Purpose: To establish the fair market value of real estate interests transferred during life and at death for federal tax purposes.

An undivided real estate interest is a tenancy in common, meaning that the interest holder is entitled to possession of the property according to his proportionate share. Unlike joint tenants, there is no right of survivorship. Thus, the interest of a tenant in common does not terminate at death. Instead, each undivided interest holder’s interest passes to his or her heirs, rather than to other interest holders in the property.

Undivided interest holders do not enjoy rights and powers comparable to the owner of a fee simple estate. A fee simple estate reflects the largest bundle of rights possible, including the rights to possess, use, enjoy, control and dispose of the property at will. The undivided interest holder’s right to possess, use and enjoy the property is limited “according to his proportionate share.” Moreover, the undivided interest holder cannot control or unilaterally dispose of the property. Since there is no established market for undivided interests and since such interests cannot readily be pledged as security for financing, they have limited liquidity. Accordingly, discounts to reflect the lack of control and lack of marketability are warranted.

Undivided interests are commonly contributed to Qualified Personal Residence Trusts, Family Liability Partnerships or Limited Liability Corporations. They may also be among the assets includable in a decedent's estate.

While real estate appraisers are adept at valuing the underlying real estate, they frequently do not have the background or experience to determine the applicable discounts for minority and marketability considerations.