Determining fair market value (FMV) can be an intricate process, as it is extremely depending on the particular realities and circumstances surrounding each appraisal assignment. Appraisers should work out professional judgment, supported by trustworthy data and sound methodology, to determine FMV. This typically requires careful analysis of market patterns, the availability and dependability of similar sales, and an understanding of how the residential or commercial property would carry out under typical market conditions including a prepared buyer and a prepared seller.

This article will deal with identifying FMV for the meant use of taking an income tax deduction for a non-cash charitable contribution in the United States. With that being stated, this method is suitable to other desired uses. While Canada's meaning of FMV differs from that in the US, there are numerous resemblances that permit this basic methodology to be used to Canadian functions. Part II in this blogpost series will deal with Canadian language particularly.

Fair market price is defined in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would change hands between a willing purchaser and a willing seller, neither being under any compulsion to buy or to offer and both having sensible understanding of relevant truths." 26 CFR § 20.2031-1( b) expands upon this meaning with "the fair market value of a specific product of residential or commercial property ... is not to be identified by a forced sale. Nor is the reasonable market value of an item to be identified by the list price of the product in a market aside from that in which such product is most typically offered to the public, considering the area of the item anywhere proper."

The tax court in Anselmo v. Commission held that there ought to be no difference in between the meaning of reasonable market value for various tax uses and therefore 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 best starting point for assistance on identifying fair market worth. While federal policies can appear overwhelming, the existing variation (Rev. December 2024) is just 16 pages and uses clear headings to assist you find crucial info quickly. These principles are also covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.

Table 1, discovered at the top of page 3 on IRS Publication 561, provides a crucial and concise visual for determining fair market worth. It notes the following considerations presented as a hierarchy, with the most trustworthy indicators of identifying fair market worth noted first. In other words, the table is provided in a hierarchical order of the greatest arguments.

1. Cost or asking price
2. Sales of equivalent residential or commercial properties
3. Replacement cost
4. Opinions of expert appraisers

Let's explore each consideration separately:

1. Cost or Selling Price: The taxpayer's cost or the actual market price received by a qualified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) might be the finest indication of FMV, specifically if the transaction happened near to the assessment date under normal market conditions. This is most trustworthy when the sale was current, at arm's length, both parties understood all pertinent realities, neither was under any compulsion, and market conditions stayed stable. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a transaction in between one celebration and an independent and unassociated party that is carried out as if the two celebrations were complete strangers so that no dispute of interest exists."

This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser should offer adequate information to suggest they abided by the requirements of Standard 7 by "summing up the results of analyzing the subject residential or commercial property's sales and other transfers, agreements of sale, alternatives, and listing when, in accordance with Standards Rule 7-5, it was essential for credible assignment outcomes and if such information was available to the appraiser in the typical course of business." Below, a remark more states: "If such details is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the details is required. If such information is irrelevant, a declaration acknowledging the existence of the information and citing its lack of relevance is required."

The appraiser needs to request the purchase price, source, and date of acquisition from the donor. While donors might be unwilling to share this information, it is required in Part I of Form 8283 and likewise appears in the IRS Preferred Appraisal Format for items valued over $50,000. Whether the donor declines to offer these details, or the appraiser figures out the info is not relevant, this need to be clearly documented in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are among the most dependable and commonly utilized methods for determining FMV and are particularly convincing to desired users. The strength of this method depends upon numerous essential factors:

Similarity: The closer the similar is to the donated residential or commercial property, the more powerful the evidence. Adjustments need to be made for any distinctions in condition, quality, or other value relevant quality.
Timing: Sales ought to be as close as possible to the evaluation date. If you utilize older sales data, first verify that market conditions have stayed steady and that no more recent equivalent sales are offered. Older sales can still be utilized, however you must change for any changes in market conditions to reflect the existing value of the subject residential or commercial property.
Sale Circumstances: The sale must be at arm's length in between informed, unpressured parties.
Market Conditions: Sales ought to occur under typical market conditions and not during uncommonly inflated or depressed periods.

To select appropriate comparables, it is very important to completely comprehend the definition of fair market value (FMV). FMV is the cost at which residential or commercial property would change hands in between a willing buyer and a willing seller, with neither celebration under pressure to act and both having reasonable knowledge of the realities. This meaning refers particularly to real completed sales, not listings or price quotes. Therefore, only sold results should be used when determining FMV. Asking rates 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 overview where similar secondhand items (i.e., secondary market) are offered to the public. This usually narrows the focus to either auction sales or gallery sales-two distinct marketplaces with various dynamics. It is essential 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 need to think about both markets and then choose the best market and include comparables from that market.

3. Replacement Cost: Replacement cost can be considered when figuring out FMV, but only if there's an affordable connection in between an item's replacement cost and its fair market worth. Replacement expense refers to what it would cost to replace the item on the evaluation date. In a lot of cases, the replacement expense far goes beyond FMV and is not a trusted sign of value. This technique is used occasionally.

4. Opinions of professional appraisers: The IRS permits skilled viewpoints to be thought about when identifying FMV, but the weight provided depends on the specialist's qualifications and how well the opinion is supported by realities. For the opinion to carry weight, it should be backed by trustworthy evidence (i.e., market information). This method is used rarely.
Determining fair market worth includes more than using a definition-it requires thoughtful analysis, sound method, and dependable market data. By following IRS assistance and thinking about the truths and situations linked to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will further explore these principles through real-world applications and case examples.