Valuation Discount

A reduction in the value of an interest in a business or other entity because of a lack of control, lack of marketability, etc. For example, you and a partner transfer a $500,000 building to a limited liability company (LLC – see separate definition). You gift 1% of the value of the LLC to your son. 1% of the underlying building is worth $5,000 (1% x $500,000). However, 1% of the LLC which is what you gift is worth only $3,000, based on an evaluation by an appraiser. The $2,000 reduction in value, called a “discount”, reflects the fact that your son will have a very difficult time selling the 1% ownership interest.