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%
E. L. & T. RESOURCES
Undivided Interest Facts