An appraisal is crucial for estate planning as well as valuation for tax purposes. It is always best to have an accurate and up-to-date appraisal when any property is involved. Having a current appraisal helps you keep better track of your financial assets rather than estimating from an outdated appraised value. Properties can often increase in value, and they can decrease just as easily.
For estate planning, appraisals can help determine the values of assets. This knowledge is indispensable for heirs if properties and assets need to be gifted or divided after a death. Keeping an up-to-date appraisal on file is also handy when determining the increase of property value as well as growth or loss margins. Being able to see steady growth or loss over time can help determine proper selling and buying values for good investment opportunities.
Appraisals are also helpful for tax purposes. Having an accurate appraisal can help in the case of a tax audit. Many privately owned businesses are required by the IRS to have an appraisal for determining values if claimed on tax returns. Appraisal costs are often tax deductible, so check with your tax preparer to determine if that works in your situation.
We look forward to assisting you in your appraisal needs. Contact us today for a professional and accurate appraisal.
We bid every project. Click an icon to learn more about our appraisal services.
On the remainder of this page, you will find our past newsletters on the topic of appraisals for estate planning. Be sure to check this page often for updates, or subscribe to our newsletter for other kinds of helpful articles.
Use the search feature below to find what you want to know.
2032A ESTATE VALUATION
by Mason Spurgeon, Certified General Real Estate Appraiser
No one ever wants to deal with the IRS, and they especially don’t want to over-pay them. I remember a funny quote from Ron Paul: “Don’t steal! The Government Hates Competition,” and I know that’s how most of us feel. The IRS is a huge bureaucracy that very few want to question, but with the right help, loopholes within the tax code can be used to reduce your tax burden, legally. One of the ways your tax burden can be reduced is through the 2032A, Special Use Valuation.
The Internal Revenue Code Section 2032A, Special Use Valuation is a valuation method used in figuring the federal taxes for an estate. An appraiser normally values a property according to its fair market value (what the tract would sell for on the open market). However, with a 2032A valuation, the value is based on the property’s current use. This can typically reduce the value of the land and in turn reduce the tax burden. This all sounds great, but with the IRS there are always technicalities.
The first task is making sure that the real estate qualifies for the 2032A Valuation election. There are several rules that dictate if a property applies. The list below summarizes requirements from the IRS website.
The decedent (the person who has died) must be a US citizen.
The real property must be in the United States.
The property must have been used by the decedent or family member for farming in a qualified manner for 5 out of the last 8 years.
Property must pass to a qualifying heir.
The farm assets, both real and personal, must compose at least 50% of the estate and the real property must compose at least 25% of the total value of the adjusted estate.
If these conditions are met the executor can elect to use the 2032A Special Use Valuation. There are still several steps and forms to be completed before the taxes can be filed. One of the most important steps is getting a real estate appraisal from a qualified real estate appraiser.
The appraiser should start by finding comparable properties in the immediate market area that are currently leased and have been leased on a cash-rent basis for the past five years. The comparable rental property must be very similar to the subject property in location, productivity, and all other aspects, if possible. The five-year cash rental data is then averaged on a per-acre basis along with the five-year annual real estate taxes, local, state, and federal taxes, which are deducted from the cash rent. That value is then divided by the average annual effective interest rate of all new Federal Land Bank loans. The image below gives an example:
While this number does appear to be high as a price-per-acre, it is much lower than the market value which is $13,400 per acre. This is a huge reduction in the value used to figure taxes for the estate. The difference between the fair market value and the special use valuation becomes the amount of the lien that can be recaptured.
That brings us to the downside of using this type of valuation. The step-up in value for the real estate basis as of the date of death will be the special use value, not the fair market value. This could create a large tax burden for the heirs if the property is sold after the 10-year period. A tax professional, such as a lawyer or accountant, should be contacted to help with any of your future estate planning or questions about filing a 2032A Special Use Valuation with the IRS. Spurgeon Appraisals would be happy to help with the valuation/appraisal side of the process.
Just remember when selecting a real estate appraiser, the lowest cost or the quickest completion time is not always the best. Real estate appraisers are not all created equal, and an appraisal is only as good as the data used in the report. At Spurgeon Appraisals, we take the time to find and confirm the best and most recent data available. Call or email us today with any questions you may have about your pending project.
Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.
THE VALUE OF MULTIPLE VALUES
by Stan Choate, Appraisal Tech / Valuation Associate
Sometimes, the most difficult part of the appraisal process is determining how many opinions of value are needed. The question seems simple enough, but it is complicated by two factors. The first complication arises because customers, being new to the appraisal process, are not entirely sure how to make that decision, and they probably did not know it would be a factor. The second complication, which is the topic of this newsletter, is the limitations of a single opinion of value.
One opinion of value can only tell the customer so much about the property’s market value. That one opinion of value can separate the value of buildings from the value of the land, and it can separate the value of different land classes from each other. But that one opinion value cannot separate the value of one tract of land from another. It also cannot tell the market value of a property at two different effective dates. Ultimately, that one opinion of value can only give one estimate for an entire property at a narrow point in time.
In order to see distinct market values for distinct tracts of land, multiple opinions of value are usually needed. If you want to know the value of a 200-acre tract which is 25% tillable, and also know the separate value of a 120-acre tract which is 95% tillable, then you need two opinions of value. That is true even if the two tracts are close, or even contiguous. And if you decide that you also want to know the value of another 75-acre timber tract, that will require a third opinion of value.
The same principle holds true for appraising one property at multiple effective dates. Most customers understand that the market value of a property changes over time. In order to determine the difference in value between date A and date B, the appraiser must analyze sales of comparable properties for both dates. It may be only one property, but it is practically the work of two appraisals, because the amount of sales research needed is doubled.
When placing an appraisal order, the appraiser should help the customer determine, clearly and decisively, how many opinions of value are needed at the beginning of the project. For one thing, it affects fee: more opinions of value will require more work and will therefore most likely cost more. Also, if the appraiser prepares only one opinion of value when more were needed, he will inevitably be asked to do the project over again, which will waste time for the customer and possibly cost more money as well. Time and money are saved by making the right choice on these matters at the beginning of the process.
The intended use of the appraisal plays a large factor in making these decisions. When banks are looking to refinance a loan, they often request a single opinion of value on multiple tracts of land. That suits the intended use well enough, because all they need is that one total market value. On the other hand, multiple opinions of value will almost always be needed when a family wishes to divide various tracts among themselves in a way that equally distributes the value of those tracts. Another case requiring multiple opinions is when the customer wants a single tract valued as of different effective dates, such as for tax purposes: one opinion of value is needed per date.
At Spurgeon Appraisals, we have years of experience with many different kinds of appraisals done for various purposes. We have the expertise needed to guide you and ensure that the finished product is exactly what you needed.