The Fair Market Value of the Note is Less than its Cost
Investors beware
The Fair Market Value (FMV) of most promissory notes and mortgages is less than the outstanding balance, their cost, or their face value. I’ve been appraising and investing in promissory notes for the last 35 years, and regularly find the vast majority of paper holders pay the taxes and fees associated with IRA accounts, estates, trusts, and wills. The dollar value of overvaluation is huge; FMV can be 20% to 40% less than the outstanding balance or nominal amount. Overpaying Federal and State taxes and administrative fees on exaggerated promissory note investments, year after year, costs a lot of money. Unaware and unsuspecting investors are wasting money.
What Causes Overpayment?
Misconceptions about the definition of “value” as used by the Internal Revenue Service (IRS) lead to overpayments. Usually investors use “dollar cost” as the value, not the FMV used by the IRS. The Internal Revenue Service (IRS), for most tax matters, does not use “dollar cost” as the “value” amount, the IRS, for taxation, uses the “FMV” of assets. Taxpayers use a definition that is not used by the IRS.
IRS Value (FMV)
The definitions used by the IRS are: FMV is the selling price of the property on the open market. It is a price agreed between a willing buyer and a willing seller, with both required to act, and both having reasonable knowledge of the relevant facts. (IRS publication 561)
How to Avoid Overpaying Taxes and Fees
Once the cause of 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 their Fair Market Value, not their dollar cost. A “Qualified Assessment” must be prepared by a “Qualified Assessor” to comply with IRS regulations.
Qualified Assessment by Qualified Appraisers
Valuation reports prepared, signed, and dated by qualified appraisers (to be determined later) based on accepted valuation standards that meet the requirements of Regulations Section 1.17A-13(c)(3) and Notice 2006-96, 2006-46 IRB902 (available at http://www.irs.gov/irb/2006-46_IRB/ar13.html ) is required.
Summary
Dollar charges or book values overstate “Fair Market Value.” Assets in many investment and trust accounts are overvalued for tax and administrative fee purposes. There is no single rule, and no single formula, for determining an asset’s Fair Market Value. law, and meet IRS regulations, a Qualified Appraiser prepared by a Qualified Assessor is required.