Fractional Interest – Partial Interest – Appraisal
A fractional interest is the divided or undivided rights in real estate that represent less than the whole. We provide appraisals for these fractional interests.
The Internal Revenue Service (IRS) allows for a discount to the value of an entity that owns real estate for interests of less than 100%. The discount relates to the fact that the ownership interest has a “Lack of Control” over the operation and disposition of the real estate and a “Lack of Marketability” due to the difficulty in selling an interest that is not publicly traded and is not easily financeable. Examples of ownership entities that own a fractional interest include: general partnerships (GP), limited partnerships (LP), limited liability companies (LLC), tenants in common (TIC), and undivided interests. The two instances where this discount generally applies are for the gifting of a fractional interest or upon the death of a person that owns a fractional interest in real estate. Courts have held that discounts for lack of control and marketability exist in the market and should therefore be considered when valuing a fractional ownership interest. Discounts can vary depending upon the particular ownership entity to be valued, the percentage of ownership, the rate of return on the investment, the amount of debt and the market time and conditions in which it is to be considered.
The IRS requires support in the form of an appraisal for the determination of a discount pertaining to a fractional interest. Per IRS guidelines, the appraisal must consist of a “qualified appraisal” and be completed by a “qualified appraiser”. The valuation of these types of fractional interests can be very complex and it is essential that a proper analysis be conducted if it is going to be accepted and pass IRS scrutiny.