To fix this issue, please reactivate the account
...Why Is It Important That You Know?
...and what should you do today?
Consider the following real-life stories:
Christine and Carly inherited two investment office buildings when their father died, sharing the estate with their step-mother. They were all shaken by their loss, but realized that they need to figure out what to do; they are on good terms, but have no interest in remaining partners into the future.
Fred had operated his manufacturing company out of his own building in Chicago for 35 years and it was time to retire. What sort of tax treatment would be necessary if Fred and Helen decided to sell the building (and what price should they ask—do they just accept the opinion of a real estate agent?) or if they decide to keep it as an investment, with a tenant paying rent?
A gas station in a major metro area was bought by a group of investors in the form of two Limited Liability Companies (LLCs). One held 40% and was a silent partner; the other LLC and its members held the majority 60% interest and were the controlling operators. There soon grew a dispute between the partners, with claims that the majority partner was cheating the other partner by over-paying themselves to run the facility, which was losing money. How do they split things up and go their separate ways?
Lee got the phone call from his sister-in-law that his brother Mike had died suddenly that morning from a heart attack at age 60. In the days ahead, Mike’s widow would need to begin figuring out what to do about the estate, and the industrial building they own from which Mike’s company was run. Should she sell the property and at what price? Or should she lease it, at what rate?
The Thompsons own 3 apartment complexes in New York that they have acquired over many years. There is a lot of equity in the properties and both Lonnie and Rita are elderly and not well. The properties appear to have a combined value that is likely in the millions of dollars. Their accountant has told them that they should know the value of their estate so that they can take whatever tax planning steps make the most sense for the sake of each other and their children. What's the first step?!
These are mostly true accounts of real family or business situations pertaining to investment real estate. I could list others in many states. You may have your own unique situation that is perhaps causing stress, whether personal or financial.
"It is important that you know now what your investment assets are worth." John Boccia, CPA
Herron Companies offers affordable appraisal services, tailored to your situation and budget; we';ve been helping investors and families around the USA like this for a long time... Jeff Key, MAI
Call us now for more information at: 800.556-1222, email us at: [email protected]
or contact us on our webpage:
Mention that you saw us on Facebook and ask for a 25% discount on your first appraisal!
Much of the distress during a family loss or partnership conflict or retirement comes from not knowing what to do, and also concern that you are making a mistake or missing some important step in the process of settling up issues pertaining to your investment property. Hopefully you will find the information and suggestions on this page to be helpful to your planning.
Often the need to think about your investment property comes at a time of tragedy, such as the loss of a loved one or dissent within a family. We cannot eliminate these traumas of course, but here are some thoughts that might help. We would be glad to discuss this by phone or email, even if you’re not ready for an appraisal at this time.!
The threshold for paying an inheritance gift tax is $11.58 million for an individual and $23.16 million for a married couple. This has been increased dramatically over the years and, although these are large numbers, with real estate values in many states continuing to grow, triggering of this limit might come as a surprise to some families. If one spouse dies, there are steps that can shift some of the difference to the surviving spouse for a larger estate; this is known as a portability election. You’ll do better to know in advance if your estate is growing close to this level and if there is planning that should be done now rather than later. There are timing limits on how long you have to file certain returns in the event of a family death.
For more modest estates, it is still necessary to take the proper steps in the event of the death of a loved one with assets. The value of real property assets will likely need to be established as of the date of death, to affect the “basis” for future gains and losses in the estate. You have some flexibility as to whether the date of death is the date for the appraisal; you may be able to adjust this date by a few months if there was some event or issue that gives you an advantage on the valuation results. You’ll want to have your accountant and appraiser talk about this.
There may be estate planning activities that can be done now, to ensure smart decisions are made in the distressing time of the loss of a parent or spouse. For example, if your business has occupied a building and that will be closed down, should the building be sold or held as an investment. Some proactive planning while everyone is healthy can be very worthwhile.
Partners in an LLC may receive an adjustment in the taxable basis of a property when one partner dies, so Boccia suggests that partnerships not go too long without updating the known value of the assets.
What if you are retiring and selling the building along with the business? The total assets need to be separated into real property and intangible business value. There can be different motivations between the seller (you) and the buyer of the properties. Having an unbiased breakdown of the property contributions can help with potential disputes or IRS scrutiny.
John recommends against using a broker to give you opinions of value for tax purposes in most cases (I did not ask him to say that BTW). With our Restricted report, we can trim the scope and fee to make it worthwhile to have a state-certified appraiser go through all the relevant steps to provide an appraisal that will stand up to scrutiny by the IRS or any partners you may have involved.
(Let us know if you’re in California and would like to be in contact with John Boccia, CPA.)
Based on John’s feedback, it seems that taking a proactive stance and knowing what you have in your estate is worthwhile; don’t go too many years without some sort of update for your planning. The benefits of being proactive are that you can make hard decisions (or easy ones) while both spouses, or all partners, are healthy and can participate in the strategy discussions. You can think ahead and set up a plan of action to implement on the unhappy day that you lose that partner or loved one. The downside to inactivity is that you will be dealing with these potentially challenging decisions at a traumatic time, and may miss legal obligations or make less-than-optimum decisions.
Most investment properties are bought for their potential to generate income, so the analysis of income and expenses is very important. This is different than when we appraise a home that you own and occupy yourself. The investment appraisal is more involved and must include comparable sales (“comps”) that themselves reflect what an investor paid for that other property.
We care not only about the price paid per square foot of building area, but also the multiplier used to convert annual net income into a value. A net income multiplier of say 14 means the price paid is 14 times the net income remaining after paying all the usual operating expenses. If gross rents are $150,000 and expenses such as property taxes, insurance, maintenance, etc., are $50,000, the net income is $100,000 and the value suggested by this analysis is $100,000 x 14 = $1,400,000.
Or we may look at comparable land sales if you have a parcel of land; in that case it is important that we find comps of land with similar potential.
Not all investment properties are bought based on their rental income. If you have a parcel of land, we’ll treat that differently from a triplex of course. What about the industrial building that you occupy with your own business? It’s still an investment because you pay the mortgage instead of rent to somebody else, right? But that value may be more closely tied to what other similar industrial building sell for to other owner occupants.
Understanding the nature of your property is important to our helping you start the ball rolling on an appraisal. We’ll ask you a number of questions when you call or email us, starting with knowing the property type—apartment, industrial, rental home, retail building, car wash. For some types we’ll ask whether it is occupied by a tenant our your business. If it is rented, you’ll need to pull together lease information and probably a couple years of income tax documents from your accountant. We’ll talk you through the process.
The assignment usually involves you signing our standardized agreement and paying a suitable retainer. The process usually takes about 3-4 weeks but we can work with you on timing if there is a particular deadline. You’ll receive a digital copy, signed by our senior appraiser and one of the Herron Companies partners, Chris Wade or Jeff Key typically. These reports are addressed to you or the client name you provide to us, perhaps the LLC that owns the building. You will typically forward the report to your tax consultant, likely your accountant. He or she will pull the relevant conclusions from our report and enter that into their accounting forms. Usually the appraisal report goes into a file and is not included in the tax return to the IRS or state. However, John Boccia cautions that estate tax returns for larger properties may call for the appraisal to be sent in with the tax return. In that case we should know it in advance if possible.
The results of the report can let you know how much to ask for your building and often what you should be getting in rent from a tenant. This can be very helpful as you talk to a real estate agent about a sale or lease of the property. You can discuss tax implications with your tax and estate planner knowing how much income you’d receive from the sale.
What About Pricing?
I’m going to stick my neck out here a little and give you a very broad range in likely fees for different situations. These properties can have complex nuances that can greatly affect the time requirement and the resulting fee. But in general for a Restricted Report assignment:
A small duplex or triplex might cost in the $850 to $1,400 range.
A larger apartment complex fee could run around $1,600 to $3,500.
An owner occupied simple industrial or retail building could range from $1,300 to $1,900.
A leased smaller investment property with a few tenants might run $1,600 to $2,200; if there are complexities this could run higher
Larger properties might run from $2,400 to $4,900, including gas stations, hotels, car washes and shopping centers.
Land parcels can be tricky but might be as little as $900 and run over $2,000 depending on size, zoning, location.
Properties on ground leases or that are in certain portions of the Country, or where there is a vacancy problem, can run higher. On the other hand, we might be able to save some if you have a group of properties in the same area.
With occasional exceptions, we find that the cost of a professional appraisal will typically run well under 1% of value.
Here Are four ways that Herron Companies can help you digest your estate situation and make wise decisions:
1. Get The Right Appraisal and Save Money
There are many possible reasons that you could need an appraisal, as we’ve discussed. If you were seeking a mortgage from a bank to buy an office building, there is an extensive appraisal report format that we must use and that cost is affected by the level of work required..
Fortunately, for most uses by private investors, we can create a reduced-scope report that still meets our standards of professional practice and will stand up to scrutiny by the IRS and investors. We call this the Restricted Report. The name reflects that our professional Standards allow us to use it only when we can identify all the intended users of the report; its use is “restricted” to only those that we can name specifically. So you need to let us know who’s involved when we engage for the assignment. This report lets us cut out a lot of information and level of detail that is not essential to your situation.
We can also carefully limit the supporting research and analysis work to cover the most important issues and that can save further on our time and, therefore, the fee.
2. We Offer One-Stop Appraisals For Simple or Complex Properties
Investment properties can range wildly in their complexity and size. In over 35 years, we have handled all types of properties, from duplexes and owner-occupied warehouses to car washes, gas stations, large retail or office complexes or hotels. Vacant land, self storage facilities and apartment projects are also fair game. The ability to use the short-form Restricted report, and to trim back on unnecessary tasks in a smaller appraisal allow us to meet tight budgets, but to also offer the expertise when a larger undertaking is needed. Some of these property types include intangible business enterprise value within the total and we can deal with such special purpose properties in many cases. We work in all 50 states, always with the appropriate licensing.
3. We offer Direct Access to the Partners
We have a substantial team of senior, certified appraisers, many of whom have been with us for decades. They all work with one partner or the other on almost all assignments, so your report is typically signed by the certified appraiser and Chris Wade, MAI or Jeff Key, MAI. You can get to us easily; we do not have “screeners” to filter our calls.
4. Sometimes Litigation is Unavoidable-- We Can Help
Thankfully, it is fairly rare for a partnership to end up in legal litigation, but when that happens it is extremely stressful for most of us. If you are facing potential legal conflict, it would be wise to retain the services of an experienced real estate attorney sooner rather than later. Our experience is that this is not a do-it-yourself project. Sometimes the contribution from an unbiased, third-party appraiser can help resolve partner differences. We have combined legal experience spanning over 70 years at Herron Companies and can provide consulting guidance to your lawyer as well as to provide a strong appraisal report. Let us know, or have your lawyer give us a call right away if this is looming. We cannot make the stress go away, but we have been told that we are very helpful to the process.
Call us now for more information at: 800.556-1222, email us at [email protected] or contact us on our webpage:
Check out our website for more information about our firm, our people and our services. There you will find links to articles we’ve written and our "Appraisal Wisdom" Youtube channel.
