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Qualified Appraisal

The valuation of various assets and property in order to meet the requirements set out by the IRS

What is a Qualified Appraisal?

A qualified appraisal is the process of valuing various assets and property in order to meet the requirements set forth by the Internal Revenue Service (IRS). The valuation process is conducted by a professional who is known as a qualified appraiser.

 

Summary

  • A qualified appraisal is the valuation of various assets and property in order to meet the requirements set out by the IRS.
  • Qualified appraisals are used for various purposes, such as for charitable donations, insurance, taxation, and disposition.
  • A qualified appraisal is carried out by a qualified appraiser, who is an individual that applies various valuation methodologies to fairly value specific assets or properties.

 

Qualified Appraisal (IRS) Explained

A qualified appraisal is a document that must meet the IRS’s standards for appraisal. The appraisal must be conducted by a qualified appraiser, and it is used to identify the value of a piece of property, especially in the context of charitable donations. Given that donations may represent a tax deduction, a qualified appraisal is important to make sure that the value of the donation and associated tax deduction is not overstated.

Appraisals for charitable purposes will make use of “Form 8283: Non-cash Charitable Contributions,” which is a tax form that the IRS distributes to deduct non-cash contributions made to a qualifying charitable organization that exceed $5,000. The deductions are reported as itemized deductions and can be on various assets such as:

  • Financial securities
  • Property
  • Collectibles
  • Art
  • Vehicles

The appraisal of the above properties and assets must be conducted within 60 days before the asset is donated in order to ensure the accuracy and recency of the valuation.

 

Understanding Appraisal

An appraisal is essentially simply a valuation of assets such as property, collectibles, antiques, and even a business. An authorized individual known as a qualified appraiser will create an estimate for these assets. Appraisals are commonly used for the following purposes:

  • Insurance: Identifying the value of property in the case that property is stolen or destroyed, and the value is to be paid out to the property-holder
  • Taxation: Identifying the value of assets in order to calculate property taxes
  • Disposition: Identifying the value of assets or businesses when they are sold
  • Donations: Identifying the value of assets such as collectibles and antiques when they are donated

One of the most common forms of appraisal is a home appraisal, which is used to calculate the value of a house. The property’s appraised value is very useful information for those that may be trying to sell the property or for mortgage lenders to analyze how risky their mortgage loan is.

For example, if a mortgage lender has an outstanding loan of $800,000 on a property. However, if the property’s appraised value is $1,000,000, the mortgage lender has a $200,000 or 20% cushion on the value of the real estate before it erodes the value of the loan. If the borrower of the mortgage cannot afford their mortgage payments, the mortgage lender can seize the property and potentially re-sell it for $1,000,000.

The appraisal will determine the home’s value to ensure it reflects the current home’s condition, location, age, size, and other features, such as the number of bedrooms and bathrooms.

 

Methodologies of Valuation by a Qualified Appraiser

A qualified appraiser is an individual who has achieved an appraisal designation from a professionally recognized appraiser organization. The appraiser must demonstrate sufficient competence to value the types of property on which the appraiser is set to value.

Furthermore, a qualified appraiser can be an individual who has met the education requirements of the IRS and is licensed in the state that the appraisal is being conducted. Essentially, an appraiser should be able to prove that they are able to fairly value various assets in an unbiased manner.

An appraiser will apply valuation methodologies in order to calculate the value of an asset. Depending on the specific asset, one may be preferred over the others.

 

1. Comparison Approach

The appraiser will appraise the value of a property or asset based on recent selling prices of similar properties or assets. The timeliness and similarity between properties and assets are important.

 

2. Cost Approach

The appraiser will appraise the value of a property or asset based on the cost of an equivalent asset, for example, on a house, taking into consideration the cost of land and construction costs.

 

3. Income Approach

The appraiser will appraise the value of a property or asset by determining the potential income yield it may generate. For real estate, the value would come in the form of rent revenue, less operating expenses required to hold the property.

 

Related Readings

Thank you for reading CFI’s guide to Qualified Appraisal. To keep advancing your career, the additional CFI resources below will be useful:

  • Fair Market Value
  • Form 1040EZ
  • How to Read a Commercial Real Estate Appraisal
  • Schedule A
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