Fair Market Value
Whenever an appraiser cites an auction record as a comparable sale, it is essential to include the buyer’s premium in the analysis. Fair Market Value (FMV) represents the price a willing buyer would pay a willing seller under typical market conditions, and this includes the total amount the buyer actually pays to acquire the item. At auction, this means the hammer price plus the buyer’s premium (BP), which is a non-negotiable fee that the buyer must pay to complete the purchase. Because the buyer cannot take possession of the item without paying both the hammer price and the buyer’s premium, the BP is considered an integral part of the sale price and must be included when calculating FMV.
The importance of including the buyer’s premium in FMV determinations has also been recognized by the courts. In Estate of Scull v. Commissioner, T.C. Memo. 1994 211, the court held that the fair market value of artwork sold at auction includes not just the hammer (bid) price, but also the buyer’s premium paid to the auction house even though the auction house, not the estate, ultimately receives the premium. For appraisers, this underscores the necessity of careful attention to auction records and accurate reporting of total sale prices to ensure credible and defensible valuations.
Other costs associated with auction sales, such as sales tax or shipping, are generally excluded from FMV calculations. These costs vary depending on the buyer and the circumstances of the sale, and they do not reflect the market value of the item itself.
Replacement Value
Replacement value can vary in terms of what costs are included, such as sales tax, shipping, or other transaction-related fees. These additional costs are not fixed and may differ based on the location of the buyer or seller, the method of delivery, the retailer’s policies, and any applicable local or state regulations. For example, sales tax rates can vary by state, shipping costs can fluctuate depending on distance or required handling, and insurance may be optional or mandatory depending on the item’s value or the client’s preferences.
The key responsibility of the appraiser is to clearly state in the report what is and is not included in the replacement value determination. Transparency ensures that clients and any reviewing parties understand exactly how the valuation was derived.
In rare cases where auction sales are used to support a replacement value, the buyer’s premium must always be included in the analysis; omitting the buyer’s premium would understate the market-based cost to replace the item.