Here’s a quick quiz: Why is a painting appraised at fair market value not usually acceptable for an insurance appraisal? How old can an appraisal be and still be valid for a charitable donation? What sales records are appropriate use for an estate appraisal? When attorneys, accountants and insurance professionals seek appraisals, how can they be sure that the document they receive contains sufficient information to support their case or to fulfill their client’s needs? How should that appraisal be read and interpreted? What requirements does the IRS look for in an estate or in a charitable donation appraisal? In other words, if you are asking for or using an appraisal for a client what should you know?

First and foremost, the appraiser doing the work should have appraisal credentials and should have been tested by an organization whose purpose is to accredit and to educate personal property appraisers. Members of such organizations are trained to understand and to employ the highest standards of the profession. The appraiser should be USPAP (Uniform Standards of Professional Appraisal Practice) certified as having passed and completed a USPAP course and examination. USPAP was developed by the Appraisal Standards Board of The Appraisal Foundation, which was authorized by Congress as the source of appraisal standards and qualifications. The appraiser should also have knowledge of all IRS appraisal requirements.

The requirements differ for each appraisal purpose, whether it’s for insurance, estates, gifts, charitable donations, or equitable distribution. The professional asking for an appraisal should know the rules for each appraisal purpose in order to judge whether the report is complete. The Appraisers Association of America has prepared “Elements of a Correctly Prepared Appraisal” ,a list of requirements for its membership to include in an appraisal. The list is found at the end of this article. All information in that checklist should be stated in appraisal report. The appraiser’s credentials should be attached to that report.

The appraisal should contain a description of each object. The appraisal should then provide the information stated in the Object ID criteria which has become the standard for the appraisal profession. They are: type of object (e.g., painting), medium, size, markings, distinguishing characteristics, title, subject, date or period, artist or maker, and a short description, all necessary information.

For a fine art appraisal to be used for estate or donation purposes, all information required by the IRS must be included. The appraiser should include photos, which the IRS may require, if the appraised value of any individual object exceeds $20,000.00. At that dollar level, the appraisal will be sent to the Art Advisory Panel of the Internal Revenue Service in Washington which meets twice a year to review and pass on appraisals of valuable works of art. If a work of art in the appraisal is highly valuable, a photo is required. The Art Advisory Panel is made up of museum professionals, art dealers and art historians who examine the appraisals without knowing if they are donations or estates. A list of the appropriate comparables used to arrive at the valuations must be attached for estate or donation purposes. That list or letter must quote exact sales used for comparables for each item in the appraisal. The Art Advisory Panel may return the appraisal analysis for more information, ask it to be defended or reject it. About 50% of the appraisals submitted are not accepted initially.

The appraiser must be a person free of any conflict of interest, someone who can state that he or she has no past, present or future interest in the object. That disqualifies the dealer who sold the object to the donor and anyone with a vested interest in that artist. A statement of disinterest should be included in the appraiser’s cover letter.

The answers to the quick quiz focus on the important distinctions necessary for an appraisal to be correct. First answer: Fair Market Values generally are not used for insurance appraisals because art is insured for replacement purposes. Replacement value is based on retail prices. Replacement value assures a quick and fair replacement due to a loss. Second answer: Estate appraisals can be no more than sixty days older than the date of death in order to be accepted by the IRS. Third answer: Unlike insurance appraisals, sales records for donation or estates appraisals use Fair Market Values such as auctions or other proven sales where a willing buyer and a willing seller, with no undue pressure and with all necessary information, agree on a price. This is, frequently, an auction price. When using auction values for an estate or donation appraisal, the appraiser must add the auction house’s buyer’s commission to the hammer price when determining Fair Market Value. To sum up, the basis for the value in an appraisal differs according to the specific purpose of the appraisal.

Checklist of The Appraisers Association of America’s - “Elements of a Correctly Prepared Appraisal”

1-Purpose of the appraisal (insurance, estate)

2-Type of valuation used (replacement, fair market value)

3-Valuation approach (market data comparison, income etc.)

4-Most common market where the value is applied

5-Market history (if any)

6-How objects were acquired (especially for the IRS)

7-Professional qualifications of the appraiser

8-Date of report preparation and date when the objects were viewed, effective date of appraisal (especially for an estate)

9-Statement of physical inspection or other method used to see the work (photographs, email

10- Statement of disinterest (no financial interest in the objects)

11-Statement that the appraiser has not been disqualified by the IRS

12-Statement of assumptions and limiting conditions

13-Statement of fee structure (cannot be a percentage of the appraised value)

14-Opinion of authenticity,

15-Clear division of work, if more than one appraiser is in involved

16-Through description of the objects

17-Biography of the artist, when necessary

18-Provenance (if available)

19-Exhibition and publication history (if any)

20-Statement of the condition

21-Comparables and related analysis (a must for IRS appraisals).

22-Firm statement of value

23-Signature of the appraiser and tax ID numbers,

24-Statement of the number of pages in the appraisal. Every page should be initialed and should state the purpose of the appraisal.