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When Do You Need Appraisals and Valuations?

Appraisals and Valuations

There are various reasons why individuals may need to obtain an appraisal or valuation of property. These reasons include buying or selling a home, seeking financing for a business, or preparing for its sale. The information included in an appraisal or valuation depends on the characteristics of the assets and the nature of the transaction. It is important that the individuals conducting the appraisal or valuation are independent and possess specialized knowledge, education, and experience. They should also be impartial and not affiliated with any parties involved in the transaction. Below, we will discuss some less common situations that require appraisals or valuations.

Tax-Deductible Donations

Individual taxpayers who itemize their tax deductions by filing Schedule A can deduct qualified charitable contributions they make throughout the year, with certain limitations. If the total claimed deduction for noncash contributions exceeds $5,000.00 (excluding publicly traded securities), a qualified appraisal is required. An appraisal is also necessary if a deduction of more than $500.00 is claimed for an individual article of clothing or household item. This appraisal requirement is separate from any other reporting or substantiation requirements that may be needed from the charitable organization receiving the donation.

Lifetime Gifts to Individuals

Generally, if an individual makes a gift to a single recipient that exceeds the current annual exclusion amount, a gift tax return must be filed. Examples of reportable gifts include cash, property (tangible and intangible), sales of property below fair market value, and debt forgiveness. For property other than cash or publicly traded stock, a qualified appraisal is necessary to determine the fair market value as of the gift date. Gifts of real estate, closely held stock, and difficult-to-value business interests require independent expert appraisals and valuations. In some cases, the fair market value of the gift can be established through a sale shortly after the gift date. However, it is advisable to always conduct an appraisal when reporting a gift. Including a qualified appraisal or valuation with a gift tax return ensures proper disclosure and significantly reduces the chances of later adjustments by the IRS or state tax agencies.

Estate Valuation

When an individual passes away, the value of their gross estate includes all property and interests owned by the individual on the date of death, and possibly some lifetime gifts. Federal estate tax returns must be filed for individuals who passed away in 2023 if the gross estate value exceeds $12,920,000.00 (state estate tax filing thresholds may be lower and vary by state). Qualified appraisals are required for estate valuation in circumstances similar to those for gift tax reporting.

Even if no estate tax returns are filed, appraisals should still be obtained to determine the fair market value of the decedent's assets as of the date of death. This is important for determining the beneficiary's basis in the inherited property, which may be stepped-up to the fair market value. A stepped-up basis can potentially reduce taxable gain if the beneficiary later sells the property. If the estate sells the property instead of distributing it, the capital gain realized on the sale can also be calculated using the stepped-up value.

Obtaining appraisals or valuations is crucial for ensuring accurate assessments and complying with legal requirements. Whether it's determining the tax deductibility of charitable contributions, assessing gift tax liabilities, or establishing the value of an estate, qualified appraisals play a vital role in facilitating transparency, reducing the risk of future disputes, and optimizing tax planning strategies. By recognizing the significance of appraisals and seeking the expertise of qualified professionals, individuals can navigate these complex financial matters with confidence and precision.

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