Determining fair market price (FMV) can be a complicated procedure, as it is extremely depending on the particular truths and scenarios surrounding each appraisal assignment. Appraisers must work out professional judgment, supported by reputable data and sound approach, to determine FMV. This typically requires cautious analysis of market patterns, the schedule and dependability of comparable sales, and an understanding of how the residential or commercial property would perform under common market conditions involving a ready buyer and a ready seller.

This post will resolve determining FMV for the meant usage of taking an earnings tax deduction for a non-cash charitable contribution in the United States. With that being stated, this approach applies to other intended usages. While Canada’s meaning of FMV differs from that in the US, there are lots of similarities that allow this general approach to be used to Canadian functions. Part II in this blogpost series will address Canadian language specifically.

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 buyer and a ready seller, neither being under any compulsion to buy or to sell and both having reasonable understanding of relevant realities.” 26 CFR § 20.2031-1( b) broadens upon this definition with “the fair market price of a particular product of residential or commercial property … is not to be identified by a forced sale. Nor is the fair market value of a product to be figured out by the sale rate of the product in a market besides that in which such item is most frequently offered to the general public, taking into account the area of the item anywhere suitable.”

The tax court in Anselmo v. Commission held that there ought to be no distinction between the meaning of fair market value for different tax usages and for that reason the 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 beginning point for guidance on determining fair market worth. While federal guidelines can appear difficult, the present variation (Rev. December 2024) is just 16 pages and uses clear headings to help you discover key information rapidly. These principles are also covered in the 2021 Core Course Manual, beginning at the bottom of page 12-2.

Table 1, discovered at the top of page 3 on IRS Publication 561, supplies an essential and succinct visual for determining fair market price. It lists the following considerations provided as a hierarchy, with the most dependable indications of figuring out reasonable market value noted first. To put it simply, the table exists in a hierarchical order of the strongest arguments.

1. Cost or selling price

1. Sales of comparable residential or commercial properties
2. Replacement expense
3. Opinions of professional appraisers
   
   Let’s explore each factor to consider individually:
   
   1. Cost or Selling Price: The taxpayer’s cost or the real selling cost gotten by a certified company (an organization eligible to get tax-deductible charitable contributions under the Internal Revenue Code) may be the finest sign of FMV, especially if the transaction took place near the appraisal date under typical market conditions. This is most reliable when the sale was current, at arm’s length, both parties understood all appropriate realities, neither was under any obsession, and market conditions stayed steady. 26 CFR § 1.482-1(b)( 1) defines “arm’s length” as “a transaction in between one celebration and an independent and unrelated party that is conducted as if the 2 celebrations were complete strangers so that no conflict of interest exists.”
   
   This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser needs to supply enough information to suggest they abided by the requirements of Standard 7 by “summarizing the results of examining the subject residential or commercial property’s sales and other transfers, agreements of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was necessary for reputable project outcomes and if such information was readily available to the appraiser in the normal course of business.” Below, a remark more states: “If such details is unobtainable, a statement on the efforts undertaken by the appraiser to acquire the info is required. If such information is unimportant, a declaration acknowledging the existence of the information and citing its lack of significance is needed.”
   
   The appraiser should request the purchase cost, source, and date of acquisition from the donor. While donors might hesitate to share this details, it is needed in Part I of Form 8283 and also appears in the IRS Preferred Appraisal Format for products valued over $50,000. Whether the donor decreases to offer these information, or the appraiser identifies the details is not appropriate, this ought to be plainly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most trusted and typically utilized approaches for determining FMV and are specifically persuasive to desired users. The strength of this approach depends on numerous essential factors:
   
   Similarity: The closer the equivalent is to the contributed residential or commercial property, the more powerful the evidence. Adjustments should be made for any distinctions in condition, quality, or other worth relevant characteristic. Timing: Sales need to be as close as possible to the assessment date. If you utilize older sales data, first validate that market conditions have remained steady and that no more current similar sales are readily available. Older sales can still be used, but you should adjust for any changes in market conditions to show the current worth of the subject residential or commercial property. Sale Circumstances: The sale must be at arm’s length in between informed, unpressured celebrations. Market Conditions: Sales must happen under typical market conditions and not throughout abnormally inflated or depressed periods.
   
   To select appropriate comparables, it is very important to totally understand the meaning of fair market worth (FMV). FMV is the price at which residential or commercial property would change hands in between a willing purchaser and a willing seller, with neither party under pressure to act and both having affordable understanding of the realities. This definition refers specifically to actual completed sales, not listings or quotes. Therefore, just sold outcomes ought to be used when determining FMV. Asking rates are merely aspirational and do not reflect a consummated transaction.
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   In order to select the most typical market, the appraiser must consider a more comprehensive introduction where similar previously owned items (i.e., secondary market) are sold to the public. This typically narrows the focus to either auction sales or gallery sales-two distinct marketplaces with various characteristics. It is necessary not to combine comparables from both, as doing so fails to clearly determine the most typical market for the subject residential or commercial property. Instead, you need to consider both markets and then select the best market and include comparables from that market.
   
   3. Replacement Cost: Replacement cost can be considered when figuring out FMV, but just if there’s an affordable connection between an item’s replacement expense and its fair market worth. Replacement cost describes what it would cost to replace the item on the valuation date. In numerous cases, the replacement cost far surpasses FMV and is not a trustworthy sign of value. This method is utilized rarely.
   
   4. Opinions of expert appraisers: The IRS allows skilled opinions to be considered when figuring out 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 reputable proof (i.e., market information). This method is used infrequently. Determining fair market value includes more than using a definition-it needs thoughtful analysis, sound approach, and trustworthy market information. By following IRS assistance and thinking about the realities and circumstances linked to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will even more check out these ideas through real-world applications and case examples.