When valuing a real estate LP interest for estate, gift, or other tax reporting purposes, one of the first questions is whether the discounts applied can withstand IRS scrutiny. The discounts should reflect the actual economics and restrictions of the interest being valued, not a generic haircut to net asset value.
A real estate LP interest is a passive ownership interest in an entity that owns or invests in real estate. In a typical private fund structure, limited partners provide capital, while the general partner makes the key decisions. That means the investor has exposure to real estate economics but does not own the underlying property directly and usually cannot control timing, sale decisions, distributions, or transfers.
For related valuation context, see business valuation basics and guidance on valuation for gift transfers, estate administration, and charitable contributions.
A real estate LP interest is a minority interest in a fund or partnership that owns or invests in real estate. The limited partner usually has economic exposure to the property, but they do not manage the assets, do not make project-level decisions, nor do they control the timing of the fund’s liquidity events. In addition, they are often prevented from transferring or selling their LP Interest to other parties, which makes the asset less liquid.
Those restrictions are the reason valuation discounts often become relevant. A buyer of the LP interest is not buying direct control of the real estate. The buyer is buying a restricted, minority position in an entity that may have its own governance terms, distribution policies, financing risk, tax attributes, and significant transfer limitations.
The valuation question is not simply, "What is the real estate worth?" Instead, ask: 'What would a willing buyer pay today for this specific interest, with these specific rights and restrictions?'
For estate tax purposes, Treasury Regulation 20.2031-1 frames fair market value around a hypothetical willing buyer and willing seller. For gift tax purposes, Treasury Regulation 25.2512-1 applies a similar fair market value standard. In practice, that means a valuation discount needs to be supported by the actual interest being transferred, not by a template percentage. The IRS is likely to focus on whether the appraisal explains the partnership agreement, transfer limits, control rights, cash flow risk, liquidity, market evidence, and buyer return expectations. IRS valuation guidance reinforces that every valuation requires professional judgment, factual support, and analysis rather than formula-driven conclusions.
What to do next: Make sure the valuation connects every discount to entity-specific evidence instead of relying on broad market commentary alone.
A valuation report is generally needed when an interest is being transferred, reported, gifted, inherited, donated, or reviewed for planning purposes. A detailed report is especially important when the appraisal may be audited by IRS agents. The following are types of individuals who’ll often need a valuation report:
When valuing a General Partnership (“GP”) interest in the same fund a separate type of valuation is needed (for PCE’s approach to these valuations see carried interest appraisal methods and allocations) as the structure of and cashflows received by a GP Interest differ significantly from those going to LP investors.
What holds up is not the biggest discount but instead a coherent valuation story. As previously discussed (see How Does the IRS Look at Discounts Section), treasury regulations that define fair market value from the perspective of a willing investor. So, any appraisal report should approach the asset like a buyer, not from a biased or taxpayer-friendly point of view. Here are a few of the most important court cases that have provided context around what the fair market value standard means.
Pierson M. Grieve v. Commissioner (T.C. Memo. 2020-28): The IRS criticized the tiered discounts taken on the private equity and venture capital investments held by Angus MacDonald, LLC. The Tax Court never commented directly on this issue, but it is notable that the IRS decided to challenge the valuation of Angus MacDonald, LLC, which contained multiple layers or tiers of discounts against LP Interests in funds.
What Held Up? Discounts from NAV are OK, but tiered discounts are an audit risk.
Borgatello, Charles A., Estate of et al. v. Comm: This ruling supported the taxpayer and his expert who applied a 33% discount for lack of marketability to an 82.76% controlling interest in a real estate holding company. The ruling reinforced that substantial discounts can apply even to controlling blocks, especially when underlying assets are illiquid.
What Held Up? Illiquid underlying assets support higher discounts.
Undivided Interests (various cases): These have featured in over half a dozen Tax Court cases. Of course, unique facts and circumstances of the subject interest play a role. However, double-digit discounts are common. See table that follows.
Secondary-market data shows how sophisticated buyers price restricted fund interests relative to net asset value. It should be used as a cross-check, not as a shortcut.
Real estate LP interests trade below NAV because buyers are not buying a liquid claim on appraised real estate. They are buying a restricted, minority interest in an entity with its own cash flow, governance, tax, and transfer rules. The Jefferies Global Secondary Market Review, January 2026 shows how visible this gap can be in real markets.
The report notes that average LP portfolio pricing settled at 87% of NAV at year-end 2025, while real estate fund LP pricing declined to 70% of NAV. Jefferies also points to muted real estate liquidity, elevated financing costs, and office-sector headwinds as some of the factors causing transactions to occur at notable discounts to NAV.
Sophisticated buyers often require meaningful markdowns because they are not buying a liquid claim on appraised real estate. They are buying a restricted interest in an entity with its own liquidity, governance, tax, cash flow, and transfer constraints.
The same market data also shows why headline pricing needs care. Delayed payment structures remained common in 2025, which means the headline purchase price may not equal today's cash-equivalent value given that part of the consideration would be paid the following year.
Secondary-market data can indicate how buyers price illiquidity, vintage, asset quality, fund strategy, and exit risk. It can also provide useful evidence that private fund interests often trade below NAV.
Secondary-market data cannot automatically justify a specific discount for a specific LP interest. The data must be reconciled to the size, rights, restrictions, risks, and expected liquidity of the actual interest being valued. The following are some items that the data cannot cover:
What to do next: Use market pricing as a cross-check, but not as a shortcut. A robust valuation requires entity-level support and consideration of the specifics of the fund interest being valued.
A strong valuation does not chase the largest discount. It builds the most defensible one.
A well-supported valuation of a real estate LP interest ultimately hinges on discipline, not aggressiveness. As Tax Court outcomes and secondary-market data demonstrate, discounts must be grounded in the specific attributes of interest: governance rights, liquidity constraints, cash flow risk, transfer restrictions, and market evidence.
The best valuations use market data as a reference point rather than a shortcut and build a cohesive narrative that aligns with how sophisticated investors price restricted fund interests. Discounts are real and often significant, but they must be supported with thorough analysis rather than cherry-picked to reach a desired outcome.
PCE’s track record appraising LP interests allows us to provide fund managers, advisors and investors with a defensible valuation that can help in many different situations. They can also avoid the headaches that can come when using a less experienced (or more aggressive) appraiser.
A real estate LP interest is a passive minority ownership interest in a fund or partnership that owns or invests in real estate. The limited partner usually has economic exposure to the assets but limited control over management, liquidity, transferability, and exit timing.
Real estate LP interests may receive valuation discounts because buyers are purchasing a restricted, minority interest rather than direct control of the underlying real estate. Discounts may reflect lack of control, lack of marketability, transfer restrictions, cash flow risk, and buyer return requirements.
The IRS generally looks for supportable assumptions tied to the specific interest being valued, including the partnership agreement, transfer limits, governance rights, liquidity constraints, cash flow risk, market evidence, and buyer return expectations.
Tax Court cases can help show how courts evaluate valuation discounts, but they do not provide automatic discount percentages. The useful lesson is that discounts need to be connected to the specific facts, rights, restrictions, and market evidence for the interest being valued.
Secondary-market data should be used as a cross-check for how sophisticated buyers price restricted fund interests relative to NAV. It should not be used as a shortcut because the data must be reconciled to the specific fund, asset quality, vintage, liquidity, and transfer restrictions.
Daniel Cooper
Daniel Cooper is a Managing Director at PCE and plays a key role in the firm’s valuation practice. He specializes in ESOP valuations and estate planning, advising clients across industries on financial reporting, tax, and transaction-related valuation matters.