Appraisal Economics has determined the fair market value of an unsecured promissory note for gift and estate tax planning purposes. The note was issued by a real estate holding entity and bears interest at the applicable federal rate (AFR). The Internal Revenue Code permits loans at what are often considered favorable interest rates to avoid being treated as taxable gifts if the interest rate is at least equal to the AFR. Taxpayers have used this provision to make loans to related parties and as part of an estate planning strategy. We valued the note using the discounted cash flow method of the income approach and selected a discount rate that accounted for the tenor of the note and the creditworthiness of the debtor.
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