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The Why and What of Appraisal for IRS Purposes

Key Elements of an Appraisal for IRS Purposes

An appraisal is an important process that determines the fair market value of an asset or property. The Internal Revenue Service (IRS) may require an appraisal in several situations. But before we understand which are these situations that require an appraisal, first let’s take a look at some of the requirements that according to IRS make an appraisal authentic.

To ensure an authentic IRS appraisal, certain requirements must be met. Here are the key elements:

Qualified Appraiser

The appraisal must be conducted by a qualified appraiser who possesses the necessary knowledge and experience to appraise the specific type of property being evaluated. The appraiser should have relevant professional credentials and certifications, such as being licensed or certified by a recognized professional appraiser organization.

Written Appraisal Report

The appraisal must be documented in a written report that provides a detailed description of the property and the appraisal methodology used. It should include information on the appraiser’s qualifications, the purpose of the appraisal, and the date of the report.

Fair Market Value

The appraisal should determine the fair market value (FMV) of the property. FMV is the price at which the property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under compulsion to buy or sell.

An appraisal should always be followed by a written report.
Detailed Property Description

The appraisal report should include a thorough description of the property, including its physical characteristics, condition, and any unique features or attributes that may impact its value.

Supporting Documentation

The appraisal report should include relevant supporting documentation, such as photographs, maps, market data, and comparable sales or rental information. These help provide a clear basis for the appraiser’s conclusions.

Compliance with Appraisal Standards

The appraiser must adhere to professional appraisal standards, such as the Uniform Standards of Professional Appraisal Practice (USPAP). These standards ensure that the appraisal is conducted objectively, impartially, and without any conflicts of interest.

Timeliness

The appraisal must be current and reflect the property’s value as of a specific date. The date of valuation should be clearly stated in the appraisal report.

It is possible that the above requirements may vary depending on the specific regulations and guidelines set by the IRS or other applicable authorities. To ensure you do not make a mistake it is prudent to get in touch with a qualified appraiser. Experts from Appraisily can help you by providing professional advice regarding your specific appraisal needs. This is highly recommended to ensure compliance with all relevant IRS requirements.

8 Instances When the IRS May Require An Appraisal

Now that we know what the requirements are that need to be met for an authentic appraisal, let’s go ahead and take a look at 8 situations that warrant an appraisal for IRS purposes.

Estate Tax Valuation:

When a person passes away, the estate they have owned may be subject to federal estate tax. To determine the worth of the assets in the estate it is important to get an appraisal of the property done. The value of the estate is determined by adding up the FMV of all the assets in the estate, including cash, stocks, bonds, real estate, and personal property. The estate must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, with the IRS, and attach the appraisal report to the return.

Gift Tax Valuation:

When a property or assets are gifted by anyone and they exceed the annual exclusion amount, an appraisal may be required to determine the value of the gift for gift tax purposes. And wht is this gift tax? It is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. If the value of the gift exceeds the annual exclusion amount, the donor must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, with the IRS. It is important to attach the appraisal report to the return.

Charitable Contributions:

Any person who makes a charitable contribution of property or assets valued at more than $5,000, may require an appraisal to determine the value of the donation for tax deduction purposes. The value of the donation is based on the FMV of the property or assets at the time of the donation. The donor must file Form 8283, Noncash Charitable Contributions, with the IRS along with the appraisal report.

Corporate Transactions:

In certain corporate transactions, such as mergers or acquisitions, an appraisal may be required to determine the FMV of the assets being transferred. The FMV of the assets is important for tax purposes, as it determines the basis of the assets in the hands of the acquiring company. The acquiring company may use the basis to calculate depreciation and other tax deductions.

Conservation Easements:

When a taxpayer donates a conservation easement to a qualified organization, an appraisal may be required to determine the value of the easement for tax deduction purposes. A conservation easement is a legal agreement that restricts the use of a property to protect its conservation value. The value of the easement is based on the difference between the FMV of the property before the easement is granted and the FMV of the property after the easement is granted. The donor must file Form 8283 with the IRS and attach the appraisal report to the return.

Property Damage or Loss:

If a taxpayer experiences a casualty loss or theft of property, an appraisal may be required to determine the amount of the loss for tax deduction purposes. The amount of the loss is based on the decrease in the FMV of the property as a result of the damage or loss. The taxpayer must file Form 4684, Casualties and Thefts, with the IRS, and also attach the appraisal report to the return.

Divorce Proceedings:

In divorce proceedings, an appraisal may be required to determine the value of property that is subject to division between the parties. The FMV of the property is important for determining how the property will be divided between the parties. The value of the property may be determined by an appraisal, which can be submitted as evidence in court.

Alternative Minimum Tax:

Taxpayers subject to the alternative maximum tax (AMT) may be required to obtain appraisals to determine the basis of property or to determine the value of stock options. The AMT is a separate tax system that limits the amount of certain deductions and credits that can be claimed. The basis of property is important for determining the amount of gain or loss on the sale of the property, while the value of stock options is important for determining the amount of income that is subject to the AMT.

Corporate transactions require an appraisal for IRS purposes.
Estate Planning:

An appraisal may be necessary to determine the value of assets in an estate for estate planning purposes. This may include situations such as when creating a trust or making lifetime gifts. Knowing the value of assets can help in determining how to structure an estate plan, including how to minimize taxes and how to distribute assets among beneficiaries.

It’s important to note that an appraisal for IRS purposes is just one piece of the puzzle when it comes to tax compliance. That is why it is always best to consult with a tax professional or qualified appraiser to determine whether an appraisal is necessary in your specific situation. By obtaining an accurate appraisal, taxpayers can ensure that they are complying with tax laws and regulations and minimizing their tax liabilities. For complete guidance our expert appraisers at Appraisily can help you.

Cited Sources

https://www.journalofaccountancy.com/issues/2019/may/basis-consistency-requirements-appraisal.html

https://www.investopedia.com/terms/a/appraisal.asp

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