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Case Study – Uncovering Real Estate Assets Valued at $1,000,000
When one of the partners of a three-person real estate investment firm passed away, Gary R. St. Pierre, CPA recommended that the executor obtain appraisals on the several properties involved to determine the valuations for the inherited interest. As the appraisals would cost thousands of dollars, the surviving partners’ legal counsel recommended saving the cost of a real estate appraisal since the partners could do that for themselves on what’s known as a “drive-by” basis.
While the “drive-by” method sounded fine to the surviving partners and the executor, Gary, working on behalf of the estate, insisted that the formal, professional appraisals be conducted on all the properties. At first the partners and their attorney resisted, but when they realized that the partnership agreement contained a written exit strategy that mandated such an appraisal, they relented. The resulting appraisal discovered that the “drive-by” appraisal had undervalued the properties by $3,000,000. The estate’s share of the $3,000,000 was $1,000,000 in previously unknown assets.
Another benefit was derived for income tax purposes. Why? The basis of the value of the property for income tax purposes is the value used on the IRS Form 706, which replaces the original cost when determining capital gain or loss.
As a result, not only did the appraisal put $1,000,000 in the pocket of the beneficiaries of the estate, but also an additional amount ranging between $100,000 to $200,000 was saved in income taxes.
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