930 / How is real estate valued for federal transfer tax purposes?
(1) Market data. An arm’s length sale of the property in question on the valuation date would, of course, determine its fair market value. Lacking such a circumstance, the next best indication of value would be the price for which a reasonably comparable piece of property was sold on or near the valuation date. This approach is particularly useful in the valuation of unimproved real estate.2
(2) Capitalization of income. The projected net income from the property, either before or after depreciation, interest, and income taxes, from the highest and best use of the property is estimated and then capitalized at a rate which represents a fair return on the particular investment at the particular time, considering the risks involved. This approach is particularly useful in the appraisal of business properties.
(3) Reproduction cost. This approach requires an estimate of the cost of replacing a structure, an estimate of the depreciation and obsolescence that has taken place in the existing structure, and an appraisal of the land involved. Use of this method is extremely limited for ordinary federal tax valuation purposes.