Someone from the research staff of the House Ways & Means committee actually called me on this issue as well and I volunteered to testify. I wanted to discuss the problem of the lack of independence of the appraiser but they wanted me to name names. They completely missed the point. Its not specific individuals, its the way the industry is set up. I got the distinct impression from my conversation that the committee already knew what they wanted to hear. They went wih an appraiser from Virginia, David Lennhoff, who didn’t name names either, but basically said that the 10% rule – of – thumb adjustment is not valid.
Most appraisers who do facade easement valuations are using 10% to 15% adjustments as a guideline which originates from the now infamous original Primoli Letter [pdf] , since replaced by a revised version from the IRS [pdf] that omits the 10% to 15% verbage. Since it could be interpreted that the IRS seems to be re-writing history, I suspect that is the motivation for the National Architectural Trust to document the changes in policy by the IRS on this matter [NAT].
The Problem: Most appraisers are simply performing a valuation and making this discount. The problem is that the disclosure of whether the seller has taken advantage of the deduction is not available to the public, in a practical manner. The inability to use empirical data (because it doesn’t exist) provides the classic catch-22. You need empirical evidence to appraise the first property in your market, but yet the IRS says you can’t appraise without using empirical data. However, there is no definition as to what constitues empirical evidence. Using court cases, sales data, equity stock trends, what conference wins the Superbowl (well, thats a stretch) might be interpreted as appropriate since they are all empirical evidence.
Our firm grew disaffected as homeowners caught on to the process and pressured appraisers to appraise the properties on the high side to get a bigger deduction. We refused to do that so we stopped getting this type of work. We were openly complaining that there was a problem, but from their perspective, they do not have the ability to police the appraisers.
Who is going to say the value is too high? No one. There is no review function or policing of these reports done for any facade easement organization. It falls in the lap of the IRS agent during an audit.
The loss in tax revenue due to inflated appraisals has got to be staggering to the Treasury. Many appraisals are inflated because there is no oversight and like the wholesale lending process (mortgage brokers), the benefactor picks the valuation expert. And once again, appraisers, including good appraisers who don’t play this game, will be blamed.