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Fractional Interest Real Estate or Business valuation "Discounting"

Often, the ownership of a property isn't cut and dried. Bill Jones might own a property outright, by himself, unencumbered by liens or mortgages, leases or easements. Or he may also own it as a "joint tenant" with Betty Jones his wife. This is the most typical vesting in many U.S. states when Husband and Wife are involved. 

But what if Mr. Jones and Betty recently married and Mr. Jones interest is a 30% partnership interest in commercial property and a business entity that is shared with a brother @30%, and their father @ 40?  Many time a real estate and/or business partnership interest like this also carries limited and/or restricted rights.

Just some of the myriad of these restrictions include the election to sell, first right of refusal, valuation methodology, tenant leasehold restrictions, and many more restrictions and/or limitations diluting the liquidation options of the individual ownership.    

The Internal Revenue Service recognizes that these restrictions and limitations may have, and in may case, do have a detrimental impact on the value of that fractional interest. In many cases, allowing significant discounts to otherwise taxable value in an estate tax situation.

The level of discount allowed by the IRS is generally based on case precedent and should be presented in a desired format and documentation. In many cases the IRS will "challenge" or even "disallow" the discounting if not prepared and presented in a well supported and convincing format. 


When else might you need a partial interest valuation?


In some divorce or disillusionment of a partnership proceedings, you might need to fairly value one party's interest in real property, particularly in partnership situations, it's not simply a matter of appraising the entire property and dividing by the number of owners. A fractional share of property may sell at a discount to reflect lack of control, costs of and barriers to sale You need the judgment of a professional appraiser


You might need the value of rents or leases on a property, but not the underlying value of the real estate This is more complicated than it sounds, and isn't just a matter of how much a tenant is currently paying A professional, well trained appraiser will examine rents in the market to determine fair market value of rents or leases If a tenant is paying below market value, they might be able to sublet at a profit If they're paying over market value, their likelihood of moving on when the lease term is up increases There are many things requiring the professional judgment of an appraiser that factor into the calculation


You might need to know the value of a proposed or existing easement  An easement is a right to use property, without owning itHow much is it worth to your neighbor to build a driveway across part of your property for entry to and exit from his property, rather than an alternate route that may be more costly to build?


You might need an appraisal of your (or your customer's) interest in a timeshare or condominium


Because there are so many ways the "bundle" of rights to property can be divvied up, when you order an appraisal you might need a partial interest valuation and not even know it You should be sure the company you hire is qualified and experienced to perform partial interest valuations. The Appraisal Corporation is that appraisal company.