Appraisers' Free Forum

I am NOT an expert in these. I hope some of our more experienced folks will post some additions to this thread.

Here are a few points that I've picked up about doing partial interests.

*These partial interest appraisals result from either tax situations or partitioning actions such as divorce, dissolution, or something similar.
*In tax situations, IRS wants the effective date to be either the date of death, or the "alternative valuation date" which is exactly six months to the day forward of the date of death.
*A partial interest is not equal to a proportional percentage of the fee simple interest.
*Typically, the value of a partial interest is reduced from its proportional value by discounts for marketability, control, and/or liquidity. IOW, a 50% interest in the fee simple value would be further reduced for those factors.
*DO NOT use prior decisions of the US Tax Court to substantiate your deductions for marketability, control, or liquidity. IRS wants primary research, not meta-research. You cannot, for example, reason that in Berg v. Commissioner, the IRS accepted a 35% discount, therefore the discount for your subject portion must be similar. IRS and the tax court will reject it out of hand.
*According to one very experienced partial-interest appraiser on another forum, there is no such thing as a majority interest in land. If you own 99.5% of a tract, and I acquire a 0.5% undivided interest, then the only thing you can do with that land (without my permission) is to sell it. If you put cows on it, I'll shoot them. Every blade of grass they eat is 0.5% mine. Want to sell your 99.5%? I'll offer $0.20 on the dollar for it. Too low? OK, then, make that $0.10 on the dollar. (Just how good are comparable sales in this situation?)

There are lots more things, and I can't think of all of them. Somebody else add to this.

Jim Plante wrote:*According to one very experienced partial-interest appraiser on another forum, there is no such thing as a majority interest in land. If you own 99.5% of a tract, and I acquire a 0.5% undivided interest, then the only thing you can do with that land (without my permission) is to sell it. If you put cows on it, I'll shoot them. Every blade of grass they eat is 0.5% mine. Want to sell your 99.5%? I'll offer $0.20 on the dollar for it. Too low? OK, then, make that $0.10 on the dollar. (Just how good are comparable sales in this situation?)
There are lots more things, and I can't think of all of them. Somebody else add to this.

There is little of consistent substance in the IRS rulings with respect to this particular situation that I am aware of. I did work on a case that was sort of in accord with the last scenario. The situation was in court and the judge ended up ordering one of the owners to buy the other out based on a formula worked out by the judge after reading the appraisal. It was a sort of a split the baby ruling, but when the IRS got ahold of it, their ruling was that the guy owed tax on the difference between what he paid the other owner and the enhancement to the value of the part he already owned. The reasoning, or what there was of it, was that he gt more than he paid for. That was later litigated in tax court and the judge there turned the IRS down saying the guy really owned the increase in value by virtue of his original investment. The cost of all of the litigation was bankruptcy and forced sale of the property. Not to be altogether Dcraconian, I have heard of cases where the IRS did the right, sensible and common sense thing, but when they take the wrong road it really screws up everybody in their way.

This is a little off partitoning or apprasing partial interests, but the latest thing I heard about IRS taxpayer torture is that for those borrowers who are selling short, the IRS is taxing the shortfall as income. Isn't that kind of like rubbing salt in the wounds?

Oh, they don't mind rubbing salt in the wounds, Edd. That's why it's important for most folks not to run afoul of them.

I'm busy right now, but later I'll post an example of marketabiltiy, control, and liquidity deductions that I used on a recent one.

The IRS are very fond of shooting the dead after the battle. Its their favorite tactic.

As for partial interests you bring up an interesting subject and one where I have a tiff a while back with a member of that other forum. To whit. Real Estate can be divided into 3 dimensions as far as i am concerned and the terms "fractional" and "partial' (imho) have no real difference in meaning. They emcompass all forms.

There are the estates. mineral, surface, and air These are partial interests. A condo which is described in terms of 'air' - i.e. - an upper floor unit is not attached directly to the ground can be defined by survey measurements in 3 D. There the suggestion that a discount would be applicable does not count.

You can have divisions of the Bundle of rights as well as different bundles.

Judges are reluctant to apply discounts for family situations (undivided ownerships of defined part or divorcing co-tenants) or where vacant land can easily be divided into equal parts.

More controversial apparently is the notion that improvements may be separately valued from the land..apportionment of improvements. This is usually a hypthetical consideration where there is a purpose in valuing the land separate from the improvements (such as tax benefits). BTW, my way of thinking is that the IRS will allow segregation of the various components of a building for different depreciation schedules. Architect-engineer-appraisers divide the HVAC system, walls, carpeting, furnishings, and building and landscaping components into different depreciated items to allow the owner of the property to capture depreciation quicker rather than taking the entire building depreciation over the 30± years that would normally accrue.

So, you can have a person with 50% of the mineral rights under a tract of land. And to only have the rights to the oil and gas but not the coal or other minerals AND to lease it out to an oil company thus be left with a leased fee estate, then die and have 3 children inherit an undivided interest. In the case of oil and gas there would rarely be a discount. If surface, a discount might be applicable. If 16 people have an undivided interest in a timber deed and they don't like each other, the discount might be 90%...
Discounts are highly variable. I recently looked at a deed where the party had retained the mineral rights to .16 acre of land but had given up the right of engress and egress to the land....as if you could considering it was a sliver of land along side the road taken in a condemnation.