Types of Appraisal Reports
What kind of appraisal report do you need written? Helpful article from Worthwhile Magazine.
“What Type of Appraisal Report Do You Need? An Overview of Common Appraisal Report Categories
Most every appraiser recalls many conversations where a new potential client calls up declaring “I need an appraisal report!” When the appraiser responds, “great, what type of appraisal report do you need?” they are often met with confused silence. If you aren’t a professional appraiser of tangible personal property, it can be quite challenging to understand all the different types of appraisal reports and identify which intended use or purpose is needed for one’s specific situation. I’ve written this article as an introductory guide for consumers of appraisal services to help them better comprehend the range of appraisal report options and know which questions to ask their attorney, insurance agent, or accountant to determine what specific appraisal services they need. I will discuss and define some of the most commonly encountered types of appraisal reports, but readers should be aware that this is not an exhaustive list. As a note on terminology, the levels of value discussed below reflect the terms used by the Appraisers Association of America, where I am a Certified Member. The other major appraiser professional organizations sometimes use different terms to describe certain levels of value. As I am an appraiser of art and antiques, this discussion also applies specifically to appraisal reports of tangible personal property such as art and antiques, not real property like real estate. It is also widely misunderstood that appraisers are authenticators – we are not authenticators. Authentication is an entirely separate field in the art and antique industry and individuals seeking authentication services should engage a professional authenticator who is regarded as a recognized expert in her or his specific category of authentication. Appraisers generally do not serve in roles where they are the primary advisor instructing their clients about what type of appraisal report is needed, and these directions should come from the client’s lawyer, accountant, insurance agent, or other similar professionals who are appropriately qualified to advise regarding the client’s specific legal and financial needs. The appraiser’s role is to prepare a professional USPAP-compliant appraisal for the type of appraisal report requested. Types of Appraisal Reports Insurance Appraisal Reports: -Insurance Appraisal Report for insurance coverage of items that need to be scheduled with an itemized appraisal in a USPAP-compliant appraisal report This type of appraisal report includes the appraisal of specific items so they can be scheduled for itemized coverage with the client’s insurance company. Insurance appraisal reports are generally prepared at retail replacement value (the highest level of the market), although some policies may instead provide coverage at actual cash value, which is a lower level. For a detailed discussion about insurance appraisal reports, see my previous article “A Consumer’s Guide to Insurance Appraisal Reports: Do You Need One and How to Get One?” -Insurance Appraisal Report for insurance damage claim purposes for items that have been damaged or destroyed This type of insurance appraisal report is prepared when an item has suffered damage or been destroyed. In my own firm, I’ve been called in to prepare this sort of appraisal report when an item has been severely damaged in a fire, lost in storage, or damaged by a contractor. The specific scope of work depends on the insurance professionals involved, but generally the appraiser’s role is to document the item’s appraised value (usually at either retail replacement value or actual cash value) on the effective date (usually the date the damage or loss occurred). It can be very challenging to do this type of appraisal if there are limited or no photographs of the item before damage or loss occurred, so a good practice is make sure all items in the home have some sort of adequate documentation, whether phone photos or a phone video tour. This will make your future appraiser’s job much easier and allow them to more precisely identify comparable records for the valuation analysis. Also remember to store that backup someone that is not in your house (I’ve heard stories from people who lost all their documentation as well when their house burned down). Estate Appraisal Reports: -Estate Appraisal Report for use with a federal tax function (it will be submitted to the IRS) This is generally the most complex and time-consuming type of estate appraisal report to prepare given the specific requirements of the IRS and the extensive comparable analysis and narrative description that must be included. -Estate Appraisal Report for use with probate filing with a local municipality -Estate Appraisal Report for use with estate filing with a state Estate appraisal reports for probate filing with a state or a local municipality are generally less complex than those to be submitted to the IRS, but it’s important to be familiar with the specific state or local requirements where the report must be filed as these can vary significantly. -Estate Appraisal Report for internal estate purposes such as setting basis for heirs -Estate Appraisal Report for family equitable distribution to help family members divide up items peacefully and fairly Both estate appraisal reports for internal estate purposes and family equitable distribution can generally be less complicated than reports that must be submitted to an external authority, and the scope of work is often guided by the needs and wishes of family members. -Estate Planning Appraisal Report to identify items of higher value and document items for heirs and future estate filing Sometimes the process of identifying items of significant value can impact the structure of an estate plan, so it can be helpful to have one’s collection appraised both to create a comprehensive illustrated catalog and have better data to design an effective estate plan. Non-Cash Charitable Contribution Appraisal Report, also known as a donation appraisal report: The Internal Revenue Service has extensive documentation about their requirements for non-cash charitable contributions and what type of organizations can receive non-cash charitable contributions detailed in their Publications 526 https://www.irs.gov/publications/p526 and 561 https://www.irs.gov/publications/p561 Taxpayers should also be aware that IRS form 8283 has recently been redesigned with a new format https://www.irs.gov/pub/irs-pdf/f8283.pdf Appraisals that will be used by the IRS must be prepared at fair market value. There are many different requirements for what level of fair market value an appraisal report is needed for depending on which object categories the donated items fall into. However, for donations of art and antiques, Publication 561 states the following: “Paintings, Antiques, and Other Objects of Art Your deduction for contributions of paintings, antiques, and other objects of art, should be supported by a written appraisal from a qualified and reputable source, unless the deduction is $5,000 or less.” (https://www.irs.gov/publications/p561) Anyone considering a non-cash charitable contribution should review their specific tax situation thoroughly and consult with their appropriate tax professional or accountant before moving forward. Appraisal Report for Planned Sale Purposes: It generally is not cost-effective to have an appraisal report prepared for planned sale purposes unless the items to be appraised have significant value and would benefit from a thorough analysis of their current markets to help identify the venues where they would be likely to achieve the highest profit. USPAP-compliant appraisers cannot have a future interest in the items they appraise, so there needs to be a clear distinction between appraising and brokering without overlap or conflicts of interest. Restricted Appraisal Report: Restricted appraisal reports generally occur less frequently than regular appraisal reports, but they have a more streamlined format where findings are stated rather than summarized with a description of the research process. The Appraisal Foundation revised the definition of a restricted appraisal report in the 2020-2021 version of USPAP. This is an important distinction from how restricted appraisal reports had previously been defined. Under the new revisions in the 2020-2021 version of USPAP, restricted appraisal reports can now have intended users beyond the client, provided these additional intended users are identified by name. The updated language in the 2020-2021 version of USPAP reads “the content of a Restricted Appraisal Report must be appropriate for the intended use of the appraisal, and at a minimum.... state the identity of any other intended user(s) by name. Comment: A Restricted Appraisal Report may be provided when the client is the only intended user; or, when additional intended users are identified by name" Questions to Ask Your Lawyer/Accountant/Insurance Agent Your appraiser will want to know the answers to these questions in order to prepare an accurate estimate of appraisal project size for you, so to save everyone time it’s a great idea to have these answers ready in advance. What type of appraisal report do I need? Your lawyer/accountant/insurance agent will be able to advise on the specific type of appraisal report you need, which will likely be one of the categories described above. What level of value should the report be written to? For a detailed discussion of the different levels of value, please see my previous article “Understanding the Different Levels of Value: It’s Worth What Where and When?” Who are the intended users of the appraisal report? The intended users are the people who are authorized to use the appraisal report for its intended use. For example, the intended users in an insurance appraisal report might be the client and the client’s insurance agent. What items need to be appraised? The appraiser will want to know how many items need to be appraised so an accurate estimate of project time can be generated. It takes much more time to appraise 100 objects than 10 objects. What is the effective date of the appraisal report? Block Clock (no. 2285/no. 6085), designed 1961/made early 1970s, Attributed to Irving Harper (American, 1916-2015) for George Nelson Associates, Made by Howard Miller Clock Company in Zeeland, Michigan, Art Institute of Chicago collection, open access image The effective date is the specific day in time the appraised values in the report should be set to. Like the stock market, values of art and antiques are constantly changing and can be impacted by global events, so an effective date freezes a particular moment in time for the appraised values for the intended users of the appraisal report. Effective dates are determined based on the type of appraisal. Insurance appraisal reports for insurance coverage generally use the date of the appraiser’s inspection of the items as the effective date (so that the condition of the items on the day the appraiser saw them is accurately reflected in the appraiser’s valuation research. For example, if an item broke the day after the appraiser’s inspection, that would change the value. This is one of the reasons why all appraised values need to be linked with the appraised value’s effective date). Insurance damage claim appraisal reports for the insurance settlement of an item that has been damaged or lost generally use the date of damage or loss as the effective date. Estate appraisal reports generally use the date of death as the effective date, or sometimes they use what is referred to as the “alternate effective date,” which is 6 months after the date of death. The alternate effective date is sometimes used if there were market conditions which dramatically impacted the markets at the time of the date of death. An example of a global situation that could prompt the use of an alternate effective date was the COVID-19 pandemic, which caused significant disruption to global markets. Non-cash charitable contribution appraisal reports generally use the date of donation as the effective date, or no more than 60 days before the date of donation. When is the appraisal report due? Some intended uses like insurance can be more flexible about when they are completed but most estate appraisals have distinct legal deadlines. Make sure you find out from your legal professional when a report is due and engage your appraiser with sufficient time to complete valuation research and analysis. Contrary to the perceptions spread by popular television shows about antiques, writing a USPAP-compliant appraisal report is a complex and lengthy process, and it’s important your appraiser has enough time available before the deadline to complete the necessary research. In conclusion, knowing what type of appraisal report you need (and when you need it) can save you time and money if you find yourself in need of appraisal services. The information in this article is for general informational purposes only and is not considered legal advice or a legal opinion. In addition, topics may not necessarily reflect the most current economic, legal, and appraisal developments. Verify sources independently and seek the advice of an appropriate professional if needed. About Sarah Reeder Sarah Reeder, AAA, ISA CAPP is Co-Editor of Worthwhile Magazine™ and owner of Artifactual History® Appraisal. Sarah is a Certified Member of the Appraisers Association of America and the International Society of Appraisers with the Private Client Services Designation for working with high-net-worth individuals. She is the creator of the online course SILVER 101: Quickly Learn How to Identify Your Sterling Silver and Silverplate to Find the Valuable Pieces and Sort with Empowered Confidence, available on-demand at https://artifactualhistory.teachable.com/p/silver-101. Sarah can be reached at https://www.artifactualhistory.com/ and @artifactualhistory”