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When and Why Is a Promissory Note Appraisal Required?
Determining the value of financial assets can be an optional decision, but in most cases, it is a requirement. An example of an alternative category is an investor seeking to know the current market value of a property acquired several years ago. The main driver of required or mandatory assessments is the Internal Revenue Service (IRA). All tax related items must be valued in accordance with IRS rules and regulations. Let’s examine when and why promissory notes are valued.
IRS Revenue Ruling 59-60 details appraisal requirements for income tax, estate tax, gift tax, or other federal tax purposes. Take note of appraisal and valuation experts in the following situations:
Determining the value of notes, both commercial and personal, for audit or taxation purposes
A note is part of the financing for the sale of a business
When a wealth manager advises on tax-related estate planning
When estate and trust attorneys and CPAs value notes for distribution and taxation
Gift Tax Planning – “Gifts”
Charitable Contribution Planning
Related Party (Family Member) Property Valuation
Valuation of Divorce Assets
Partnership Dissolution Asset Valuation
Self-Directed IRA Account Evaluation
Appraisal specialists are increasingly involved in working with estate and trust attorneys, auditors, CPAs and investors. These parties require valuation and valuation of financial assets.
Factors Affecting Note Valuation
The following list outlines the thirteen assessment factors:
1. Clarity of loan document language
2. Loan Document Terms and Conditions
3. Interest rate-fixed or adjustable
4. Tenure of loan-long or short term
5. Payment schedule-amortizing or interest only
6. Loan payment history
7. Financial information and financial strength of the borrower
8. Collateral Security
9. Financial Conditions
10. Marketability of Property
11. Liquidity of assets
12. Collectibility of Debt
13. Risk Factors
All the above factors are analyzed and evaluated individually; Then, they should be analyzed in conjunction with each other. Each of the thirteen elements influences me in one or more ways. Their correlation affects the final fair market value. Arriving at rational, defensible assessment conclusions requires experienced judgment and training.
Other cash flow financial instruments that require valuation
Promissory notes are not the only type of cash-flow financial asset that requires valuation and appraisal. More than fifty categories of non-publicly traded financial assets require a valuation by an independent, third-party appraiser. Listed below are some of the more common categories.
Contract for contract–installment land contract
Promissory notes secured by commercial property
Seller Carried-Back Financing/Seller-Financing Promissory Note
Partial ownership of income streams
Full ownership of the income stream
Full ownership of Balloon Balance
Other cash flows are not related to financial instruments-promissory note
Accounts Receivable
General consumer loans
Auto Finance Notes
Lease payments
Decision-Professional and Consumer
Credit card debt
Health and Country Club Memberships
Equipment rental
Faith grows
Retail installment agreement
Winning the lottery
Yacht Promissory Notes
Annuity payments
Insurance Settlements
Timeshare and vacation club agreements
Heritage and faith progress
Winning the lottery
Military Retirement Pension
Winning prizes and awards/casino
Structured Settlements/Class Action Awards
Tax lien certificates
What Professional Assessment Services Should You Expect?
A privately held promissory note is often the centerpiece of an owner’s retirement savings; It often represents a large portion of the estate’s value. As such, a valuation expert must have actual experience in valuing and valuing private promissory notes. The evaluation report should be well reasoned and supported by documented findings. It should be an objective and defensible valuation analysis that will survive litigation or IRS scrutiny.
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