Heritage Auctions Appraisal Services
All About Appraisals: Why Does Fair Market Value Include Buyer's Premium?
by Meredith Meuwly, ISA CAPP
One of the first lessons you learn when you become an appraiser is that fair market value always includes buyer's premium. It's become a mantra that is repeated over and over by instructors, peer appraisers, and the IRS staff. But why? Why does fair market value include buyer's premium?
When an item sells at auction, the price called by the auctioneer for the winning bid is known as the hammer price. The winning bidder then pays a buyer's premium on top of the hammer price, which is the fee the auction house keeps for their services. The buyer's premium at most major auction houses has been slowly creeping higher and now is usually set on a sliding scale as the value increases. At Heritage Auctions, the buyer's premium differs by department. The current buyer's premium can be found in the Terms and Conditions of Auction in the back of your printed catalog or the online catalog web page.
In Treasury Regulation §1.170A-1(c)(2), the IRS defines fair market value at "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts". This definition of fair market value is applied by the IRS to any tax-related appraisal situation --- estate tax, gift tax, and charitable donation.
It is in Treasury Regulation §20.2031-1(b) regarding Estate Tax that the definition of fair market is expanded: "nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Although relating specifically to estate tax in this statement, the same concept is applied to both gift tax and charitable donation.
It is here that the IRS has clarified for us that the fair market value is the sale price of an item to the public in the item's most common market. Simply, it is the amount obtained in a sale, not the amount retained . Still, confusion reigned, because it was unclear to many whether or not buyer's premium was part of the sale price. Thus, on May 27, 1992, the IRS issued Technical Advisory Memorandum 9235005, based on a ruling in Publicker v. Commissioner, stating very clearly that in an auction the buyer's premium is a component of the purchase price, and as such, is included when calculating fair market value.
So why does fair market value include buyer's premium? The answer is: because the IRS said so. Thus, when appraisers use the auction market to find comparables for the fair market value of an item, they have to include the buyer's premium in their calculations.
It may seem unfair to taxpayers to pay estate or gift taxes on the total purchase prices, but don't forget that the same policy also applies to charitable donations. Taxpayers receive tax benefits based on the fair market value of the item, which includes buyer's premium!
For more information about fair market value appraisals, contact Meredith Meuwly, Director of Appraisal Services, today for a confidential consultation at MeredithM@HA.com or 214-409-1631.
After five years at Christie's in New York, Meredith Meuwly joined Heritage Auctions in 2007 as Senior Consignment Director in the Fine & Decorative Arts Department and currently manages the Appraisal Services department. In 2009, Meredith participated as an appraiser for the Antiques Roadshow on PBS. She is also a member of the Fine Art committee for the International Society of Appraisers and looks forward to assisting with any formal appraisal needs.