16A — April 11 - 24, 2014 — Mid Atlantic Real Estate Journal
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F INANCIAL D IGEST The quarterly publication of the Appraisal Institute Appraisers key to property loss deductions: The Appraisal Journal
HICAGO, IL — Nat- ural disasters often cause damages to prop- erties that qualify for deduc- tions 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 aca- demic publication of the Ap- praisal Institute , the nation’s largest professional associa- tion of real estate appraisers. The materials presented in the publication represent the opin- C
ions and views of the authors and not necessarily those of the Appraisal Institute. “The Appraiser’s Role in Cal- culating Casualty Loss Deduc- tions from Natural Disasters,” by James K. Smith, Ph.D., J.D. , and Barbara A. Lou- gee, Ph.D. , emphasizes the important role an appraiser plays in measuring casualty loss tax deductions for prop- erty 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 Rev-
enue Service sections, regula- tions 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 val- ue of the taxpayer’s property. The IRS definition of a “quali- fied 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 suc- cessfully 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 with- stand court and IRS scrutiny when the appraisal report in- cludes background information on the appraiser’s education, experience and qualifications; the appraisal method used (i.e., income capitalization ap- proach, cost approach or sales comparison approach); and a statement that the appraisal was prepared for income tax purposes. Smith has been on the fac- ulty at the University of San Diego since 2001. His research examines international and state taxation, multidisci- plinary practice, bankruptcy and other tax-related issues. He has published articles in a number of taxation and ac- counting 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 Di- ego 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 Univer- sity 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 Di- sasters” in the Winter 2014 is- sue of The Appraisal Journal. Also in The Appraisal Jour- nal’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 mar- kets during 2000-2012. “Incorporating Capital Re- covery into Discounted Cash Flow Models” by Sergey Gri- bovsky analyzes discounted cash flow and income capital- ization methods, and suggests enhancement of the tradition- al DCF technique to allow for precise incorporation of vari- ous capital recovery patterns on par with those in income capitalization techniques.
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