Appraisers Key to Property Loss Deductions: The Appraisal Journal
March 11, 2014 08:00 AM
CHICAGO (March 11, 2014) – Natural disasters often cause damages to properties that qualify for deductions on federal income tax returns, but property owners need a qualified appraiser to substantiate and defend those losses, according to an article published this week in The Appraisal Journal.
The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest professional association of real estate appraisers. The materials presented in the publication represent the opinions and views of the authors and not necessarily those of the Appraisal Institute.
“The Appraiser’s Role in Calculating Casualty Loss Deductions from Natural Disasters,” by James K. Smith, Ph.D., J.D., and Barbara A. Lougee, Ph.D., emphasizes the important role an appraiser plays in measuring casualty loss tax deductions for property owners affected by natural disasters. It explains how an appraiser can avoid making mistakes that might be costly to clients.
In the article, the authors analyze relevant Internal Revenue Service sections, regulations and rulings, and court cases to clarify important considerations in valuations for casualty loss deductions.
The IRS permits a deduction equal to the difference between a property’s pre-disaster and post-disaster value, minus any insurance reimbursement. Qualified appraisers play a crucial role inmeasuring the decline in the fair market value of the taxpayer’s property. The IRS definition of a “qualified appraiser” specifically includes individuals who have earned an Appraisal Institute designation.
The authors stress that a properly prepared appraisal report dramatically increases a taxpayer’s chance of successfully defending a casualty loss deduction. The authors caution that tax courts give extra scrutiny to appraisals that do not take into account recent sales before and after the disaster. Although the IRS is flexible about the valuation method an appraiser uses, it does require that the loss in value is from actual damages to the property — not a general decline in prices in an area after a disaster.
The authors advise that the valuations can better withstand court and IRS scrutiny when the appraisal report includes background information on the appraiser’s education, experience and qualifications; the appraisal method used (i.e., income capitalization approach, cost approach or sales comparison approach); and a statement that the appraisal was prepared for income tax purposes.
Smith has been on the faculty at the University of San Diego since 2001. His research examines international and state taxation, multidisciplinary practice, bankruptcy and other tax-related issues. He has published articles in a number of taxation and accounting journals. Prior to teaching, he worked in the tax department at KPMG and as a tax attorney. He is a CPA licensed in California and is a member of the State Bar of California.
Lougee joined the faculty at the University of San Diego in 2007 after spending two years as a vice president of the ModelWare Business Unit, Institutional Securities Division at Morgan Stanley and six years on the faculty at the Paul Merage School of Business at the University of California, Irvine. Her research examines issues related to financial reporting and employee benefit plans. She has published articles in a number of journals.
Read “The Appraiser’s Role in Calculating Casualty Loss Deductions from Natural Disasters” in the Winter 2014 issue of The Appraisal Journal.
Also in The Appraisal Journal’s Winter 2014 issue:
“Land Rush! Winners and Losers in the New Century,” by Barrett A. Slade, Ph.D., MAI, discusses the findings of transaction-based, constant-quality, land price data in 28 U.S. metropolitan areas and looks at the dramatic changes in land prices in these markets during 2000-2012.
“Incorporating Capital Recovery into Discounted Cash Flow Models” by Sergey Gribovsky analyzes discounted cash flow and income capitalization methods, and suggests enhancement of the traditional DCF technique to allow for precise incorporation of various capital recovery patterns on par with those in income capitalization techniques.
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The Appraisal Institute is a global professional association of real estate appraisers, with nearly 22,000 professionals in almost 60 countries throughout the world. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Individuals of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SRPA, SRA, AI-GRS and AI-RRS designations. Learn more at www.appraisalinstitute.org.