Real Property Deficiency Studies
Inherited real property can result in a significant tax exposure. For the tax year 2011, an estate is subject to a 35% tax on the value exceeding $5.0 million. Upon inheriting real property and in order to settle the tax bill, the IRS requires that the beneficiaries ascertain the fair market value (FMV) of the property. The IRC further states that the FMV must be calculated with "reasonable knowledge of relevant facts." These five words in the IRC essentially allow a reduction in the FMV that can lower the survivor(s) tax liability by a significant amount.
What does a FMV Appraisal not include?
The IRS requires the estate tax preparer to calculate the property's FMV, to do so the preparer typically engages the services of an appraiser.
The Appraisal Institute's standard limiting conditions exclude the appraiser from opining on items that could substantially diminish the value. These items include, but are not limited to, structural issues, latent defects, environmental conditions, deferred maintenance, physical deficiencies, building code non-compliance, ADA compliance, etc.
Should a property be encumbered with any such deficiencies, the costs to remedy these conditions are taken into consideration by CCR when determining the property's FMV by conducting a Real Property Deficiency Study.
What is the Scope of a Real Property Deficiency Study?
A Real Property Deficiency Study identifies and documents physical deficiencies, deferred maintenance, environmental liabilities, and issues of noncompliance with codes. Cost estimates, along with photographs, will document the basis for the report's opinions. Bear in mind that the IRS requires "significant support" to justify estate valuations. Thus a deficiency study should be submitted along with the appraisal to support Form 706 (Federal Estate Tax Return). CCR's professionals also provide the tax and engineering audit defense, if required.
A recent deficiency study prepared by CCR identified deferred maintenance and physical deficiencies totaling over $970,000. The estate was valued well in excess of the minimum threshold, and included a 50-unit apartment building with deteriorated concrete balconies and substantial deferred maintenance of the parking lots, exterior finishes, boiler, etc. A reduction of $436,500 of estate transfer taxes was realized by the beneficiary.
A Real Property Deficiency Study Should be Part of a Comprehensive Tax Strategy
The most common question posed by estate tax attorneys and tax preparers is: "Should I have a Real Property Deficiency Study conducted before or after an appraisal is completed?" Ideally, the study should be completed prior to the appraisal and discussed with the appraiser. The costs to remedy the noted deficiencies can then be incorporated into the appraisal.