Q: My father passed away in October 2021, what would be accepted on how to calculate inheritance tax on the house?

A: if you are planning to keep the house, the Department of Revenue will usually accept the most recent County Assessed Value multiplied by the current Common Level Ratio as the fair market value on the PA Inheritance Tax Return

A: I agree with the preceding answer, but there's another factor to consider: the valuation for estate tax purposes (where the appreciation in value is taxed at 4.5%) becomes the "stepped-up" basis for future income tax/capital gains purposes. The estate tax 4.5% is a way better rate than the probable applicable rate of federal and state income tax, with capital gains, for you and your sister, when the property is sold. If not for the stepped-up basis, you would be paying a capital gains tax using the original purchase price of the house (from 30 years ago, or more) as the tax basis to compute the taxable gain.

In other words, take the longer view, and be happy about paying the 4.5% to avoid paying a much higher income tax rate in the future.

A: The inheritance tax on the house is based upon its value on the date of death. The PA Department of Revenue allows a choice of three methods for determining the date of death value. One is gross sale price, if sold within 15 months after date of death, which apparently does not apply to your situation because you want to keep the house for now. Second, you can obtain a professional appraisal and submit that with the inheritance tax return. Or, third, you can take value of the assessment for property taxes and multiply that by the published common level ratio in effect for the county in which the real estate is located as of the date of death.

You should keep in mind that the value you report on the inheritance tax return for the date of death value will also be the amount for the stepped-up basis for the house property that will be used to compute capital gain tax when the property is sold in the future. Because the rate for capital gain tax will be much higher than the 4.5 percent inheritance tax rate, you may want to consider NOT using the lowest possible value for the inheritance tax since it is better to pay more inheritance tax now to save capital gain tax in the future. It should be noted that what capital gain tax you may owe in the future could be impacted by what use you make of the property going forward - use as a personal residence, use as a vacation home, use as rental property - each of those choices will have different impacts on future capital gain tax.

For more detailed advice on this matter, consult an attorney who is experienced in these areas.