How a wine collection is valued, and when you need a formal appraisal

One cellar, several values

The same bottles can carry quite different figures, each correct for its purpose.

Fair market value is the standard for estates, gifts and charitable donations in the United States: “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.” It is not a forced-sale price, and it is measured in the market where the item is most commonly sold to the public.

Replacement value is what an insurer needs: what it would take to replace the wine today. The IRS itself notes that an insurance appraisal reflects replacement cost, which usually bears no relationship to fair market value. Some insurers instead agree a value with the owner in advance.

Likely proceeds are what matter when selling: what a particular route, such as an auction, a private sale or a merchant, can be expected to achieve for a particular wine at a particular time.

When a cellar is divided among heirs, the will or the heirs themselves decide the basis. What matters is that everyone works from the same figures.

Where the evidence comes from

• Auction results are real transactions, which makes them valuable evidence. But every lot differs in condition and provenance, and one result is not a market. Published auction results often include the buyer’s premium, which goes to the house rather than the seller, so a valuation should state which basis it uses.
• Merchant listings are asking prices, not transaction prices. Aggregators such as Wine-Searcher average the prices merchants list, which is useful for orientation but is not evidence of what changed hands.
• The trade exchange. Liv-ex, the exchange used by professional merchants, publishes prices and indices for the most actively traded wines. Its prices are trade prices, generally for wine held in bond under standard trading terms. They are a strong reference for young, liquid wines and a weaker one for older or rarer bottles.

The IRS weighs a comparable sale by how similar the item is, how close the sale was to the valuation date, whether it was made at arm’s length and the market in which it took place. A careful valuer does the same.

What moves the value of a bottle

Beyond the producer, the vintage and its reputation:

• Format. Magnums and larger bottles are scarcer and generally age more slowly, which collectors prize.
• Quantity and packaging. A full case in its original wooden case or carton is worth more than the same wine in loose bottles, and consistent fill levels across a case are a good sign.
• Provenance. Wine bought direct from the estate, held by one owner or kept in professional storage commands more confidence, and usually a higher value, than wine with no history.
• Condition. In Bordeaux-shaped bottles, fill levels run from “into neck” through “top shoulder” and “mid shoulder” to “low shoulder”; in Burgundy-shaped bottles they are measured in centimeters below the cork. Top shoulder is normal for Bordeaux 15 years old or more; low shoulder is a real risk. Labels, capsules and corks are graded too, and signs of seepage often point to past heat.
• Drinking window and demand. Wines at or near maturity, and wines that trade often, are easier both to value and to sell.

When a formal appraisal is required

Charitable gifts in the United States. Above a value threshold, a donor needs a qualified appraisal by a qualified appraiser, summarized on IRS Form 8283. The regulations set out what the appraisal must contain, including a description and the condition of each item, the method used and the specific evidence relied on, and they require it to follow the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP). It must be signed no earlier than 60 days before the gift, and the appraiser’s fee cannot depend on the appraised value. The donor, the charity and anyone who sold the wine to the donor are among those who cannot act as the appraiser. If the charity resells the wine, as at a benefit auction, the deduction is generally limited to the donor’s cost.

Estates in the United States. Where personal effects include articles of marked artistic or intrinsic value above a modest total, an expert appraisal under oath is filed with the estate tax return, along with the executor’s statement on the appraiser’s qualifications and independence.

Canada. The Canada Revenue Agency describes fair market value as, usually, the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting independently of each other. For donations above a modest value, it strongly recommends an independent appraisal, and when a gift is appraised, the appraiser’s name and address go on the receipt. At death, property is treated as sold at fair market value, and that value must be supportable.

Insurance. Insurers generally offer blanket cover for a collection, itemized cover for valuable bottles or both, and they ask for a current inventory and periodic appraisals. Intervals vary by insurer. Review the values when the market moves or the cellar changes materially.

No license is needed to appraise personal property, although for a charitable gift the IRS requires verifiable education and experience in valuing that type of property. Ask about training in USPAP, experience with fine wine and independence from any later sale. The American Society of Appraisers offers a specialty in fine and rare wines.

Wine held in bond or abroad

Where the wine is matters. Wine held in bond in the United Kingdom has not had duty or taxes paid, so its value differs from that of the same wine in a cellar in New York or Toronto; trade prices on Liv-ex, for example, are quoted for wine in bond. Currency matters too, and so does how practical it would be to bring the wine to the market where it would sell. A valuation should say where the wine is and which market its figures come from.

How a careful valuation is documented

A valuation that will stand up to an insurer, a tax authority or a family names each wine line by line, with its condition, the evidence used, the effective date and the purpose. It also sets out the valuer’s qualifications and independence. The IRS puts it plainly: “The appraiser’s opinion is never more valid than the facts on which it is based; without these facts, it is simply a guess.”

Common mistakes

• Using retail asking prices as values.
• Ignoring condition and provenance.
• Relying on a single auction result.
• Letting insurance values go out of date.
• Reusing an insurance appraisal for tax purposes, or the reverse.
• Mixing bases: results with and without the buyer’s premium, or prices in bond and duty-paid.
• Asking someone with a stake in a sale to set the value.

This note is general information, not legal, tax or insurance advice. Rules change and differ by state, province and country. For a particular wine, collection or estate, write to us.

Sources

1. Treasury Regulation § 20.2031-1, definition of fair market value (eCFR)
2. Treasury Regulation § 20.2031-6, household and personal effects (eCFR)
3. Treasury Regulation § 1.170A-17, qualified appraisals and appraisers (eCFR)
4. IRS Publication 561, Determining the Value of Donated Property
5. IRS, Instructions for Form 8283
6. Canada Revenue Agency, determining the fair market value of gifts in kind
7. Canada Revenue Agency, capital gains when someone has died
8. Liv-ex, fine wine indices
9. Liv-ex, trading and logistics
10. Sotheby’s Wine, glossary of condition terms
11. American Society of Appraisers, personal property specialties