How to Calculate Life Estate Values for Non-Residential Property

Calculating the present value of a life estate is daunting, as the value is dependent on the lifespan of the person who controls the property. To overcome the uncertainty inherent in guessing how long someone will live, it is common practice to rely on actuarial tables to estimate the value of a life estate. Absent access to more specific and detailed tables, it is best to rely on IRS tables and data, as it is easily obtained. The IRS produces this data for calculating the value of life estates for gift and estate tax purposes.

Determine the fair market value of the non-residential property as a whole. Before you can calculate the value of a segment of the property interest, you need to know how much the entire property is worth. If you are unaware of the value of the property, or you acquired it a long time ago, have the property assessed.

Look up the applicable interest rate. The correct interest rate varies based on current market conditions. If you are attempting to value the life estate for gift or estate tax purposes, you need to comply with IRS guidelines. Each month, a new interest rate is provided through a press release. Contact the IRS at 800-829-1040 to obtain the correct interest rate for the life estate. If you are attempting to value the property for another purpose, the number provided by the IRS is a good rate to use when you lack any other criteria specific to the property.

Study actuarial tables to determine the appropriate life estate factor. Section 7520 of the tax code requires the use of IRS-issued actuarial tables to calculate the value of time-dependent assets, such as life estates. Using Table S of the Section 7520 tables, select the appropriate group of values based on the interest rate you decide to use to calculate the value. After choosing the appropriate value groupings, use the age of the person who holds the life estate to find the life estate factor, which is located in the middle column of the table.

Calculate the value of the life estate by multiplying the fair market value of the property by the life estate factor.

Warnings

  • If you are calculating the value of the life estate for estate or gift tax purposes, consult with an attorney or certified public accountant to ensure that you will comply with all relevant state and federal guidelines.

References

About the Author

John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.