The success of an appraisal requires a critical understanding of the purpose for which that particular appraisal is needed, whether for donation and estate tax issues, equitable distribution, insurance or liquidation. Choosing the wrong path may result in some very unwelcome outcomes.
Many practitioners don’t realize that different purposes dictate different appraisal methods:
- Insurance liability, which uses replacement or retail value, typically generates the highest value in appraising, often twice that of fair market value (FMV).
- For estate tax and donation purposes, FMV is a principle favored by the Internal Revenue Service and is a gross value that includes all sales costs and commissions.
- With divorce and equitable distribution, we use marketable cash value (MCV), which is defined as how much the seller would actually receive if the item was offered for immediate sale net of expenses or some 25 percent to 30 percent less than FMV.
- Liquidation value is defined as the price realized in a sale situation under forced or limiting conditions and under time constraints and is traditionally the lowest valuation.
Using any of the methods incorrectly will result in clearly unintended valuation errors and the possible consequence of egregious fines from government agencies. Hence the importance of using a qualified appraiser.
Qualified Appraiser
There are no licensure requirements for a qualified appraiser of personal tangible assets (not so in real estate), so appraising may be considered self-regulated. Also, consider that all appraisal documents are, by their nature and definition, subjective. It’s therefore incumbent on the legal and financial professional to interview and review the credentials or provenance of the appraiser in depth to determine his level of expertise.
When a tax return selected for audit includes an appraisal for a single work of art or cultural property valued at $50,000 or more, the IRS examining agent or appeals officer must refer the case to Art Appraisal Services for possible referral to the Panel, unless a specific exception exists. The appropriate results from the appraisal may depend on choosing the right appraiser with the right qualifications, especially when taxes are concerned. In the world of checks and balances, the Panel provides advice and makes recommendations to the AAS unit in the Office of Appeals. This Panel, with its own appraisers, helps the IRS review and evaluate the acceptability of tangible personal property appraisals of works of art involved in income, estate and gift tax returns.
The IRS defines “qualified appraiser” as an individual who’s earned an appraisal designation from a recognized professional appraisal organization (such as the Appraisal Institute, ASFMRA, NAIFA, ASA, AAA) or has met certain minimum education and experience requirements.
Education requirements.
- Classroom hours (120) in appraisal theory, practice, ethics and methodology and area(s) of appraisal specialization, and
- Uniform Standards of Professional Appraisal Practice Foundation Course (15 hours), and
- 30 semester credit hours from an accredited college, junior college, community college or university, or
- An associate’s degree or higher.
Experience requirements.
- 700 hours appraisal research, development and writing experience, and
- 1,800 hours of market-related experience (at least 900 of which are in the appraiser’s area of specialization), and
- 4,500 hours of market-related personal property, non-appraisal experience in area(s) of specialization, or
- An equivalent combination of market-related personal property appraisal experience and market-related, non-appraisal experience in area(s) of the appraiser’s specialization based on a minimum ratio of
one year to two and a half years.
Continuing education. Seventy hours every five years, which must include at least 20 hours valuation theory-related coursework, and seven hours of a USPAP Update Course every two years or 15 hours of a USPAP Update Course every five years.
The appraiser must:
- Regularly prepare appraisals for which the individual is paid;
- Demonstrate verifiable education and experience in valuing the type of property being appraised;
- Not have been prohibited from practicing before the IRS under IRC Section 330(c) at any time during the 3-year period ending on the date of the appraisal; and
- Not be an excluded individual (someone who’s the donor or recipient of the property).
This piece is adapted from the author’s original article in the March 2018 issue of Trusts & Estates.