Andy Warhol, One Dollar Bill (Silver Certificate), 1962, casein and pencil on linen, 52⅛ x 71⅝ inches
Art appraisals for IRS tax purposes: Overview
The IRS recognizes only one type of value, which is "fair market value," defined as "the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts" (IRS Publication 561). Fair Market Value is generally accepted to include all transaction costs, such as the buyer’s premium at auction.
Appraisals for tax purposes include:
1) Charitable donations
U.S. law provides a strong incentive in the form of tax deductions for donating art to museums and other relevant institutions. This tax law has cultivated the creation of great museum collections, fostering the development of a common art culture, in large part from personal collections.
Once a donee institution accepts a charitable donation, the taxpayer will need to demonstrate to the IRS the value of the donated artwork to qualify for a tax deduction. If the value of the donated artwork is over $5,000, this will require a "qualified appraisal," which is a report that includes specific criteria and is performed by an appraiser who has the relevant education and experience working with the type of property being donated.
If the donated property is a higher-value item, one can expect that the IRS will scrutinize the appraisal more closely. Higher-values works are reviewed by the Art Advisory Panel, which is a group of selected art experts; the value threshold for review by the Panel may vary, but IRS states that works valued above $150,000 are reviewed.
2) Gifts
The annual U.S. gift tax exemption in 2024 is $18,000 per person. This means that a person can give another person up to that amount in cash or property, including art, without taxation. These gifts can be made to numerous people each year. For gifts in excess of this amount, the giver of the gift has a tax liability; for purposes of gift tax, personal property such as artwork is considered equivalent to cash or other assets. An appraisal may be needed to assess tax liability for that gift.
3) Trusts
Like other assets, art can be placed into trusts, which may be tax advantageous. Trusts are frequently used for estate planning. Placing art in trusts may require appraisal.
4) Estates
Estate tax is similar to gift tax: The tax burden is on the giver — i.e., the estate of the decedent, not the beneficiary. As with gifts, personal property including art in estates is taxable, and therefore may require appraisal.
Call to find out more about DSFA appraisals for IRS tax purposes.