Why do I need an appraisal?

A professional appraisal is used to provide an unbiased opinion of value as of a specified date in time known as the effective date of value. An appraisal is typically required for tax planning, estate planning, legal matters such as divorce, death of an individual or spouse, bankruptcy, trust or probate matters, litigation, partnership partial interests and mortgage lending transactions.

Who can provide and appraisal?

A professional real estate appraiser is one who is licensed by a state agency after meeting stringent education, experience and testing requirements. There are basically two different license levels an appraiser my hold. A Residential License allows a Residential Appraiser to value only small residential properties such as a single-family home, a condominium unit or a 2-4 unit residential property. A General License allows a Commercial Appraiser to value all residential property types in addition to all income producing properties such as apartments with 5 or more units, commercial properties such as office, industrial, retail or raw land.

What is a Step-Up in Basis value:

Generally, when a property is purchased the basis value is the purchase price plus any capital improvements completed over time. When an owner dies, the basis value is recalculated, or stepped up, to its market value as of the date of death. The surviving spouse or heirs get a new basis value that is supported by an appraisal with the effective date of appraisal the same as date of death. A step-up in basis is a big tax advantage, because it reduces the capital gains taxes due upon sale of an inherited asset. It is critical that an appraisal be completed by an experience appraiser in order to provide documentation for tax reporting purposes.

Example: A property is purchased for $500,000 which establishes the original “basis” value at time of purchase. The owner dies 10 years later and the current value is $1,000,000 as of the “date of death”. The new “basis” is $1,000,000 and if the property is sold, the surviving spouse or heirs are required to pay “capital gains tax” based on the difference between the “stepped-up basis” value and the current selling price of the property. A “retrospective appraisal” is required to establish the new “stepped-up basis”, as of the date of death, in order to determine the capital gains tax due at the eventual time of selling the property.

What is a Retrospective Appraisal?

An appraisal that has an effective date at some time in the past, typically as of the date of death or some other past event.

Example: If a property owner died 10 years ago, an appraisal is required to establish the property value as of the date of death 10 years ago. A Retrospective Appraisal considers sales comparables within that time period (at the time of death) to establish the value.

What is a Partial Interest Discount of a fractional ownership interest in real estate?

When a property is owned by two or more parties, the fractional ownership interests suffers adversely from a lack of marketability and a lack of ownership control. Discounting is used for tax planning purposes to adjust a “property’s” fair market value to account for these two adverse influences of value, thereby reducing the tax burden of the individual partners. The resulting reduction in the fractional interest can be most significant and is employed by the most successful real estate owners and investors.

Disclaimer: This is not intended to be tax advice. Please consult a tax attorney for further details.

How is a Partial Interest Discount determined?

In certain circumstances, The IRS has allowed a discount of an appraised value to account for lack of marketability and lack of ownership control. Current and past cases involving the IRS and partial interest properties owners are analyzed to determine what discount rate has been allowed based on the unique circumstances of the subject property.

Can I use a realtor’s opinion of value or other online estimation tool as an appraisal?

A realtor sometimes provides a Broker Price Opinion (BPO) or Comparable Market Analysis (CMA), however, these are used in property sales transactions to determine what price to list a property at or how much a buyer should offer to purchase a property. In addition, some internet-based companies offer “estimates” of value based on mathematical algorithms known as an automated valuation model (AVM). The Supreme Court, IRS and lending institutions do not accept these as credible valuation reports.

Why does an Automated Valuation Model (AVM) indicate a different value than my appraisal?

There are limitations on the accuracy of an AVM due to limitations associated with the search parameters and quality of sales data used in the mathematical algorithms. These limitations can include going outside of the subject’s competitive market area, using comparable sales that do not reflect recent additions and remodeling, or adverse location influences.

What is my property worth?

Real Estate Valuation is a very complex analysis of many factors that affect a properties value. The process of determining the value of a property involves first, 1) identifying the purpose of the appraisal report, 2) researching the subject property characteristics, followed by 3) analyzing comparables sales, listings and rental properties(if the subject generates rental income). 4) The comparable sales, listings and rentals are then compared against many of the subject’s characteristics such as gross living area(GLA), bedroom and bath count, age or effective age(if modernized), locational differences that may be adverse or beneficial compared to the subject, to name but a few. 5) The end result indicates an Adjusted Sales Price range of the Comparables. 6) The appraiser determines which of the several comparables are most similar to the subject, which is often indicated by the comparables that have the lowest Gross Adjustments, in conjunction with giving greater consideration to the comparables that have the most recent closing date. 7) Finally, the appraiser performs a Reconciliation of Value based on the comparables that are most similar to the subject and are considered the best “substitute” properties to compare against the subject property.