pine, mixed), this supports the timber component value. Keep the cruise report permanently — it is the foundation for all future depletion calculations.

Arkansas severance tax note. Arkansas imposes a severance tax on harvested timber: $0.17 per ton for pine, $0.125 per ton for other timber, assessed at the first processing point. This is a separate obligation from income tax and applies to the heir or estate when timber is sold.

Mineral Rights (Oil, Gas, Royalties)

What you need: A reserve valuation report from a petroleum engineer or mineral rights valuation specialist, or at minimum, documentation of the income being produced by the interest as of the date of death.

Why mineral rights are difficult: The value of a mineral interest depends on the type of interest (royalty interest vs. working interest vs. overriding royalty interest), whether it is producing at the time of death, the estimated remaining reserves, current commodity prices, and applicable royalty rates. County ad valorem assessments for mineral interests are based on market value and estimated future production capacity — not past income — and may differ significantly from the actual fair market value for tax purposes.

Documentation minimum. If you cannot obtain a professional reserve valuation immediately, at minimum document:

• The lease agreements in effect as of the date of death
• The production reports showing monthly output for the 12 months prior to death
• The royalty statements showing income received
• The county property tax assessment for the interest
• The name of the operator and the well identification numbers

This documentation can support a retrospective professional valuation later if needed.

Depletion. Mineral royalty income is taxable as ordinary income, but the heir is entitled to a depletion deduction to account for the finite nature of the resource being extracted. Percentage depletion (15% of gross royalty income for oil and gas) is the simplest approach. Cost depletion, based on the documented basis of the interest divided by the estimated remaining reserves, may yield larger deductions but requires the reserve valuation documentation. Without any basis documentation, cost depletion is not available.

Investment Accounts (Stocks, Bonds, Mutual Funds)

What you need: The date-of-death account statement from the custodian, showing the balance and the price of each security as of the date of death.

How to obtain it: Request a "date-of-death statement" or "estate valuation statement" from the brokerage, bank, or retirement account custodian immediately after death. Most custodians will generate this as of the date of death and provide it to the estate upon request with a copy of the death certificate. Do not wait — custodians typically purge online statement access after 18-24 months, and requesting historical statements later may involve fees or may not be possible at all.

Per-share price documentation. For publicly traded securities, the stepped-up basis per share equals the average of the high and low trading price on the date of death (or the mean of the date before and date after if the market was closed). This is a matter of public record available from the exchange, but it is easiest to document from the custodian's statement at the time.

Mutual funds and ETFs. The stepped-up basis equals the fund's net asset value (NAV) per share on the date of death. Document the NAV from the custodian statement or fund company records.

Retirement accounts (IRAs, 401(k)s). These do not receive a step-up in basis. Every distribution from an inherited traditional IRA is taxable as ordinary income regardless of when the assets were purchased. Arkansas provides a $6,000 per-person income tax exemption for retirement distributions (under AR Code § 26-51-307), but amounts above $6,000 are fully taxable at the standard 3.9% rate. Lump-sum liquidation of a large inherited IRA in a single year creates a significant Arkansas state tax event. Document the account balance at death for estate purposes, but the basis issue is federal, not basis — it is how you time the distributions.

Business Interests

What you need: A formal business valuation from a Certified Business Valuator (CBV) or Accredited Senior Appraiser (ASA) with experience in the type of business being valued.

Business valuations are the most expensive and time-sensitive basis documentation exercise. For a closely held family business, the value depends on a combination of the business's assets, earnings history, future earning capacity, and applicable discounts for lack of control or lack of marketability. This is not a DIY task, and it is not something a residential appraiser can do.

If the estate includes a business interest and you do not obtain a formal valuation near the date of death, you will have difficulty defending any basis claim on a future sale of that interest.

The Form 8971 Requirement

For estates that are required to file federal Form 706 (because they exceed the $15 million exemption threshold), the executor must also file IRS Form 8971 and furnish a Schedule A to each beneficiary, showing the IRS-reported estate value of each inherited asset. This reported value becomes the beneficiary's maximum allowable basis under the consistency requirement introduced by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

Most Arkansas estates are far below the $15 million threshold and are not required to file Form 706. For these estates, Form 8971 does not apply. But beneficiaries still carry the burden of proving their basis if questioned, which is why contemporaneous documentation matters regardless of whether the estate is required to report it formally.

Practical Documentation Checklist

Use this checklist immediately after a death to capture basis documentation before evidence goes stale:

• [ ] Order sufficient death certificates to provide to appraisers, financial institutions, and county offices
• [ ] Request date-of-death account statements from all brokerage, bank, and retirement accounts
• [ ] Pull county assessor records for all real property as of the date of death
• [ ] Engage a licensed appraiser for all residential real property
• [ ] Engage an agricultural land appraiser for all farmland and timber tracts
• [ ] Commission a timber cruise for all timberland to establish component allocation
• [ ] Document all mineral interests: lease agreements, production reports, royalty statements, county assessments
• [ ] Request a business valuation for any closely held business interest
• [ ] Create a basis tracking worksheet listing each asset with its documented date-of-death value
• [ ] Store all appraisals, statements, and supporting documentation permanently — not just until the estate closes

Tradeoffs

Skipping formal appraisals to save money: The appraisal fee for an Arkansas residential property is $400-$600. For farmland, $800-$1,500 depending on acreage. This is not an optional cost if the property will be sold. The alternative is paying capital gains on the entire appreciation since original purchase — which can easily be tens or hundreds of thousands of dollars for property that has been in a family for decades.

Using assessor values instead of appraisals: County assessor values are faster and free. They are also frequently below market and reflect assessed value rather than fair market value. The IRS can challenge an assessor-based basis claim; a formal appraisal is significantly harder to attack.

Waiting to document: Every month you wait increases the cost of appraisals (retrospective valuations cost more), reduces the quality of available comparable sales data, and increases the risk that the appraiser cannot establish a defensible value at all.

Frequently Asked Questions

What is the stepped-up basis and how does it reduce my taxes?

When you inherit an asset, the IRS resets its cost basis to the fair market value on the date the prior owner died. Capital gains tax is calculated on the difference between your sale price and your basis. If you inherit a farm worth $500,000 at the date of death and sell it for $510,000, you owe capital gains on $10,000, not on $450,000 of prior appreciation. The step-up eliminates tax on all appreciation that occurred before you inherited the asset.

What if the estate is below the $100,000 small estate affidavit threshold — do I still need appraisals?

Yes. The $100,000 threshold for the Arkansas small estate affidavit is a probate procedure question, not a tax question. Regardless of whether the estate goes through formal probate, every inherited asset gets a stepped-up basis, and every beneficiary who later sells that asset needs to prove the date-of-death value. The probate pathway does not change the basis documentation requirement.

How do I value inherited mineral rights I know nothing about?

Start by pulling county records to identify the specific parcels and interests the decedent owned. Contact the operators listed in the lease agreements to obtain current production reports. Search the Arkansas Oil and Gas Commission (AOGC) records for well information associated with the parcel. With this information, a mineral rights valuation specialist can prepare a defensible basis valuation. For small, non-producing interests, a simpler approach may be available, but do not assume the interest has zero value — even non-producing interests have option value.

Can I use the property tax assessment as my basis for an inherited house?

The county assessor's assessed value is not the same as fair market value, and it is not sufficient documentation of basis if the IRS questions a future sale. In Arkansas, assessed values are often 20-30% below actual market value. You can use it as supporting evidence, but a formal appraisal is the foundation.

What if the executor already distributed the estate without getting appraisals?

You can still obtain a retrospective appraisal — an appraiser reconstructs the fair market value as of the date of death using historical sales data, assessor records, and market conditions from that time. Retrospective appraisals are more expensive and carry more IRS audit risk than contemporaneous appraisals, but they are better than no documentation. Engage a qualified appraiser as soon as you realize the gap.

The Arkansas Final Tax & Estate Tax Guide includes a standalone Step-Up in Basis Worksheet — a fillable form to document the date-of-death fair market value for every inherited asset before appraisals, assessor records, and comparable sales evidence become stale. It also covers the full basis documentation requirements for farmland, timberland, mineral rights, and investment accounts in step-by-step detail.

See more Arkansas guides →