Although it might seem counterintuitive, the first step in valuing a work of art is establishing a purpose for that value. There are important differences between Fair Market Value and Retail Replacement Value, for example, and you want to make sure that you are using the correct type of valuation.
Fair Market Value is defined as “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,” according to Technical Advisory Memorandum 9235005 [May 27, 1992], via the IRS Treasury Regulation Sections 1.170A-1 (c) (2). Fair Market Value should include the buyer’s premium. Examples of uses for Fair Market Value are charitable donations, tax and estate appraisals, and equitable distribution. Sometimes Marketable Cash Value is used for collateral loan, or maybe divorce (a lender or attorney will advise which type of value they require). Marketable Cash Value is Fair Market Value with the cost of selling deducted.
In contrast, Retail Replacement Value is “the highest amount that would be required to replace a property with another of similar age, quality, origin, appearance, provenance, and condition within a reasonable length of time in an appropriate and relevant market,” according to the IRS, as stated in the Treasury Regulation Sections 1.170A-1 (c) (2). This means that to accurately insure a work of art, you should consider Retail Replacement Value in order to capture the value of the artwork as if it needed to be replaced in a restricted timeframe, including the framing and shipping fees that might be associated with that replacement.
If you have any questions about the complexities of these value types, just ask us. That’s why we’re here!