The IRS does not require a formal appraisal annually for every asset. Instead, it requires a reasonable, good faith estimate of Fair Market Value supported by appropriate documentation.
When Professional Valuations Are Required
There are situations where a professional valuation or appraisal may be required or strongly recommended.
These often include:
- The purchase or sale of an asset
- Distributions of assets from the IRA
- Significant changes to the asset
- Certain inherited account situations
- Circumstances where a value cannot be reasonably determined otherwise
In these cases, a third party valuation helps establish a defensible and documented value.
When Professional Valuations Are Optional
For many assets, especially those that are stable or have readily available information, professional valuations are not required every year.
Examples include:
- Real estate valued using broker opinions or comparable sales
- Performing notes with consistent payment history
- Private investments with sponsor provided statements
As long as the valuation is reasonable and supported, a formal appraisal may not be necessary annually.
Cost Considerations
Professional valuations can be costly, and requiring one every year would place an unnecessary burden on investors.
The goal of FMV reporting is accuracy and compliance, not perfection. Paying for valuations only when they add meaningful clarity or support helps balance cost and responsibility.
What Does Good Faith Mean?
A good faith valuation means:
- The value is reasonable based on available information
- The method used makes sense for the asset type
- Documentation supports how the value was determined
- There is no intent to misstate or manipulate value
Good faith does not require certainty, only reasonable effort.
Understanding Responsibility
Ultimately, the account holder is responsible for determining FMV and deciding whether a professional valuation is appropriate. Custodians report the value provided but do not advise on valuation methods.
This structure allows flexibility while maintaining compliance.