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The fractional or undivided partial interest (UPI) discount is recognized by the IRS for ownership interests that are less than 100% in a property, effectively reducing taxable exposure. This discount is commonly applied when an individual sells or gifts a fractional interest in a property or business, often to a family member, even without the occurrence of a death. These discounts are primarily utilized in two situations: gifting a fractional interest during the donor's lifetime and transferring a fractional interest in real estate to a beneficiary upon the donor's death. Valuing these interests is complex and requires detailed analysis to ensure acceptance by the IRS for tax filing purposes. Let's use an illustration to explain further.
Note: The discount varies based on specific circumstances such as the percentage, number of owners, and other particulars. Typically, these discounts are lower for ‘controlling interests’ above 51%, while they are higher for ‘noncontrolling interests’ that range from 1% to 49%. Our UPI valuations follow accepted practices validated by the IRS, and are based on established case law, and as required along with real world intra-family or open market transactions. Why a discount is applied: The value of a partial interest is typically less than its proportionate share of the total property value. This is due to factors such as: - Lack of Control: Partial interest owners may have limited control over the property's use, management, and sale. - Marketability: Selling a partial interest can be challenging, as potential buyers may be hesitant to purchase a share of a property rather than the whole property. - Legal and Financial Complications: Disagreements among co-owners and potential legal disputes can further reduce the attractiveness and value of partial interests.
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