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I'm the personal representative of an estate with a situation like the following:

  1. Property with tax assessment of $100,000
  2. Tenant with a multi-year lease for the property with a total "lease fee" of $25,000
  3. During the lease, the Tenant has a (separate) option to buy the property at $50,000
  4. All lease payments decrease the option purchase price by a corresponding amount.

As the personal representative, I need to assign a value to these assets in the estate disregarding "likelihood to collect". I'm assuming this means I should assume the tenant pays the full amount of the lease and then executes the option at the end of the lease.

I'm also trying to track the initial value and changes to it in my personal finance software.

So far, I can't quite wrap my head around which set of double entry accounts would properly show a value. My intuition is that the lease is an asset but there is something offsetting its entire value because lease payments decrease the option purchase price. Similarly, the option itself is an asset because it would result in $50,000, but it is somehow offset because exercising the option would cause the property to be sold.

I'd appreciate any guidance on how to properly value and track this.

  • Just checking: the property is worth $100k but they can buy it for half price? Was there an option fee/premium as well? – Lawrence Jan 9 at 16:54
  • Maybe record the Present Value of the lease payments? – RonJohn Jan 9 at 16:56
  • @Lawrence I've simplified the numbers for the question, but, yes, the option purchase price is well below market value. There was a token option fee of a few dollars. – Eric Jan 9 at 17:53
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    tax assessment values are not market value. – Pete B. Jan 9 at 18:25
  • @Grade'Eh'Bacon Not sure what professional context or workplace you might be referring to. I'm asking because I'm assuming there are no decisions to be made, rather there are just correct accounting practices to be applied that I am unfamiliar with. – Eric Jan 9 at 18:35
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Anything that lets someone do something with your property is an asset to that person, and a liability to you. So both the lease and the option are assets to the tenant, and liabilities to the estate. The only assets that the estate has is the property and the $25,000 payment (either as cash or accounts receivable, as the case may be).

The estate is pretty much guaranteed to end up with not much more than $50k; if the property ends up being worth more than that (plus transaction costs), the tenant would be foolish to not buy, and if it ends up worth less (which would require either a massive overassessment and/or something catastrophic in the housing market), then the estate will be left with a worth-less-than-50k property.

Since you're getting $25k of that at the end of the lease, if you want that in present value you'll have to do time discounting, and if the other $25k is being received over the course of the lease, then you'll have even more (and more complicated) time discounting.

The simplest accounting would be to take the time discounted $50k as current assets, ignore the value of the property itself, since you no longer have any claim to it (during the lease, the tenant is entitled to its use, and at the end of the lease, it almost certainly will be bought), and if the house decreases below $50k, treat that as an expense. A slightly more complicated version of this would be to estimate the expected value of this loss (integral of (50k-x)(p(x)) from 0 to 50k where p(x) is the probability of the house being worth x dollars) and add that to the $50k (this will be a negative number, so adding it will decrease the amount).

If you want to be really fancy, you can enter the property as an asset, set some value for it (the assessment would be one candidate, but as Pete B. said, assessment is not the same as market value), then value the option to buy. Figuring out the market value of a property is nontrivial, and figuring out the market value of an option on a property is even more difficult; it's not like there's a market of people trading options on your property. On the other hand, with it being so far in the money, its value depends almost entirely on the value of the property. As the property is an asset, and the option is a liability, any value over 50k cancels out (the property being worth more means the option is also worth more, making the effect on your total value negligible). So while this avenue is arguably more complete from an accounting point of view, it's adding a bunch of complexity and uncertainty that isn't really worth much from a practical point of view.

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  • Thanks. Your comments on how the value is basically limited to the option value helped me arrive at my simplified solution. – Eric Jan 31 at 14:18
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Just to close this out with what was actually submitted in the estate inventory.

First, in the state where the estate is, property tax assessment was an acceptable "fair market value" for the purposes of compiling an estate inventory and assigning a value to the asset.

The house was valued at fair market value, which I did not base on the property tax assessment. The lease was not assigned any value since lease payments directly decreased the option value. The option was not assigned value. Instead, it was an "encumbrance" on the house that limited the house value to the option value.

So the net value of the house was the option value in the estate inventory.

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