NAC

Sooner or later, particularly as one gets older with gray hair (or lack thereof- in my case) the necessity of having a tax appraisal performed becomes more likely. There are three main reasons for having one executed. One is for estate or probate. It is the valuation of all one's property at the time of death. Usually the deceased doesn't care too much, but survivors and heirs certainly do! Executors of wills, friend or family, are not usually accustomed to the process. (Many times this is the only estate they'll ever do.) They were chosen because of their relationship to the deceased, not because they were financial wizards or accountants. They are left "holding the bag." and Uncle Sam needs to know what's in it.

The next reason could be for a charitable contribution of property (household, art, antiques) to a museum or qualifying charitable organization. This happens when you either need a tax deduction or just want the public to benefit from your good fortune. The IRS allows you to deduct up to 100% of the fair market value of donated property from that year's taxes. This includes things as simple and common as used clothing to paintings worth millions of dollars.

The other main reason to have an appraisal for taxes is when one encounters severe losses that are uninsured. Things like hurricanes, fires, and floods may wipe out an entire houseful of property. If one is not insured, the loss may be deducted-but only to the extent that the loss exceeds 10% of a taxpayer's adjusted gross income (reduced by $100). This 10%/$100 rule is often misunderstood and many fail to take advantage of it. You can bet many along our coasts are checking this out!

In all three instances, the IRS requires that all property be valued at "fair market value." This concept is defined in their regulations and becomes an important aspect of an appraiser's methodology. It is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts (IRS Treas. Reg. Section 1.170A-1(c)(2)).

The value is the same for all three functions, although worded slightly different in each section. That means that the value of an item for estate tax purposes is exactly the same as if one were donating it to a charity. No "high balling" items for charity or "low balling" items as part of an estate. What's fair for the goose is fair for the gander.

There are a few differences, however, that you should note (Revenue Procedures 66-49). In an estate, appraisals must be done if an item is over $3,000 or a group of similar items is over $10,000. A houseful of antiques-or even just a few, would require an appraisal. The appraisal must be done by an IRS qualified appraiser and must conform to the regulations. Items are done room by room, some of which may be grouped (if they are under $100). You may not be taxed, but the value becomes part of the whole.

In a charitable contribution appraisal, any taxpayer can donate up to $5,000 without the necessity of an appraisal. If the item is worth over $5,000, however, then an appraisal must be done. If it's worth over $20,000 the appraisal must be sent in to the IRS with tax form 8283. (Tax form 8283 must be sent in when deductions are claimed over $500). The appraiser must sign the 8283 after they've done the appraisal.

In all cases, appraisers must provide "proof" of their claims. Their appraisals must be self-contained and provide all factors that apply to value. Descriptions must be complete and include all the elements required by the IRS. There are some people excluded from appraising the property. It would be wise to check that out first.

There are many required report elements, but a good trained appraiser will know them-things like effective date, purpose and function, comparable sales, conditions of the market, certification, etc. There are no fixed formulas and "book" values are seldom correct.

Taxpayers and appraisers are both liable for either understating or overstating the values. This includes hefty penalties and exclusions. Faulty appraisals can also lead to tax court and it's consequences.

They key factor when needing a Federal tax appraisal is to get the right appraiser. They will know automatically what to do and how to do it. They will guide you through the process and become an asset instead of a costly aggravation. Look for someone with educational credentials and membership in a reputable appraisal society (ISA, AAA, ASA). Make sure they've done these appraisals before and done them correctly. You don't need a penalty based on their incompetence.

Questions or comments can be submitted to Leon Castner (leon@nacvalue.com). Leon teaches appraisal classes for the International Society of Appraisers.