WE BUY UNDIVIDED INTERESTS IN REAL ESTATE. MANY RELEVANT VARIABLES MUST BE CONSIDERED WHEN BUYING FRACTIONAL INTERESTS. MULTIPLE OWNERS AND LONG LOST RELATIVES WILL OFTEN RUSH FORTH TO CLAIM "THEIR FAIR SHARE" OF ANY REAL ESTATE IF OWNERSHIP AND LAND TITLES ARE NOT CORRECTLY ADDRESSED FOR MANY YEARS. (WE KNOW OF ONE PARCEL THAT HAD 800 FRACTIONAL OWNERS) SOME FORM OF LEGAL PROCEDURE MUST BE UTILIZED FOR THE HEIRS TO GAIN THEIR OWNERSHIP. OTHERWISE, THEY MAY BE "ENTITLED" TO OWNERSHIP, BUT ARE NOT YET THE ACTUAL OWNER. PAYING TAXES ALONE DOES NOT GRANT FULL LEGAL OWNERSHIP RIGHTS. SOME RELEVANT POINTS ARE SET FORTH BELOW. UNDIVIDED INTERESTS CONCERNS 1. Heir Property Ownership. When a person dies without a will, or an estate plan, state law controls who can rightfully inherit and how much they can inherit. Land that is passed down to heirs according to state law is commonly known as heir property. If the deceased owned land before death, the legally recognized rightful heirs will each inherit an undivided, fractional ownership interest in the land. Their interests are fractional because each co- owner has an individual, partial interest in the whole. Their interests are undivided because the heirs do not have separate deeds to their ownership interest or specific piece of the land. In fact, no heir can assume that his/her interest correlates to a specific area of the land until AFTER the land has been subdivided. The size of each heir’s fractional ownership interest depends on several factors, such as how many generations removed is an heir from the deceased, or, how many heirs can rightfully take their inheritance at a specific point in time? Heir property ownership is often the precursor to land loss. With each passing generation of heir property owners who die without a will or other estate plan, a new generation of heirs inherits ownership of the land. Typically, each successive generation is larger than the previous one. As a result, the next generation of landowners’ ownership interests are smaller, yet the number of interest holders has increased. With numerous co-owners, the following can occur, which can impede proper management of the land: * Heirs do not live on or near the land. * Heirs do not liver near each other. * Heirs do not know one another. * Heirs do not know how to locate one another. * Heirs do not have a connection to the land. These common situations can make it difficult, if not impossible for the land to be properly managed. Lack of a land management plan and/or improper implementation of a land management plan can lead to land loss. In some cases, the land is being managed, but this responsibility rests in the hands of one heir, or a small group of heirs, with the other heirs enjoying an unearned benefit. Those few who do invest in family land holdings can face many obstacles to management. Without specific authorization by the other heirs, many land use decisions (i.e. harvesting timber, leasing, building a structure on the land, etc.) can be made ONLY by unanimous consent. 2. Lack of Estate Planning. Estate planning is the process of arranging for the distribution and management of your estate after you die. An example of an estate plan is a will. Estate planning is an important tool for many reasons. One, you are prepared for the unexpected? Two, when you have an estate plan, you can prevent the creation of heir property. And, three, if you are currently an heir property owner, you may be able to prevent further fractionation. Despite the advantages to having a will or an estate plan, many landowners do not have an either. 3. Tax Sales. A tax sale is the public sale of property to recoup the amount of unpaid taxes on land that are owing to various local governments or agencies. One of the challenges of owning heir property is that you may not know who is paying the taxes, or if the property taxes are delinquent. Therefore, keeping track of who pays the taxes, and whether they are current are extremely important issues. 4. Partition Sale. Partition sales are a common way landowners have lost their land. A partition sale is a court-ordered sale of land. With a partition sale, the highest bidder becomes the owner. The proceeds from the sale are then distributed among all the co-owners of the property according to the size of their fractional interest. The proceeds, however, are not distributed to the heirs until after the cost of conducting the sale, attorney fees, taxes, and any other sale-related expenses are deducted. While a partition sale is a less awkward means to clear the problem of multiple ownership, there are disadvantages, such as: * It is often difficult for heir property owners to outbid land speculators and developers at the sale. * Any heir, or outside interest holder, in the estate property does not need to obtain the consent of the other heirs or interest holder before seeking the partition sale of the family land. VALUATION OF UNDIVIDED INTERESTS TAX COURT ADOPTS 60% FRACTIONAL INTEREST DISCOUNT The estates of John and Sarah Baird were consolidated for this proceeding. The only dispute was the value of each decedent’s fractional interest in a family trust holding 16 noncontiguous tracts of timberland in Louisiana. FACTS At their respective deaths, John owned a 14/65 (21.5%) interest and Sarah a 17/65 (26.1%) interest in the trust. On their amended returns, both estates claimed 60% fractional discounts. The IRS disallowed the discounts and assessed deficiencies. The estates and the IRS stipulated to the fair market value of the undivided fee interest on both valuation dates, but they disagreed as to the appropriate fractional interest discounts to be applied. The IRS agreed that some discount was appropriate but claimed that the size of the discounts proposed by the estates was excessive. VALUATION EVIDENCE At trial, the estates offered three expert witnesses and the IRS presented one. The estates’ experts were found to be qualified but the IRS’s was not. John A. Young, a real estate appraiser, testified for the estates and prepared a study in which he concluded that fractionalized interest discounts should be at least 50% of the proportionate fee value. His conclusion was based on his analysis of six comparable sales of fractional interests in timberland in Louisiana. He showed that the discounts were substantially larger where buyers purchased a partial interest and did not have control of the fee. Lewis C. Peters, a forester/real estate appraiser, also testified for the estates. Peters relied on 104 transactions in fractional interests in timberland in Maine and the East Texas/Louisiana area. He did not adjust for differences in control, as did Young, but simply estimated that the average discount attributable to these interests was 55%. The estates’ third expert, James Steele, III, had been in the Business of buying and selling rural Louisiana farm and timberland for over 20 years, particularly undivided interests. In his experience, purchases of fractional interests were initially subjected to discounts generally around 60%. When the buyer had acquired sufficient partial interests to hold at least 80%, the discounts suddenly dropped to just over 14%. In his report, Steele concluded that a discount of at least 55% would be appropriate. At trial, however, he testified that the value of the partial interests should be discounted 90% from the fair market value of the full fee interest. TAX COURT’S FINDINGS The court found Steele’s testimony “helpful and germane” and that his “unique and extensive experience” in the industry made him particularly well qualified on the issue. The court noted the factors Steele considered in arriving at his 55% discount: · Fair market value of a 100% interest · Percentage available for sale · Total number of owners · “Staying power” of existing owners · Property location · Number of tracts · Number of acres · Ability to influence management Continuity of the tracts · Access to the property · Topography · Mineral value Steele gave additional reasons for the increase in his discount to 90%, but the court found that most of the reasons were already reflected in his original discount opinion of 55%. Relying primarily on Steele’s valuation report, the court concluded that the record and the experts’ reports supported a fractional interest discount of 60% |
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