Appraisals: What They Are, How They Work

An appraisal is an official written opinion by an independent expert on how much a particular item or property is worth. You might need an appraisal when you’re trying to buy or sell a house, for instance, or applying to refinance your mortgage. Appraisals are also used in estate planning to either aid in the gifting or division of assets, or to determine the value for tax purposes.

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. 

There are many different circumstances in which you might need an appraisal. Here are a few use cases:

• 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 they agree to a loan amount.

• You need insurance. 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.

• 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 as you decide the division of assets.

• You’re donating. If you’re donating a large item or property and hoping to take a tax deduction, an appraisal can determine the value of your donation.

• You’re dividing assets with someone. For example, if you and a partner own a thing 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. 

The type of appraisal will depend on what you’re appraising and the purpose of the appraisal.

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:

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

• Orderly liquidation value. This is the value of machinery in a situation in which it must be sold, such as when someone is selling a business or needs money quickly. 

• 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. 

A real estate appraisal is an official estimate of the value of personal or commercial property, and it may be done in three ways. For example, imagine that a three-bedroom house was being appraised.

• Cost: A cost appraisal provides an estimate that includes the value of the land and the house, plus any improvements made. 

• Sales comparison: A sales comparison appraisal provides an estimate of a property compared to other three-bedroom homes in the area that have recently sold. 

• Income: An income appraisal provides an estimate of a property based on future benefits to the owner, such as the income stream that might result from renting out the three-bedroom house. 

A qualified appraisal is an official estimate of value that meets IRS requirements so that someone might use the value for tax purposes, such as a charitable donation.

Appraisal costs vary, depending on what you’re having appraised and where you live. A home appraisal, for instance, costs about $353 on average, according to HomeAdvisor, a digital marketplace for home services. But timing, size and location all affect the final price.

Appraisals are helpful in various aspects of estate planning:

• When property must be divided or gifted to heirs.

• When you’re planning for estate taxes. 

• 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 or valuable.