What Art Collectors Need to Know About Art Valuation

Artist Sandy Brown Jensen shows a close-up of her hands holding her hand-gilded photograph, "Last of the Light on Mt. Pisgah," on vellum with 24K gold and copper. Photo credit Heather Mills Photography.

Understanding valuation is a key part of art collecting.

It’s critical for collectors to understand art valuation so that they can sell, gift and insure their collection properly. Art values can be different depending on their use, so it’s important to know when you’ll need to use each value.

When will collectors need to know the value of their artworks? Here are some scenarios:

For insurance coverage
Estate planning
Gifts subject to transfer tax
Charitable donations
Income tax deductions
Estate tax or probate
Equitable division in a divorce and legal settlement or in the case of heirs and other beneficiaries
An insurance theft or damage claim

When valuable art changes hands, taxes will likely be involved and the IRS “Statement of Value” is required for anything over $5,000 USD – and must be included in tax returns. For the IRS Statement of Value, an appraisal is necessary.

Did you know that appraisal values can vary?

The type of value the appraiser will determine is based on the intended use of the report. Depending on the purpose for obtaining an appraisal—an insurance claim versus estate planning—you need a different type valuation report for each scenario.

For instance, you don’t want to give a retail replacement value to your estate planner.

These are the three most common types of valuations – fair market value, retail replacement value, and marketable cash value (commonly known as market value).

Fair Market Value

Fair market value (FMV) is the price that the piece would sell between a buyer and seller on the open market. The American Society of Appraisers defines fair market value as “An opinion expressed in terms of money, 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, as of a specific date.”

The FMV is generally used for appraisals for estate tax and estate planning, family division, donation and financial planning.

If you’re using Artwork Archive to manage your art collection, you can track this value within the “Fair Market Value” field. And, you can report on the total FMV of your collection with an inventory report.

Retail Replacement Value

Insurance value is the cost it would require to replace the item with a similar work of like kind and quality within a limited amount of time. This value is the highest value of an artwork and is used for insurance coverage.

This price not only represents the sales price of the work, but is defined to include sales and import taxes, as well as any commissions or premiums incurred in the purchase.

Log these values within Artwork Archive’s “Insurance Value” field so that you can easily include it when submitting an insurance claim or preparing a loan.

Market Value

Market Value is what a buyer is willing to pay to a seller, with no obligation to transact, in the current and open market. It is also referred to as “Market Cash Value” and is the FMV of an artwork minus the selling costs. This approach is utilized in divorce and partnership dissolutions.

*Artwork Archive also has a Wholesale Value field for those selling via third parties.

And, there are three different approaches to valuation.

There are different approaches to valuing art depending on the type of property and the appraisal assignment. Winston Art Group, the nation’s leading independent art appraisal and advisory firm, breaks it down on their website.

Income Approach: is based on the amount of income the property can potentially generate during ownership. This approach is often used for companies that rent art for display or for museum collections that showcase artworks and generate income through ticket sales.
Cost Approach: This type of valuation is founded on the premise of an identical piece being created and based upon the price of the components comprising the property. This approach is often used for works by artists whose work has never sold. It is also used for donation appraisals when the donor is the artist themself.
Comparative Market Data Approach: This is the most common approach for personal property appraisals. Value is determined based on comparing subject property to sole comparable property – a piece of art by the same artist or one of similar quality, and a piece created in the same genre, content, and materials.

Artwork Archive makes it easy to track it all. You have fields to record the Price and Fair Market Value along with Insurance Values, appraisal information and any documentation associated with the value.

Who are the valuation experts?

Typically a valuation is established by a qualified appraiser. Appraisers should follow standards (the USPAP - Uniform Standards of Professional Appraisal Practice) to ensure that their valuation report meets the standards of a qualified appraisal, particularly for the purpose of estate tax or charitable donation. If you’re looking for an appraisal, you can find an appraiser at Appraisers Association of America, American Society of Appraisers, or International Association of Appraisers

According to Shanna Hennig, Senior Director at Winston Art Group, it is important to engage a professionally accredited and USPAP-compliant appraiser who has specific experience in valuing the type of material to be appraised and does not have a conflict of interest, such as working at an auction house or dealer.

Understanding an object’s value is the foundation of proper asset management, thus Shanna notes that it is important to update values regularly as markets and scholarship changes. It’s best practice to review values on an annual basis to make sure that insurance schedules and estate plans accurately reflect the current market. While values may not need to be updated every year, by reviewing the collection on a consistent basis you can avoid costly issues related to an inaccurate valuation.

Once you have it, don’t lose track of your valuation information

Make sure to digitize or upload your appraisal documentation in an art collection database like Artwork Archive so that you can easily reference or share the information.

With value information documented, protected and preserved, you’ll be prepared to make informed and confident decisions regarding insurance, estate planning and gifting of your art collection.