Not Everyone Needs An Appraisal
by Mark Allred
Posted 4/13/2014
Most people go through life never needing an appraisal or an appraiser outside of real estate. There are 2 types of appraisers. One appraises real estate or real property. The other appraises everything else which is classified as personal property. Personal property appraisals most often include fine art, some decorative art, antiques and collectibles, specifically those items that can appreciate or depreciate in value. For example, if someone wanted to insure a certain item say a painting or an antique chair because they were told by a relative or friend that it was worth a great deal of money, they would certainly need an appraisal to satisfy their insurance company. It may be questionable to the appraiser if the item is worth very much but a minimum amount of research would be necessary to ascertain an approximate value. If similar items were selling at auction at an average of $500 and the appraisal was going to cost the client $1,200, it would be absurd for the appraiser to continue writing a lengthy, legal, formal document without the approval of the client.
Logically most people would not need insurance on items valued below a certain level. If insurance is now out of the question then so is the purpose of the appraisal. As an alternative, simple research can answer the questions many clients may have. When approached in this manner the client would be responsible for the research time but now given pertinent information could opt out of the formal document since it has not been written yet. The appraisal should have a specific purpose stated. If the appraisal document simply answers the question, “Do I need an appraisal?”, the appraisal is not being used for any purpose it is intended. The client should be considered in every step of the process and justifiably since no one wants to pay for something they do not need. Preparing the final appraisal document is more time consuming than the actual inspection of the item and sometimes takes longer than the research time.
Other Needs
Other cases may involve a situation where a value that may be “LOW”, needs to be established regardless of any apparent logic. If the client had acquired fine art in a self-directed IRA then the value may be calculated as a loss or gain. For instance, the Rembrandt painting increased by $10 million but the ivory carvings significantly dropped in value because of new state and federal legislation regarding ivory. The extensive glass collection that was purchased over 30 years ago, with very authentic looking signatures, is now identified as fraudulent and worth a fraction of the original purchase price.
Personal property appraisals are predominantly crucial for about four main purposes: Death, Divorce, Damage, and Donation. Arguably there are more “D”’s that are being left out that could be considered essential as well.
When planning or resolving an estate that includes art, an appraisal may be needed for various reasons: inheritance and tax liability, collateral, inventory, liquidation, and more. If the client and their three siblings inherited the uncle’s art collection, an appraisal would usually be necessary before everyone agreed on the specifics of the estate. If the courts had to decide the outcome it would be essential to have a qualified appraisal. In a divorce when there is art involved, usually both attorneys will need an appraisal. Sometimes each party hires their own appraiser. If you were to access your tax deferred trust where your art collection had been set-up as part of a self-directed retirement plan, an appraisal would be essential to determine Fair Market Value. Your banker would most likely require an appraisal for the personal property that was offered as collateral for a loan.
You might acquire an expensive piece of art or collectible that your homeowner’s policy would not cover. Your Insurance Company might request a formal appraisal determining Replacement Value. The movers might damage your priceless art or antique China that your insurance does not cover but would want to have it appraised to determine the compensation to the owner. This appraisal would not only determine replacement value but estimate the cost of repairs and give consideration to whatever effect the repairs might have on the value of that particular piece or collection. If the owner of the item(s) in question was not happy with the offer the insurance adjuster made, a second appraisal by another appraiser might be in order. Maybe the first appraisal did not include all aspects and considerations?
If you moved to a smaller home and your art no longer fit your walls or you re-married and your new spouse did not share the same taste in art, and you needed a tax break, you might consider donating your art collection to a non-profit institution such as a University or Museum. The appraisal would determine the amount you can take as a tax deduction.
The I.R.S. requires a qualified appraisal on all art donations over $5,000. (rule does not apply to used clothing and household wares) A qualified appraisal is defined specifically in IRS PUBLICATION 561.
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Qualified appraisal:
An appraisal document that is made, signed, and dated by a qualified appraiser (defined later) in accordance with generally accepted appraisal standards, and that meets the relevant requirements of Regulations Section 1.17A13(c)(3) and Notice 2006 96, 2006-46 I.R.B.902 (available at www.irs.gov/irb/2006-46_IRB/ar13.html),relates to an appraisal made no earlier than 60 days before the date of contribution to the appraised property, does not involve a prohibited appraisal fee, and includes certain information as stipulated in IRS Document 561, page 10 (http://www.irs.gov/pub/irs-pdf/p561.pdf) [1]
If that sounds a bit vague, it is, but only if you have not read the numerous other publications, rules, and notifications published by the IRS, the Appraisal Foundation, and the U.S. Treasury.
The IRS also requires that comparables be included with the appraisal for donation as described by USPAP BINDING REQUIREMENT 8-1b, USPAP RULE 8-2H, 8-2I, and 8-2J, and Treasury Regulation Section 1.17a-13c. A comparable is defined as a recorded past sale of an identical, similar or like item. Not all comparables are accepted by the IRS. Not all appraisers are accepted by the IRS. Not only does the IRS have specific guidelines for appraisals but guidelines for appraisers as well. If these requirements for appraisals are not adhered to, it could result in the appraisal being dis-qualified. If the appraisal is disqualified, that could result in an audit as well as penalties and fines for the taxpayer. The IRS can hold the appraiser responsible as well with stiff fines and by never accepting further appraisals from that appraiser. This organization is not known for second chances. That is why many appraisers (certified or not) do not offer appraisal services if the IRS is involved.
Now this is not something the average person would need to worry about or be knowledgeable about, but your appraiser should. Obviously, it is not a good idea to use an appraiser who has been disqualified by the IRS, especially if you are needing a donation appraisal. Most formal appraisals are used in some way to assist in or resolve a legal situation. Probably before you have a court date you will have an attorney and not many lawyers will walk into court with an ill written appraisal but it can happen.
Which brings us to the next question “Who can write a Qualified Appraisal?” IRS PUBLICATION 561 gives a more comprehensive definition of a Qualified Appraiser that is not extensively expanded nor contradicted by other publications.
Qualified appraiser:
A qualified appraiser is an individual who meets all the following requirements.
The individual either:
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Has earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised, or
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Has met certain minimum education and experience requirements. For real property, the appraiser must be licensed or certified for the type of property being appraised in the state in which the property is located. For property other than real property, the appraiser must have successfully completed college or professional-level coursework relevant to the property being valued, must have at least 2 years of experience in the trade or business of buying, selling, or valuing the type of property being valued, and must fully describe in the appraisal his or her qualifying education and experience.
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The individual regularly prepares appraisals for which he or she is paid.
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The individual demonstrates verifiable education and experience in valuing the type of property being appraised. To do this, the appraiser can make a declaration in the appraisal that, because of his or her background, experience, education, and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued.
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The individual has not been prohibited from practicing before the IRS under section 330(c) of title 31 of the United States Code at any time during the 3-year period ending on the date of the appraisal.
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The individual is not an excluded individual.
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In addition, the appraiser must complete Form 8283, Section B, Part III. More than one appraiser may appraise the property, provided that each complies with the requirements, including signing the qualified appraisal and Form 8283, Section B, Part III. [1]
The IRS has gone to great lengths to enlighten the uninformed as to what they will accept in the way of an appraisal. Of course, if the client is the only one going to read the appraisal then the appraiser would probably have a lot more flexibility with his product. I have personally witnessed a law firm inform me that they did not need measurements and photos; nothing more than just dollar values on the inventory list and that the clients were going to settle out of court. That may very well be and surely, this firm knows what they need in order to represent their client but by the same token the document they described is not an appraisal or at least not to most trained appraisers. Just as all roads do not lead to Damascus, no doubt all methods are not necessarily “by the book” but may still work in specific circumstances. I think an appraiser’s worst nightmare would be for some customer-dictated amateurish looking document, under the label of an appraisal, be brought into court by that disgruntled client that no longer wants to “settle out of court”. It is usually much more advantageous for the client when the appraiser works together with the attorney than when both work independently from one another.
Most anyone can write some form of something and call it an appraisal, but that does not mean it will be accepted by the courts. But maybe it does not need to be. And that is a good indication that you probably do not need an appraisal. However, when you need an appraisal that will definitely be accepted by the IRS, by the Insurance Company, or by the Courts, there really is only one thing that can give that guarantee. USPAP. USPAP stands for Uniform Standards of Professional Appraisal Practice. Any appraisal written under the adherence of USPAP is considered the recognized industry standard.
USPAP was developed in 1986-87 by a special committee consisting of representatives from nine of the leading appraisal organizations in the US and Canada. By 1989 the Appraisal Board of the Appraisal Foundation had now been established and the Foundation had adopted these Uniform Standards. [2] Now this is where most start falling asleep but if you can, stay with me. It does not get better so you may want to bail out now and go to another page, otherwise you will find the next part interesting and explains some of the origins of legislation that govern the appraisal practice.
Some of you might remember during the 1980s organized crime laundered a ton of money through real estate and left the Savings and Loans holding worthless paper. From that fiasco came some very direct legislation. As a result, the real estate industry, associated appraisers, and banking procedures evolved with new required standards in the banking and appraisal practice. Many of these changes were also applied and adopted by the personal property side of appraising. Obviously, the rules and guidelines are not identical but both real estate and personal property practices were and are currently affected by legislation and the Appraisal Foundation.
Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FFIREA) commonly known as the “Savings and Loan Bailout Bill”, requires the Federal Reserve Board to issue regulations to protect federal financial and public policy interests in real estate transactions requiring the services of an appraiser. Federal Law recognizes the Uniform Standards (USPAP) as the current industry standard and identifies the Appraisal Standards Board of the Appraisal Foundation as the authority for professional Appraisal Standards.[3]
CERTIFIED
This is important because if the appraiser working for you CERTIFIES the appraisal by stating in the appraisal that the appraisal abides and adheres to the USPAP guidelines and signs that statement you now have legal recourse. But more important, certain standards of practice can be expected from the appraiser and a certain amount of assurance that the appraisal will be accepted by those involved. That is why a Certified Appraisal is much more important than a certified appraiser. UNFORTUNATELY, no Federal or State certification for personal property exists today. Therefore, there are many versions of “certification”. Auctioneers can be certified to appraise when they finish an auctioneer course study. An appraisal organization can offer a complete study course and give a certificate upon completion but still not consider the appraiser CERTIFIED within that organization. The appraiser might become accredited but not certified. The term “certified appraiser” may simply reflect the appraisers position of membership in one of the numerous appraisal organizations.
There are 3 major appraisal organizations identified with, but not limited to, personal property appraisals; the International Society of Appraisers (ISA), the American Society of Appraisers (ASA), and the Appraisers Association of America (AAA). All three of these organizations have some good points, some bad points, and all points in between. Overall the most common and most important trait they all three share is the requirement for all active members to take the USPAP study course which is required every 5 years or the update equivalent every 2 years. This is a good thing. For that reason alone, membership in these appraiser organizations can give the client some sort of comfort zone with their appraiser. These organizations were originally designed to offer educational seminars for appraisers to keep their chops up but probably offer the most to those that are experienced the least. Hefty annual membership fees do not limit some appraisers from having membership in several organizations while other appraisers question the necessity of an organization that has become more social than educational.
There is no one set study course offered by the 3-major personal property appraisal organizations for the appraiser to become certified. There are certainly study courses and some good ones that appraisers should take offered by these appraisal organizations. Many appraisers are inclined to spend their money on the USPAP course study program along with independent specific studies that will further their knowledge and field of expertise than to spend money on a confusing title. No wonder on a nationwide average of these appraisal organizations only about 10% of membership is “Certified”.
Certification is not a bad thing but it is puzzling and it may not mean what it implies. That is why USPAP certification is so important. That TEST is based on a specific body of information and specific course study.
So, when curious about the value of something inherited, or stored in the garage or attic, and you might want to sell the item(s), an appraiser should be able to help you even when you do not need an appraisal. The appraiser might direct you to an auction house, art gallery, or antiques dealer. In many cases the very people who have the expertise in specific fields do not have the credentials to appraise nor the desire. Not everyone needs an appraisal but when you do, nothing less will suffice.
References
1. IRS Publication 561
2. The Appraisal Foundation
3. The Appraiser Regulatory System