Determining fair market price (FMV) can be a complicated procedure, as it is extremely depending on the particular realities and situations surrounding each appraisal task. Appraisers must exercise professional judgment, supported by reputable data and sound methodology, to determine FMV. This often needs mindful analysis of market trends, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would carry out under typical market conditions including a willing purchaser and a ready seller.

This short article will attend to determining FMV for the planned usage of taking an income tax reduction for a non-cash charitable contribution in the United States. With that being said, this methodology is appropriate to other intended uses. While Canada's definition of FMV varies from that in the US, there are lots of resemblances that enable this general method to be used to Canadian functions. Part II in this blogpost series will address Canadian particularly.
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Fair market worth is defined in 26 CFR § 1.170A-1( c)( 2) as "the price at which residential or commercial property would alter hands between a prepared buyer and a willing seller, neither being under any obsession to purchase or to offer and both having affordable knowledge of relevant facts." 26 CFR § 20.2031-1( b) broadens upon this definition with "the reasonable market worth of a particular product of residential or commercial property ... is not to be figured out by a forced sale. Nor is the fair market price of a product to be figured out by the sale price of the product in a market besides that in which such item is most typically offered to the public, taking into consideration the area of the product anywhere proper."

The tax court in Anselmo v. Commission held that there should be no difference in between the meaning of reasonable market price for different tax usages and for that reason the combined definition can be utilized in appraisals for non-cash charitable contributions.

IRS Publication 561, Determining the Value of Donated Residential Or Commercial Property, is the very best starting point for guidance on identifying reasonable market worth. While federal guidelines can seem overwhelming, the current version (Rev. December 2024) is just 16 pages and utilizes clear headings to assist you find key details rapidly. These principles are likewise covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.

Table 1, found at the top of page 3 on IRS Publication 561, provides an essential and succinct visual for figuring out fair market price. It notes the following considerations presented as a hierarchy, with the most reputable indications of determining reasonable market price listed first. To put it simply, the table is presented in a hierarchical order of the greatest arguments.

1. Cost or market price

1. Sales of comparable residential or commercial properties
2. Replacement cost
3. Opinions of professional appraisers
   
   Let's explore each consideration individually:
   
   1. Cost or Selling Price: The taxpayer's expense or the actual market price gotten by a qualified organization (an organization eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) might be the very best indication of FMV, especially if the transaction took place near to the valuation date under common market conditions. This is most dependable when the sale was recent, at arm's length, both parties knew all relevant facts, neither was under any obsession, and market conditions stayed steady. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a deal in between one celebration and an independent and unassociated party that is performed as if the 2 celebrations were strangers so that no conflict of interest exists."
   
   This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser needs to provide adequate details to indicate they adhered to the requirements of Standard 7 by "summarizing the results of examining the subject residential or commercial property's sales and other transfers, arrangements of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was essential for trustworthy assignment results and if such details was available to the appraiser in the typical course of business." Below, a remark more states: "If such info is unobtainable, a declaration on the efforts undertaken by the appraiser to obtain the information is required. If such info is irrelevant, a statement acknowledging the presence of the information and mentioning its absence of importance is required."
   
   The appraiser must ask for the purchase price, source, and date of acquisition from the donor. While donors might be reluctant to share this details, it is required in Part I of Form 8283 and also appears in the IRS Preferred Appraisal Format for items valued over $50,000. Whether the donor decreases to provide these details, or the appraiser figures out the details is not pertinent, this should be clearly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most reliable and typically utilized methods for determining FMV and are particularly convincing to intended users. The strength of this method depends on a number of essential factors:
   
   Similarity: The closer the similar is to the donated residential or commercial property, the stronger the evidence. Adjustments need to be produced any distinctions in condition, quality, or other value pertinent quality. Timing: Sales ought to be as close as possible to the evaluation date. If you use older sales data, initially verify that market conditions have stayed stable and that no more recent similar sales are offered. Older sales can still be utilized, but you must adjust for any modifications in market conditions to show the present value of the subject residential or commercial property. Sale Circumstances: The sale needs to be at arm's length in between notified, unpressured celebrations. Market Conditions: Sales should occur under regular market conditions and not during abnormally inflated or depressed periods.
   
   To pick appropriate comparables, it is necessary to completely comprehend the meaning of fair market value (FMV). FMV is the price at which residential or commercial property would change hands in between a prepared purchaser and a ready seller, with neither celebration under pressure to act and both having reasonable knowledge of the realities. This meaning refers particularly to actual finished sales, not listings or quotes. Therefore, just sold outcomes need to be used when identifying FMV. Asking costs are merely aspirational and do not reflect a consummated transaction.
   
   In order to choose the most typical market, the appraiser needs to think about a broader summary where similar secondhand items (i.e., secondary market) are sold to the general public. This typically narrows the focus to either auction sales or gallery sales-two unique markets with various characteristics. It's crucial not to integrate comparables from both, as doing so stops working to clearly determine the most typical market for the subject residential or commercial property. Instead, you should think about both markets and then select the very best market and consist of comparables from that market.
   
   3. Replacement Cost: Replacement expense can be thought about when identifying FMV, however just if there's a sensible connection between a product's replacement expense and its fair market value. Replacement expense refers to what it would cost to change the item on the valuation date. In most cases, the replacement expense far surpasses FMV and is not a trusted sign of worth. This approach is used occasionally.
   
   4. Opinions of professional appraisers: The IRS allows expert viewpoints to be thought about when identifying FMV, but the weight offered depends upon the professional's qualifications and how well the viewpoint is supported by truths. For the opinion to carry weight, it needs to be backed by credible evidence (i.e., market data). This approach is utilized rarely. Determining reasonable market worth includes more than applying a definition-it needs thoughtful analysis, sound method, and reputable market data. By following IRS guidance and thinking about the truths and situations connected to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will even more explore these ideas through real-world applications and case examples.