Offer in Compromise - Real Estate Valuation Considerations

How is the fair market value of real estate established for IRS Offer in Compromise purposes?

IRS advises taxpayers to use the following resources to determine the fair market value of real estate:

• Real estate appraisals based upon a walk-through by a qualified real estate professional

• Recent purchase price or existing contract to sell

• Market comparable established by Internet-based real estate search engines such as Zillow, Redfin, etc.

• Real Estate Tax Assessor's land and building property values

• Homeowner's insurance policy

Taxpayers should use the resource(s) that result in the lowest valuation to achieve the best result in an offer in compromise.

Is it possible to use more than one resource in determining the fair market valuation?

Yes, a taxpayer may determine their fair market valuation of their real estate based upon multiple sources and can use the average to reduce the valuation for IRS purposes.

What other types of support will the IRS accept to support a lower valuation for real estate?

Taxpayers may request independent third-party quotations for necessary repairs and improvements and take photographs to prove that the repairs are necessary to IRS. This is an acceptable reduction to the fair market valuation because any potential buyer would consider these improvements in arriving at a purchase price.

What resource does IRS typically use in determining fair market valuations for Offer in Compromise purposes?

IRS uses market comparable based upon internet-based real estate search engines.

What are the disadvantages with fair market valuations based upon real estate search engines such as Zillow?

• Internet data derived from Zillow and like companies is 'not actual' data but is instead based on assumptions and speculation.

• The internet companies do not visit the real estate but base the value of a particular property on guesses that may be similar to other properties that were sold in the neighborhood.

• Zillow does not consider the age and condition of real estate when determining fair market valuations.

As a result, properties may be valued at a significantly higher valuation for offer in compromise purposes and therefore may result in a higher settlement and/or disqualifying the taxpayer from an offer in compromise completely.

If a taxpayer has negative excess monthly income or a financial hardship, can IRS include net equity in asset/equity tables for offer in compromise purposes?

When IRS includes net equity in real estate in asset/equity tables, IRS is treating it as if it were a hypothetical sale. However, IRS cannot increase the taxpayer's negative monthly income with a forced sale if the taxpayer can demonstrate that the costs of selling, moving and renting would result in a higher negative monthly excess income.

If a taxpayer owns more than one real estate property, can a taxpayer apply the negative net equity in a property that is under water with the positive equity of another real estate property?

Yes, taxpayers do have the ability to apply negative equity against positive net equity. The taxpayer must provide substantiation that the real estate is worth less than it was paid for. It would be substantiated by demonstrating that the current loan balance is larger than the property's fair market value. In addition, proof of foreclosure is also an acceptable form of substantiation.

If real estate is jointly owned by two spouses and only one spouse is liable for delinquent taxes, can IRS exclude net equity in real estate for offer in compromise purposes?

For real estate properties held as tenancies by the entirety, when the tax is owed by only one spouse, the taxpayer's allocable share for IRS purposes is usually 50 percent of the property's total net equity.In situations where the property does not appear to have been transferred into the tenancy to avoid tax collection, IRS may reduce the taxpayer's share of net equity to less than 50 percent based upon the difficulty in liquidating or borrowing against the taxpayer's share of the asset.

In situations where a taxpayer cannot borrow against the equity in real estate and/or liquidate the real estate, can the IRS exclude it for offer in compromise purposes?

If the taxpayer can demonstrate the inability to borrow and/or liquidate the residence due to special circumstances and/or public policy considerations, IRS may exclude the net equity for offer in compromise purposes.Special circumstances include but are not limited to:

• Financial hardship

• Permanent disability or medical illness

• Taxpayer's age and employment status

• Number, age and health of taxpayer's dependents

• Any other extraordinary circumstances