Appraisals: What They Are, How They Work

An appraisal is an official written opinion from an independent expert about how much a particular item or property is worth^[0]

An appraisal can be used for any item of value, including:

• Commercial or residential property.

• A private business.

• Fine art, antiques or jewelry.

• Equipment, such as farm or business equipment or motor vehicles. 

• Inventory. 

» Getting your home appraised? Here’s what to know

Appraisals may be helpful in estate planning to determine the value of an item for tax purposes and aid in gifting or dividing assets. They can also help to complete the probate process when an estate is being settled. An estate planning attorney or tax advisor can help determine when an appraisal may be necessary.

Here are a few circumstances in which you might need an appraisal:

• You're planning to bequeath assets to an heir. Appraisals can be helpful in estate planning if you're trying to determine the value of an item or property, especially if you’re trying to divide assets evenly.

• You're donating. If you're donating a large asset or property and hoping to get a tax deduction, an appraisal can determine the value of your donation (and thus the size of the tax deduction).

• You're dividing assets with someone. For example, if you and a partner own or inherit something and you're trying to split it, you might need an appraisal to determine the value of the item or property so one person can buy the other person out. 

• You're trying to make a purchase or sale. An appraisal is a good way for the buyer and seller to understand the true market value of an item or property.

• You need to borrow money. If you're trying to secure a loan to buy an item or a property, the lender might require that an appraiser confirm the value before making the loan.

• You want to get something insured. If you're trying to purchase insurance on an item or property, the insurer might require that an appraiser confirm the value before they agree to an insured amount.

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The three main types of appraisals are real estate appraisals, qualified appraisals and equipment appraisals. The type of appraisal you choose will depend on what you're appraising and the purpose of the appraisal.

Real estate appraisals

A real estate appraisal is an official estimate of the value of personal or commercial property. It may be done in three ways:

1. Cost appraisal. These estimate the value of the land and the property itself, plus any improvements made. 

2. Sales comparison appraisal. These estimate the value of a property by comparing it to other similar properties in the area that have recently sold. 

3. Income appraisal. These estimate the value of a property based on future benefits to the owner, such as an income stream from renting out a house. 

» MORE: How homeowners can address appraisal discrimination

Qualified appraisals

A qualified appraisal is an official estimate of value that meets IRS requirements for tax write-off purposes. Qualified appraisals:

• Are necessary for a charitable donation of over $500,000 of property or over $20,000 of art.

• Must be conducted by a qualified appraiser with verifiable education and experience in property valuation, typically through membership with a nationally recognized appraisal organization. 

• Must be conducted within 60 days of the donation to claim the tax deduction.

• Can't be appraised by the donee, donor or anyone related to or employed by either party.

• Can't be substantially misvalued. If so, the appraiser may have to pay a penalty of up to 125% of the gross income received from the appraisal^[0]

  Internal Revenue Service. Determining the Value of Donated Property. Accessed Jun 6, 2023.

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Equipment appraisals

An equipment appraisal is an expert estimate of the value of a piece of equipment, such as business machinery, and it can be done in three different ways:

1. Fair market value. This is the current value at which the machinery could reasonably be bought or sold.

2. Orderly liquidation value. This is the value of machinery that must be sold, such as when someone is selling a business or needs money quickly. 

3. Forced liquidation value. This is the value of machinery that must be sold as soon as possible, such as at an auction. This would be considered the lowest value.