Avoid Overpaying Taxes & Fees – Promissory Note Valuation

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The Fair Market Value of a Note is Less than its Cost

Investors Beware

The Fair Market Value (FMV) of most promissory and mortgage notes is less than their unpaid balances, their cost, or their face values. I've appraised and invested in promissory notes for the past 35 years, and regularly found most notes holders overpay taxes and fees related to IRA accounts, estates, trusts, and probates. The dollar amount of over-valuation is large; the FMV can be 20% to 40% less than the unpaid balance or the face amount. Overpaying Federal and State taxes and administrative fees on the overstated value of promissory note investments, year after year, costs serious money. Unaware and unsuspecting investors are throwing money away.

What Causes the Over-payments?

Misunderstanding the definition of “value 'as used by the Internal Revenue Service (IRS) causes the overpayment. The typical investor uses their” dollar cost “as their value, not FMV used by the IRS. The Internal Revenue Service (IRS), for most tax matters, does not use “dollar cost” as a “value” amount; the IRS, for taxation, uses the “FMV” of the asset.

IRS Value (FMV)

The definition used by the IRS is: FMV is the price that property would sell for on the open market. It is the price agreed on between a willing buyer and a willing seller, with both being required to act, and both having 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 overpaying taxes and fees? The goal is to comply with the IRS regulations and to value investment assets at their Fair Market Value, not at their dollar cost. A “Qualified Appraisal” must be prepared by “Qualified Appraiser” to satisfy IRS regulations.

Qualified Appraisal by a Qualified Appraiser

An assessment report made, signed, and dated by a qualified appraiser (defined later) under accepted evaluation standards that meets 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/en13.html ) is needed.

Summary

The dollar cost or book value overstates the “Fair Market Value.” The assets in many investment and trust accounts are overvalued for taxation and administrative fee purposes. Comply with the law, and satisfies IRS regulations, a Qualified Appraisal prepared by Qualified Appraiser is required.

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