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Old 09-05-2012, 04:24 PM
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Calculating Fair Market Value on Jewelry

Hi. Soon I'll be gifting a piece of jewelry to my (grown) child. As a result, I'll need to calculate fair market value to pay the gift tax. Here are my questions:
1. Is it alright to calculate Fair Market Value with the latest (20-year-old) appraisal certificate I have on the item? If not, how *new* do appraisals have to be to satisfy the IRS?
2. Since we've long lost the original sales receipt (it's been in the family since the 1900s), what other ways are there of estimating [and documenting!] the cost basis of the jewelry so if my child ever sells it, it's not necessary to pay total capital gains?
Many Thanks.



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Old 09-06-2012, 02:49 AM
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“1. Is it alright to calculate Fair Market Value with the latest (20-year-old) appraisal certificate I have on the item? If not, how *new* do appraisals have to be to satisfy the IRS?”----> the latest (20-year-old) appraisal certificate??? I don’t think so; however, previous appraisal report may help an appraiser arrive at a more accurate value for a vintage jewelry.FMV is the price for which an item sells on the consumer market. In other words, FMV is what a buyer is willing to pay a seller for a particular item, regardless of whether the item is new or used. Unfortunately, determining the fair market value of used personal items like clothing, jewelry, andcollectibles is not easy because there is no set standard for calculating the value.
An appraiser may also consider general price trends in determining an item's value by taking into account current market conditions, which might increase or decrease the value of the jewelry.


2. Since we've long lost the original sales receipt (it's been in the family since the 1900s), what other ways are there of estimating [and documenting!] the cost basis of the jewelry so if my child ever sells it, it's not necessary to pay total capital gains?”---> As described previously, I guess you need professional help form an appraiser. When you give a gift to your child, you have an annual and lifetime gift limit to adhere to. Each year, you can give up to $13,000 (or $26,000 if you are married) to each one of your children (as of 2012) without paying any taxes. In order to bypass having to file a gift tax return (IRS Form 709) your gifts to each individual must be $13,000($26K if you are married) or less. If you gift more (unless you meet one or the exceptions) you have to file Form 709.( However, UNLESS your give up to $5.12 million, you are NOT subject to the gift tax.) Any gifts above that amount go toward your lifetime limit. As of 2012, you can give up to $5.12 million in your lifetime before incurring any gift taxes.
In general, as long as the FMV of the jewelry exceeds its adjusted basis when it was given to your child , then, your child’s basis of the gift will be the same as the donor's(your) adjusted basis at the time it was given to him. For example, assume that whne you gave the gift to your child, its adj basis was $20,000 and its FMV,appraised value, was $30,000, then as FMV>Adj basis, your child’s basis is $20,000. And your child doesn’t need to pay tax on the LTCG, $10K;$30K-$20K since his LTCG tax will be deferred until he disposes of the pjewerly later. However, if you realize a loss on the sale of your gift( I mean adjusted basis of the gift exceeds FMV),then, your child’s basis is the lesser of the donor's adjusted basis or the fair market value on the date it was given to him. If the FMV of the jewerly at the time of the gift is less than the donor's (your)adjusted basis, your child’s basis depends on whether your child has a gain or loss when he disposes of the gift.Your child’s basis for figuring a gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the jewerly. Your child’s basis for figuring a loss is the FMV of the gift when he received the gift, plus or minus any required adjustments to basis while he held the jewerly. In this case, you need to sell the jewerly at a loss and give the cash to your child so that he can purchase a new jewerly, then the FMV(purchase price)’d be his basis, higher basis and he can reduce his tax capital gain tax liability when he disposes of it later. For example, assume that your child received the jewerly as a gift. At the time of the gift, the jewerly had an FMV of $80,000. The donor's (your)adjusted basis was $100,000. After your child received the jewerly, no events occurred to increase or decrease his basis. If he sells the gift for $120,000, he will have a $20,000 gain($120K-$100K) , NOT $40K,because your child must use the donor's(your) adjusted basis ($100,000) at the time of the gift as his basis to figure gain. If he sells the gift for $70,000, your child will have a $10,000 loss, NOT $30K, because you must use the FMV ($80,000>$70,000) at the time of the gift as your child’s basis to figure a loss. This means that UNLESS your child sells the jewelry at less than FMV, $80K, he can never recognize his loss on the sale of the jewerly.
If the sales price is between $80,000 and $100,000, your child has neither gain nor loss. For instance, if the sales price was $90,000 and your child tried to figure a gain using the donor's adjusted basis ($100,000), he would get a $10,000 loss. If he then tried to figure a loss using the FMV ($80,000), your child would get a $10,000 gain



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Old 11-13-2012, 04:33 PM
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Many thanks for the good advice, Wynhough. Will use!



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Old 03-01-2013, 03:47 AM
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Wnhough has explained it very nicely. Although, as suggested above you need professional help form an appraiser. The capital gains taxes rate has gone up to 23% in Jan'13 and that too for income above 450k & you can gift up to $13,000 (or $26,000 if you are married) to each one of your children (as of 2012).



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