April 2002 Managing/Appraisals What's Fair About Fair Market Value? Here are tips on what the IRS definition means Fair market value is one of those appraisal concepts mired in confusion. It also can wreak havoc on an appraiser’s practice and professional reputation if not fully understood. Fair market value is required for estate tax calculations and charitable contributions. Contrary to popular belief, fair market value is not automatically 25% of retail. The IRS defines fair market value as “the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.” That’s quite a mouthful, so lets break it down into a series of questions. Is the property new or has it been used for 25 years? We can assume the property in this case is jewelry or a watch. Its condition is key in determining the market in which to do your appraisal research. For example, the appropriate market for a 25-year-old engagement ring with worn prongs and a loose stone is a pawn shop or estate sale. You wouldn’t do your research in the new jewelry market. Likewise, a new, never-worn ring in its original box would necessitate research in the new jewelry market. What is a willing buyer? This is someone who wants to buy the item for his or her own use, not Grandma Esther buying a watch from Cousin Johnny because he can’t pay his credit card debt. In that case, Grandma Esther is under pressure and may pay too much (if she likes Johnny) or too little (if she wants to teach him responsible spending). What is a willing seller? A willing seller is someone who wants to sell an item, but is under no pressure to do so. People undergoing bankruptcy or divorce proceedings are not willing sellers. They’re being forced to sell and usually are under strict time constraints. The amount these sellers realize tends to be lower than that of a willing seller, who has time to advertise and consider several offers. What is “knowledge of the relevant facts?” A seller with reasonable knowledge of the facts won’t sell a Cartier bracelet owned by a famous socialite to a pawn shop for $150. In this case, the buyer took advantage of the seller’s lack of knowledge. A buyer paying $10,000 for a synthetic flame fusion ruby doesn’t know the relevant facts, i.e. that flame fusion synthetic rubies aren’t worth that much. Where do you go to find fair market values? Pawn shops are good for used jewelry that doesn’t have a true antique following. Mainstream auctions are also good sources for fair market values because reasonable reserves are set, gem identifications are made and buyers can evaluate quality before buying. An auction organized by a government agency in response to tax evasion may not be a good source for fair market value because there’s generally no reserve and everyone knows it’s a place to pick items at a low cost because of the forced circumstance. Also, fair market value on new, unused jewelry is most likely a jewelry store. Do your research and support your value. Simply writing an appraisal for 25% of what a piece would sell for new is not a fair market value appraisal. Explaining a fair market value that has been thoroughly researched to the IRS is much less painful than admitting your appraisal reflects 25% of retail and trying to defend your reasoning. – Julie Nash, A.S.A., G.J.G., and Arthur Skuratowicz, N.J.A., G.J.G. The authors operate Anton Nash LLC, Independent Jewelry Appraisers and Jewelry Trade Consultants, Colorado Springs, CO; (888) 440-6274, www.AntonNash.com.