Charitable donation, gift, and estate appraisals have something important in common: They all go to the Internal Revenue Service (IRS). The consequences are of course very different: A charitable donation typically results in a tax deduction, whereas properties contained in an estate or gift would be appraised for determining tax liability. "How much?" is of course the big question.
While appraisers use a number of different types of value, the IRS recognizes only one, namely "fair market value," which is defined by the IRS in Revenue Procedure 96-15 Section 1.170 and 20.2031 (b), as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." It is an opinion of this value alone that should be presented in any appraisal headed to the IRS.
Other circumstances may occasion an appraisal being sent to the IRS. These are three of the big ones:
1) Donations of Artworks to Museums or Other Relevant Charitable Institutions
U.S. law (unlike that of many other countries) provides a strong incentive in the form of tax deductions for donating art to museums and other relevant institutions. A tax deduction reduces the amount of income on which you have to pay taxes. So, if, for example, in 2013, you make $100,000 and you donate a $40,000 Matisse print to the Metropolitan Museum of Art, you will only be responsible for paying income tax on the remaining $60,000 of your income. This tax law has long cultivated the creation of great museum collections in this country, fostering the development of a common art culture of unprecedented size and diversity, largely from great personal collections.
Once the museum accepts your charitable donation, you will need to demonstrate to the IRS the value of the donated artwork in order for your charitable contribution to qualify for a deduction. If the value of the donated artwork is over $5,000, this will require a "qualified appraisal," which is a valuation that includes specific criteria and is performed by a "qualified appraiser," one who has the relevant education and experience working with the type of property being donated.
If the donated property is a higher-value item, you can expect that the IRS will scrutinize the appraisal more closely. In fact, artworks valued over $50,000 are, as a matter of routine, reviewed by the Art Advisory Panel, which is comprised of a group of top gallerists and other art world professionals. So, for such donations, you will need to ensure that your appraisal is researched with great care and valued with convincing reason. *Remember: The IRS requires appraisals for charitable donations to be made no more than 60 days before the property is donated to the institution.
The annual U.S. gift tax exemption in 2015 is $14,000 per person. This means that a person can give another person up to that amount in cash or property, including artwork. These gifts can be made to an indefinite number of people each year. For gifts in excess of this amount, the giver of the gift has a tax liability -- and for purposes of gift tax, personal property such as artwork is considered equivalent to cash or other assets. In other words, you cannot just give that Picasso painting to your kids without paying taxes. And the IRS will tell you that in order to assess your tax liability for a gifted artwork, you will need a qualified appraisal of the property.
Estate tax, assessed at death, is essentially like a really big gift tax. Similar to gift tax, the tax burden is on the giver, in this case the estate of the decedent, not the beneficiary. And similar to the gift tax, personal property, including artwork, is treated like cash, i.e. it is taxable. The IRS requires qualified appraisals for items in the estate for property worth $3,000 and up. (See IRS Revenue Procedure 96-15, Section 20.2031-6[b]). The effective date of valuation for these appraisals must be the exact date of death or exactly six months after the date of death. *Remember: If you are an executor of an estate, check with the accountant and the attorney of the estate about the "unified credit" to find out if the estate is eligible for any tax exemptions.
Image: Marinus van Reymerswaele, The Banker and His Wife