Fractional discounting

[mactoolsix]

Client has several rental properties which, due to the recent death of the spouse, are being appraised. There are a couple of properties with partial ownership (25% to 60%) and a couple TICs with around 4% ownership. Because of this the attorney / appraiser will be applying a "control" and "market" discount. This will allow more of the assets to be put in a disclaimer trust reducing the overall estate tax upon the death the surviving spouse. We are assuming a 100% chance of the 706 beginning audit, so the attorney says her appraiser is "bullet proof."

My question is what should be used as FMV for depreciation on the 1040?
If a property's FMV of $1,000,000 is discounted to $750,000 then the 706 will show a FMV of $750,000. I had another EA say he would use the full FMV ($1M) for depreciation on the 1040. Seems only right that the FMV for the 1040 would also be $750,000.

Any thoughts?

Mike

[TaxGuyBill]

I've never encountered anything like this, but I would use $750,000.

In my opinion if the 706 was audited and they looked closely and saw that the 1040 depreciation was based on $1,000,000, the auditor would want to increase the 706 valuation to $1,000,000. It is extremely unlikely that would happen, but it if it did, the taxpayer could run into problems.

[TAXNJ]

Tax

Client has several rental properties which, due to the recent death of the spouse, are being appraised. There are a couple of properties with partial ownership (25% to 60%) and a couple TICs with around 4% ownership. Because of this the attorney / appraiser will be applying a "control" and "market" discount. This will allow more of the assets to be put in a disclaimer trust reducing the overall estate tax upon the death the surviving spouse. We are assuming a 100% chance of the 706 beginning audit, so the attorney says her appraiser is "bullet proof."

My question is what should be used as FMV for depreciation on the 1040?
If a property's FMV of $1,000,000 is discounted to $750,000 then the 706 will show a FMV of $750,000. I had another EA say he would use the full FMV ($1M) for depreciation on the 1040. Seems only right that the FMV for the 1040 would also be $750,000.

Any thoughts?

Mike

Consult with a Tax Attorney if a "stepped up" basis may be involved in your scenario. Tax Attorneys may know more than a "bullet proof" attorney. Sounds like a good case and want all professionals who have involvement and experience in this type of case than one that is not.

[mactoolsix]

Thank you for the responses. I agree with using the discounted valuation.

NJTAX - Yes, everything was community property (CA) and gets a set-up in basis which has caused an estate basis of about $10M before death to jump to $22M post death - a nice problem to have . . . .

Mike

[Burke]

Valuation discounts on an Estate's assets are generally allowed under the law for two reasons, LOC (Lack of Control) and LOM (Lack of Marketability.) Once established as actual FMV on the Estate Tax return, however, you must use that discounted value as basis for future depreciation and/or sales.

[mactoolsix]

Valuation discounts on an Estate's assets are generally allowed under the law for two reasons, LOC (Lack of Control) and LOM (Lack of Marketability.) Once established as actual FMV on the Estate Tax return, however, you must use that discounted value as basis for future depreciation and/or sales.

Thank you Burke. I was hoping you would chime in!