Valuation is an important part of owning any type of property. It is defined as the process by which property is examined and given an estimated monetary value.1 Putting a monetary value on property such as artwork can provide you peace of mind knowing how much it is worth. This also allows for benefits in income tax, gift tax, and estate tax scenarios. If you plan to use your art for tax benefits, you should take great care in ensuring proper valuation of the pieces of art in your collection. The Internal Revenue Service (“IRS”) looks closely at the actual value of your art when it is claimed for any type of deduction. Below are some considerations when going valuing your artwork. In particular, these considerations look at the process required by the IRS in order to use artwork for tax benefits.
When should I get my art valued?
If you intend to donate art for tax benefits, you will need an appraisal for each piece of artwork or collection that you intend to utilize that calendar year that is estimated to have a base value of $5,000 or more.2 Similar to valuation, appraisal is when an expert, called an appraiser, analyzes the artwork using their experience to provide a fair market value for the art. The fair market value is the price a piece of art would be in an exchange between a willing buyer and a willing seller, both of which are not under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.3 Further, the fair market value is based on the market in which the art would most commonly be sold to the public.4
How do I get a proper appraisal?
The appraisal process begins with selecting a qualified appraiser. The IRS considers a qualified appraiser as a person who holds themselves out as an appraiser, who is an expert in that particular piece of artwork, and who is independent from the donor.5 An appraiser is fully independent when they are not the donor or donee, they are not employed by the donor or donee, they were not a party to the transaction by which the donor acquired the art originally, and they are not a related party as defined under Treasury Regulation § 267(b).6 A qualified appraiser also understands that they are liable for making false or fraudulent overstatements of value in regards to the artwork being appraised.7
When selecting an appraiser, it is important to make sure the appraiser verifies their credentials and is experienced in the specific era, style, or artist of the work being appraised. The IRS meticulously looks at the qualifications of appraisers to reduce the risk of overvaluation or fraudulent valuation. Carefully selecting the right appraiser can increase the validity of the appraisal and lessen the risk of the IRS inquiring about your art.
Once a qualified appraiser is selected, then the qualified appraisal process can begin. A qualified appraisal is an appraisal prepared by a qualified appraiser no more than 60 days before the date that the artwork is to be donated.8 The appraisal must be signed and dated by the appraiser, returned to the taxpayer before the due date of their income tax return,9 and contain the following information:
- A detailed description of the property;
- The physical condition of the property;
- Date or expected date of the donation;
- The terms of any expected or entered into agreement by or on behalf of the donor that relates to the use, sale, or other disposition of the contributed property;
- Name, address, and taxpayer ID of the qualified appraiser;
- Detailed description of the qualified appraiser’s background and experience;
- Statement that the appraisal was prepared for income tax purposes;
- Date on which property was valued;
- Appraised fair market value of the property;
- Method by which the property was valuated;
- The specific basis for valuation such as any specific comparable sales transactions, quoted prices of similar works in dealers’ catalogues, or the economic state of the art market around the time of valuation; and
- A description of the fee arrangement between the donor and appraiser.10
Once the appraisal is complete, the report associated with the appraisal is attached to the income tax form that is being filed for the current tax year. The more precise and complete the appraisal form is, the less likely it is to be questioned by the IRS. Fortunately, the IRS has a form, called the Form 8283, which satisfies all the requirements listed above and is available for the public to use.11 Another helpful tip is to have your appraiser use the Uniform Standards of Professional Appraisal Practice (“USPAP”). The IRS issued an official notice, in October 2006 which stated that an appraisal would be deemed qualified if it met all the requirements of existing IRS regulations and was consistent with generally accepted appraisal standards.12 To have generally accepted appraisal standards, the appraisal must be done in conformity to the provisions of the USPAP.13
Lastly, for any charitable donations of artwork or collections of art, the IRS requires that you maintain proper records about the donated artwork. These records must be consistently updated and contain the following:
- Name of charitable organization you are donating to;
- Date and location of the donation;
- A proper description of the property donated;
- The fair market value of the property, the method used in determining the fair market value, and a signed copy of the appraisal;
- Factual details on section 170(e)(1) property;14
- Special rules for partial-interest contributions; and
- The terms of any agreement or understanding entered into, by or on behalf of the taxpayer that relates to the use, sale, or disposition of the property contributed
Additionally, if the artwork or collection is valued greater than $500, further records must be kept indicating the manner and approximate date of acquisition of the property, and the cost basis of the property. Make sure to keep these records accurate, accessible, and in duplicate in the event that the IRS requests them.
My appraisal was audited. What happens next?
Even if your tax return is properly filed, the IRS may audit the validity of an appraisal. Most often, the IRS will challenge an appraisal report if it does not consider all the applicable factors, the report is a statement of opinion not supported by an analysis of relevant facts, the report is inconsistent with known factors, or the opinion of the appraiser is beyond reason or is arbitrary.16
Any art that is flagged to audit or that is valued at $50,000 or more will be reviewed by a special board of the IRS called the Art Advisory Panel. This panel consists of several art experts that assist the IRS in determining whether submitted appraisals realistically value the art or collection.17 The panel has its own art appraisers that will determine the fair market value of the art in question. Subsequently, the panel will provide a written statement within 45 days of the date of the request. This written statement must include an explanation for the basis of how fair market value was determined, why the value was different than the original appraisal value, what computations were used in determining the value, and a copy of any expert appraisal made for or by the IRS.18 The fair market value of the art determined by the panel’s appraisers is only a recommendation. However, the IRS almost always considers that value binding.
What happens if my artwork is ruled “overvalued?”
If the IRS determines that the appraised artwork was overvalued, there are monetary penalties that may apply. The IRS will charge a 20% penalty on any underpayment of taxes for a “substantial valuation misstatement.”19 For artwork, a substantial valuation misstatement occurs when the original appraisal valued the art at 150% or more of the amount determined by the IRS to be the appropriate fair market value.20 The 20% penalty is bumped up to 40% if the original appraisal valued the art at 200% or more than the determined value, which is considered a “gross valuation misstatement.”21 There is a limited exception that does not penalize you for underpayment if you can show that there was reasonable cause for the underpayment and that you acted in good faith regarding the value of the claimed art.22 In addition to you having to pay a penalty, the appraiser who performed the appraisal may be liable as well.
It is important to get your artwork properly appraised. Artwork can benefit you with tax deductions if you properly valuate the art through a qualified appraisal conducted by a qualified appraiser. Make sure to take care in selecting who your appraiser is and know ahead of time what their appraisal method will be. Additionally, be sure your appraisal is submitted with your tax return for that year and is as complete as possible. This will help reduce the likelihood that your tax return will be audited by the IRS. If these factors are considered, your art appraisal process will be smoother and more successful.
- “Valuation.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary /valuation. Accessed 28 Aug. 2022.
- Tax Reform Act of 1984 Section 155(a)(2); 26 C.F.R. § 1.170A-13(c)(1).
- 26 C.F.R. §§ 20.2031-1 and 20.2031-6.
- 26 C.F.R. § 20.2031-1.
- Tax Reform Act of 1984 Section 155(a)(2); 26 C.F.R. § 1.170A-13(c)(5)(i).
- Id. 26 C.F.R. § 267(b) provides an extensive list of who is defined as a “related person.”
- Tax Reform Act of 1984 Section 155(a)(2); 26 C.F.R. § 1.170A-13(c)(5)(i).
- Tax Reform Act of 1984 Section 155(a)(2); 26 C.F.R. § 1.170A-13(c)(3)(i).
- 26 C.F.R. § 1.170A-13(c)(3)(iv)(B).
- 26 C.F.R. § 1.170A-13(c)(4). It should be noted that the fee arrangement between the donor and the appraiser cannot be based on a percentage of the value of the appraised artwork.
- Form 8283 available at: https://www.irs.gov/pub/irs-pdf/f8283.pdf.
- Notice 2006-96, 2006-46 IRB 902, 10/19/2006.
- I.R.C. § 170(e)(1) states that “[a]ny qualified conservation contribution shall be allowed to the extent the aggregate of such contributions does not exceed the excess of 50 percent of the taxpayer’s contribution base (being the taxpayer’s overall adjusted gross income) over the amount of all other charitable contributions allowable under this paragraph.” A qualified conservation contribution is “means a contribution— (A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes.”
- 26 C.F.R. § 1.170A-13(b).
- Ralph E. Lerner & Judith Bresler, Art Law: The Guide for Collectors, Investors, Dealers, & Artists, Volume II, 1232-33, (4th ed. 2012).
- Id. at 1240-41; see also Valuing Art in an Estate: New Concerns, Anne-Marie Rhodes, 31 Cardozo Arts & Ent LJ 45, 64, Winter 2012.
- I.R.C. § 7517.
- I.R.C. §§ 6662(a) and (b)(3).
- I.R.C. § 6662(e).
- I.R.C. § 6662(h)(1).
- This exception requires that both 1) the claimed value was based on a qualified appraisal made by a qualified appraiser; and 2) the taxpayer made a good faith investigation into the value of the contributed property. I.R.C. § 6664(c)(2).