Accurate real estate appraisals play a crucial role in estate planning, particularly when it comes to navigating the complexities of estate and gift tax returns. While each estate plan is unique, at a high level any high-net-worth individual with real property as a significant part of their estate should understand the importance of having their property appraised.
In the intricate world of estate planning, the importance of accurate real estate appraisals cannot be overstated, especially when facing the watchful gaze of the IRS during estate and gift tax audits. As families and individuals seek to preserve their wealth and ensure a smooth transfer of assets across generations, real estate often represents a significant — if not the largest — component of an estate’s value. This reality makes the proper valuation of real property not only a foundational step in the estate administration process but also a critical defense against costly disputes with tax authorities down the road.
The IRS plays a pivotal role in verifying estate and gift tax returns accurately reflect the fair market value of real property included in an estate or transferred as a gift. Since real estate markets can fluctuate and are often prone to subjective interpretations, the IRS pays special attention to these valuations. An IRS determination that a submitted value is understated could trigger audits, penalties or even litigation. Not only can this jeopardize the financial legacy intended for heirs, but it can also result in protracted legal battles and substantial tax liabilities.
Both the federal estate tax and the federal gift tax are designed to ensure individuals pay their taxes, either by transferring assets to their heirs before death or at the time of death. The value of real estate is central to calculating these taxes — overstating or understating a property’s worth can have significant financial consequences:
A professional real estate appraisal is a formal, unbiased estimate of a property’s market value and is conducted by a qualified and licensed appraiser. When conducted according to rigorous standards, such as those outlined by the Uniform Standards of Professional Appraisal Practice (USPAP), appraisals become the linchpin in defending an estate’s or gift’s value during an IRS audit.
The timing of asset transfers can dramatically affect your estate’s future tax exposure, especially when leveraging valuation discounts for gifts of real estate interests.
Suppose an individual transfers $10 million in real estate holdings out of their estate today, using a 25% discount for lack of marketability or fractional interest — reducing the taxable value to $7.5 million. If those assets appreciate at 5% annually over 15 years, their value compounds to more than $15.6 million, all outside the estate for future tax purposes. Assuming a 40% estate tax rate, transferring sooner rather than later could ultimately save over $3 million from estate taxation compared to waiting. This demonstrates how strategic early transfers capture today’s discounts and the full spectrum of future growth, maximizing wealth preservation for heirs.
By understanding the stakes involved and the importance of accurate property valuations to estate and gift tax returns, individuals can better navigate the complexities of estate planning. Leveraging professional appraisals and strategically planning for the timely transfer of assets can position you and your heirs for a smooth transition of assets, minimizing tax exposure and maximizing wealth preservation.
Contact Jon Marshall or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.