appraise

What It Is

An appraiser is a person capable of providing an appraisal.

How It Works

An appraisal is a document that formally describes the value of a piece of property, usually exceeding $5,000. For example, let’s imagine that John Doe wants to donate a painting to his favorite charity. He believes the painting is worth $20,000. Instead of simply putting a $20,000 deduction on his tax return for the year, John Doe hires an appraiser to determine how much the painting is worth. A qualified appraiser provides an independent estimate, putting the value of the painting at $22,000. John Doe files IRS Form 8283 with his tax return and deducts $22,000.

Although almost anybody can estimate the value of goods or services, the IRS has very strict guidelines about who can be a "qualified appraiser." Among other things, the appraiser must have a professional appraiser designation from a national appraiser organization, perform appraisals regularly, meet certain education requirements and meet other guidelines as the IRS deems necessary. In many cases, a qualified appraiser can’t be the donor, the donee, anyone party to the acquisition of the property, or an employee or relative of anyone involved.

Appraisers charge a fee for appraisals, though for qualified appraisers, the fee cannot be based on or a percentage of the value of the property appraised. The cost of the appraisal itself is also not deductable as a charitable contribution, though it might be deductible elsewhere depending on the donor’s tax situation. Sometimes charities pay the appraisal fee, but some types of charities are restricted from doing so.

Why It Matters

For many securities, the market is a natural appraiser—it dictates the value of securities on an almost instantaneous basis throughout the day. But for less liquid things, such as houses, old cars, pieces of art, or ownership positions in private companies, it’s harder to decide what those things are worth. And in many cases, the value of an asset determines the price of a transaction or the size of a tax bill.

Accordingly, misleading asset pricing can also be a way to engage in tax fraud or lopsided deals. That’s why the IRS requires people who want to deduct certain large charitable donations to obtain qualified appraisals for those items. The IRS can impose penalties of 40% for a gross misstatement of a donation (and even a 20% penalty for just a “substantial” misstatement), and it can also penalize the appraisers involved in the misstatement.

Source: Investing Answers