Determining reasonable market price (FMV) can be a complex process, as it is extremely based on the specific realities and situations surrounding each appraisal task. Appraisers need to work out expert judgment, supported by reliable information and sound methodology, to figure out FMV. This typically needs careful analysis of market patterns, the schedule and dependability of comparable sales, and an understanding of how the residential or commercial property would carry out under typical market conditions involving a ready buyer and a willing seller.

This short article will address identifying 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 approach is applicable to other designated uses. While Canada’s meaning of FMV differs from that in the US, there are many similarities that allow this basic 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 price at which residential or commercial property would alter hands in between a ready purchaser and a prepared seller, neither being under any compulsion to buy or to sell and both having affordable understanding of appropriate truths.” 26 CFR § 20.2031-1( b) expands upon this meaning with “the fair market price of a specific product of residential or commercial property … is not to be determined by a forced sale. Nor is the fair market price of an item to be determined by the sale cost of the item in a market besides that in which such product is most typically sold to the general public, considering the location of the product anywhere appropriate.”

The tax court in Anselmo v. Commission held that there must be no difference between the meaning of fair market price for various 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 Residential Or Commercial Property, is the best starting point for assistance on identifying reasonable market price. While federal guidelines can seem complicated, the existing version (Rev. December 2024) is only 16 pages and utilizes clear headings to assist you discover crucial info rapidly. These principles are likewise 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 an essential and concise visual for identifying reasonable market value. It notes the following considerations provided as a hierarchy, with the most trusted indicators of identifying reasonable market value noted initially. Simply put, the table is presented in a hierarchical order of the greatest arguments.

1. Cost or asking price

1. Sales of equivalent residential or commercial properties
2. Replacement expense
3. Opinions of professional appraisers
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   Let’s check out each consideration separately:
   
   1. Cost or Selling Price: The taxpayer’s expense or the actual selling cost gotten by a certified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the best indication of FMV, specifically if the transaction happened near the assessment date under common market conditions. This is most trusted when the sale was recent, at arm’s length, both celebrations knew all relevant facts, neither was under any obsession, and market conditions stayed stable. 26 CFR § 1.482-1(b)( 1) specifies “arm’s length” as “a deal in between one party and an independent and unassociated celebration that is conducted 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 needs to provide sufficient info to suggest they complied with the requirements of Standard 7 by “summarizing the outcomes of examining the subject residential or commercial property’s sales and other transfers, contracts of sale, options, and listing when, in accordance with Standards Rule 7-5, it was required for credible assignment outcomes and if such info was available to the appraiser in the normal course of company.” Below, a comment more states: “If such information is unobtainable, a statement on the efforts undertaken by the appraiser to acquire the info is required. If such info is unimportant, a declaration acknowledging the presence of the information and mentioning its lack of relevance is needed.”
   
   The appraiser should ask for the purchase cost, source, and date of acquisition from the donor. While donors may be unwilling to share this information, 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 declines to offer these information, or the appraiser determines the info is not pertinent, this need to be plainly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most reliable and typically utilized techniques for identifying FMV and are specifically convincing to designated users. The strength of this method depends on several key elements:
   
   Similarity: The closer the similar is to the contributed residential or commercial property, the stronger the evidence. Adjustments need to be made for any differences in condition, quality, or other worth relevant quality. Timing: Sales need to be as close as possible to the valuation date. If you use older sales data, initially verify that market conditions have actually remained stable and that no more recent similar sales are offered. Older sales can still be used, however you must change for any changes in market conditions to show the present value of the subject residential or commercial property. Sale Circumstances: The sale must be at arm’s length between notified, unpressured parties. Market Conditions: Sales ought to happen under typical market conditions and not throughout unusually inflated or depressed durations.
   
   To select proper comparables, it’s important to fully comprehend the definition of fair market price (FMV). FMV is the price at which residential or commercial property would alter hands between a prepared buyer and a ready seller, with neither celebration under pressure to act and both having reasonable understanding of the facts. This definition refers particularly to real completed sales, not listings or price quotes. Therefore, just sold results need to be utilized when figuring out FMV. Asking prices are simply aspirational and do not show a consummated transaction.
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   In order to pick the most common market, the appraiser must consider a more comprehensive introduction where equivalent pre-owned 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 different dynamics. It’s important not to integrate comparables from both, as doing so fails to plainly recognize the most typical market for the subject residential or commercial property. Instead, you should think about both markets and then pick the very best market and include comparables from that market.
   
   3. Replacement Cost: Replacement expense can be thought about when identifying FMV, but only if there’s a sensible connection in between a product’s replacement expense and its fair market price. Replacement cost describes what it would cost to replace the item on the assessment date. In many cases, the replacement cost far exceeds FMV and is not a reputable sign of worth. This technique is utilized infrequently.
   
   4. Opinions of professional appraisers: The IRS allows skilled opinions to be thought about when determining FMV, however the weight offered depends upon the professional’s credentials and how well the opinion is supported by facts. For the opinion to carry weight, it should be backed by credible evidence (i.e., market data). This technique 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 facts 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 concepts through real-world applications and case examples.