Discussion:Discounting the value of real property in an estate to account for built-in capital gains
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Discussion Forum Index --> Tax Questions --> Discounting the value of real property in an estate to account for built-in capital gains
| 5 November 2009 | |
| Can I discount the value of real property held by an estate to account for built in capital gains?
We are currently in the process of valuing an estate that consists primarily of ownership interests in partnerships owning commercial real estate assets. Many of these assets have been owned by the decedent for 10-30 years. We are currently having discount studies prepared to account for lack of marketability and lack of control discounts. In researching another issue, I came across a body of tax law (Estate of Jelke III v. Comr., 507 F.3d 1317(11th Cir. 2007)) that referred to a dollar for dollar discount available for holders of stock in C-corporations to account for the capital gains tax liability on the date of death. I would like to apply this logic to my situation and discount the value of the real property in the estate by capital gains liability. I'm having trouble tracking down precedent for doing this. Twoodbury 11:15, 5 November 2009 (CST) | |
| 5 November 2009 | |
| Taylor, if 1014 applies, why do you think there are any 'built in capital gains'? I think you are misinterpreting or simply missing the basic code/law that applies in this situation.
(In Jelke, the corporation was a holding company, the investment holdings having built in gains. This is certainly not the case with most C corporations, thus it appears you have misinterpreted the case law completely also.) Perhaps instead of focusing on the exceptions, you might want to look at the rules. This is a common occurance in our industry. I had the same attitude when I was new in the business. We think that we can find a 'loophole' instead of applying the regular rules. Later in my practice I decided that more taxpayers fit the rules than the exceptions. | |
| 5 November 2009 | |
| As far as I know, the courts have only allowed a discount for the capital gains tax, or built-in capital gains tax, that a hypothetical buyer would have taken into account in purchasing an interest (e.g., stock) in the decedent’s closely held business. See Estate of Jameson v. Comm., 267 F.3d 366 (5th Cir. 2001); Estate of Jelke v. Comm., 507 F.3d 1317 (11th Cir. 2007); Estate of Welch v. Comm., 208 F.3d 213 (6th Cir. 2000); Estate of Borgatello v. Comm., T.C. Memo. 2000-264; Estate of Davis v. Comm., 110 T.C. 530 (1998).
The problem with applying such a discount to real estate is that it is too speculative. The capital gains tax would be due only if the value of the property increased above the IRC §1014 basis and were then sold, resulting in capital gain. If the heir decided to hold onto the property and its value decreased below the IRC §1014 basis, then there would be no capital gain, and no capital gains tax. I’m pretty sure that you would not agree if the IRS argued that the estate tax value should be INCREASED if the real estate market crashed after the decedent’s death and subsequent sale of the property would have resulted in a deductible loss and tax savings. | |
| 6 November 2009 | |
| Fair point (and good advice) Kevin and Dave. I obviously got a little ahead of myself on this one. | |
PVCC-CCIFP (talk|edits) said: | 2009-11-06 |
| Twoodbury:
Have your explored the IRD issues with relation to the partnership interests? (sections 691, 736, 753 as a start). | |
| 8 November 2009 | |
| Discounts for fractional interests are at this point a fact of law. Not mentioned here is what you do about it when rather than lowering estate tax presents the heirs with a capital gain...♫ | |
