Avoid Paying Excess Taxes and Fees: Valuation of Notes

The fair market value of a note is less than its cost

Investors Beware

The fair market value (FMV) of most notes and mortgages is less than their unpaid balances, their cost, or their face values. I have valued and invested in notes for the past 35 years, and found that most note holders overpay taxes and fees related to IRAs, estates, trusts, and estates. The dollar amount of the overvaluation is large; FMV can be 20% to 40% less than the unpaid balance or face value. Overpaying federal and state taxes and administrative fees on the inflated value of investments in notes, year after year, costs a lot of money. Unaware and unsuspecting investors are throwing money away.

What causes overpayments?

Misunderstanding the definition of “value” as used by the IRS causes the overpayment. The typical investor uses his “dollar cost” as his value, not the FMV that the IRS uses. The Internal Revenue Service (IRS), for the IRS, for taxes, uses the “FMV” of the asset.

IRS Value (FMV)

The definition used by the IRS is: FMV is the price that the property would sell for on the open market. It is the price agreed between a voluntary buyer and a voluntary seller, both of whom are required to act and both of whom have reasonable knowledge of the relevant facts. (IRS Publication 561)

How to Avoid Overpaying Taxes and Fees

Now that the cause of the overpayment is clear, the next question is how can we avoid overpayment of taxes and fees? The goal is to comply with IRS regulations and value investment assets at fair market value, not dollar cost. A “qualified appraisal” must be prepared by a “qualified appraiser” to comply with IRS regulations.

Qualified appraisal by a qualified appraiser

An appraisal report completed, signed, and dated by a qualified appraiser (defined below) in accordance with accepted appraisal standards that meets the requirements of Section 1.17A-13(c)(3) of the Regulations and Notice 2006- 96, 2006-46 IRB902 (available at http://www.irs.gov/irb/2006-46_IRB/ar13.html) is required.

Resume

The dollar cost or book value overstates the “Fair Market Value.” Assets in many investment and trust accounts are overvalued for tax purposes and administrative fees. There is no single rule, or single formula, for determining the Fair Market Value of an asset. to comply with the law and comply with IRS regulations, a Qualified Appraisal prepared by a Qualified Appraiser is required.