4 Valuation Principles That Appraisers Follow for an Accurate Estate Tax Appraisal

What is Estate Tax?

Also known as the “death tax,” estate tax is that which is levied on the transfer of a deceased person’s property to their heirs or beneficiaries. This tax is calculated based on the value of the property. Such a property requires an estate tax appraisal after the death of the owner.

The estate tax is a federal tax that is governed by the Internal Revenue Code. The tax applies to the transfer of property at death, as well as certain transfers made during the lifetime of the individual, such as gifts that exceed the annual exclusion amount.

What is important to know is that there are certain exemptions and deductions available that can reduce or eliminate the amount of estate tax to be paid. Also, it’s important to note that not all estates are subject to the estate tax.

There are certain thresholds and exemptions in place that can exclude smaller estates from taxation. However, for larger estates, the estate tax can be a significant expense. To minimize this burden, proper estate planning can help. For an accurate estate tax appraisal, professionals from Appraisily can help you.

What is Estate Tax Appraisal?

Estate tax appraisal is a process used to determine the value of a deceased person’s estate for the purpose of estate tax calculation. This appraisal involves appraising the estate’s assets, such as real estate, stocks, bonds, and personal property, as well as any liabilities, such as debts and taxes.

And why is this necessary? Because the process helps in calculating the net value of the estate. This is the amount of money the deceased person’s heirs will be liable for in estate taxes.

The estate tax appraisal also determines the fair market value (FMV) of the assets in the estate. It is usually conducted by a professional appraiser who is licensed or certified to value assets for tax purposes.

The appraiser will consider various factors such as the condition of the property, its location, and comparable sales or prices for similar assets in the area. The value determined by the appraiser is used to calculate the amount of estate tax that must be paid. There are certain principles that govern the estate tax valuation. Let’s understand some of them.

Estate Tax Valuation Principles

Estate tax valuation is a complex process that requires careful consideration of several important principles. It is important to understand the various valuation principles that are used to assess the value of assets for tax purposes.

We have tried to sum here the key principles associated with estate tax valuation and how appraisers use them for an accurate estate tax appraisal.

These valuation principles are a set of guidelines used by real estate appraisers to analyze and value property for estate tax purposes. These principles are based on market data, economic trends, and the condition of the property. Some of the methods appraisers use to determine the value of a property have been listed as follows.

1. Fair Market Value

The appraiser must determine the fair market value of the property, which is the price that the property would fetch in an open and unrestricted market. This is the most important principle in valuation, and it requires the appraiser to consider various factors that affect the property’s value.

2. Sales Comparison Approach

The sales comparison approach is the most commonly used and is based on the sale price of similar properties in the area. This approach takes into account current market trends, economic conditions, and the condition of the property. Appraisers will look at recent sales in the area to determine the FMV of the subject property. The appraiser must make adjustments for any differences between the subject property and the comparable properties.

3. Cost Approach

The appraiser must use the cost approach to determine the value of the property if there are no comparable sales or income data available. This approach involves estimating the cost of replacing the property, deducting any depreciation, and adding the value of the land. It is based on the estimated cost of constructing or replacing the property. It takes into consideration the cost of materials, labor, and other costs associated with the construction or replacement of the property. Appraisers will also include the value of any improvements to the property in this approach.

4. Income Capitalization Approach

The appraiser must use the income capitalization approach to value income-producing properties such as commercial and rental properties. This approach takes into account the income potential of the property, as well as expenses such as taxes, insurance, and maintenance costs. The appraiser must consider various factors, such as the property’s rental income, expenses, vacancy rates, and market rents. Appraisers will also consider the risk associated with investing in the property.

Why You Should Hire Only Professional Appraisers

Of utmost importance is that the appraiser must adhere to the uniform standards of professional appraisal practice (USPAP). The USPAP requires appraisers to be impartial, objective, and independent. It requires them to provide a well-supported and unbiased opinion of value.

During an estate tax appraisal, the appraiser will also consider any special characteristics of the property, including location, view, and environmental factors. That is why it is important to understand how these principles are applied. Knowing them will help to minimize the estate tax liability.

It is also essential for appraisers to be aware of the latest market trends and any applicable laws when conducting an appraisal. This will prevent you from getting scammed. Also, hire only certified professional appraisers. Let expert appraisers from Appraisily help you with your estate tax valuation for an accurate appraisal.

Cited Sources

https://answerconnect.cch.com/topic/19ab14087c6b1000973590b11c2ac4f1045/estate-tax-valuation-general-principles

https://artofestates.com/tax-estate-appraisal/amp/

https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax