Property Valuation Issues

Valuing a piece of property where there is not a readily available market price available can be difficult.  And issue may arises when you make a gift of this property to a loved one or a charity.

A recent case by the 5th Circuit Court of Appeals highlights this difficulty.  In that case a real estate partnership donated a conservation easement to a non-profit organization dedicated to historic architectural preservation.  The partnership claimed a $7.5 million charitable deduction on its tax return.  The IRS audited the tax return and challenged the valuation of the easement, claiming it should have been valued at $1.15 million.  In addition, the IRS hit the partnership with a 40% underpayment penalty for the gross overvaluation of the gifted property.  The 5th Circuit allowed the IRS valuation of the property but vacated the 40% penalty.

This case is typical of the issues a taxpayer encounters when valuing gifted property.  There are a number of methods for valuing property.  If challenged by the IRS, the matter will become a battle of valuation methods.  For property that is gifted as a charitable deduction, the IRS will seek to use the valuation method that renders the lowest valuation.  For property that is gifted to another person and thus subject to the estate and gift tax, the IRS will seek to use the valuation method that renders the highest valuation.

Because of the subjective nature of valuing property in a gifting situation, it is important to seek the advice of competent professionals knowledgeable in property valuation methods and their use by the IRS.

If you are contemplating a gift of property to charity or a loved one and want to minimize your taxes as they relate to this gift, schedule your free consultation by calling (480) 888-7111 [or submit a web request here].