Determining fair market worth (FMV) can be a complex procedure, as it is extremely depending on the specific facts and scenarios surrounding each appraisal assignment. Appraisers need to work out professional judgment, supported by trustworthy information and sound approach, to identify FMV. This typically requires mindful analysis of market trends, the schedule and reliability of comparable sales, and an understanding of how the residential or commercial property would carry out under common market conditions involving a prepared buyer and a willing seller.

This post will attend to identifying FMV for the meant usage of taking an income tax reduction for a non-cash charitable contribution in the United States. With that being stated, this methodology applies to other designated usages. While Canada's definition of FMV varies from that in the US, there are many resemblances that allow this basic method to be used to Canadian functions. Part II in this blogpost series will resolve Canadian language specifically.

Fair market price is specified in 26 CFR § 1.170A-1( c)( 2) as "the price at which residential or commercial property would alter hands in between a ready buyer and a ready seller, neither being under any obsession to buy or to sell and both having sensible knowledge of appropriate facts." 26 CFR § 20.2031-1( b) broadens upon this meaning with "the reasonable market price of a specific item of residential or commercial property ... is not to be determined by a forced sale. Nor is the reasonable market value of an item to be determined by the price of the item in a market besides that in which such product is most frequently offered to the public, considering the place of the item any place suitable."

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

IRS Publication 561, Determining the Value of Donated Residential Or Commercial Property, is the finest beginning point for guidance on identifying fair market worth. While federal guidelines can seem daunting, the current variation (Rev. December 2024) is just 16 pages and utilizes clear headings to help you discover key details quickly. These concepts are also covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.
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Table 1, found at the top of page 3 on IRS Publication 561, provides an important and succinct visual for figuring out reasonable market value. It lists the following factors to consider presented as a hierarchy, with the most trusted signs of figuring out fair market price listed first. Simply put, the table exists in a hierarchical order of the strongest arguments.

1. Cost or asking price

1. Sales of equivalent residential or commercial properties
2. Replacement cost
3. Opinions of expert appraisers
   
   Let's check out each consideration individually:
   
   1. Cost or Selling Price: The taxpayer's cost or the actual selling cost received by a qualified organization (a company eligible to get tax-deductible charitable contributions under the Internal Revenue Code) may be the finest indication of FMV, specifically if the transaction took place close to the valuation date under typical market conditions. This is most trustworthy when the sale was recent, at arm's length, both parties understood all appropriate facts, neither was under any obsession, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a deal between one celebration and an independent and unassociated party that is conducted as if the two celebrations were strangers so that no dispute of interest exists."
   
   This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser should provide sufficient details to show they adhered to the requirements of Standard 7 by "summing up the results of analyzing the subject residential or commercial property's sales and other transfers, arrangements of sale, alternatives, and listing when, in accordance with Standards Rule 7-5, it was needed for reputable project results and if such info was offered to the appraiser in the typical course of organization." Below, a remark more states: "If such info is unobtainable, a statement on the efforts carried out by the appraiser to obtain the info is needed. If such information is unimportant, a statement acknowledging the existence of the information and citing its absence of relevance is required."
   
   The appraiser should request the purchase price, source, and date of acquisition from the donor. While donors might be hesitant to share this details, it is needed 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 provide these details, or the appraiser identifies the information is not relevant, this ought to be plainly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most trusted and frequently used approaches for figuring out FMV and are especially convincing to intended users. The strength of this method depends on several crucial aspects:
   
   Similarity: The closer the equivalent is to the donated residential or commercial property, the more powerful the evidence. Adjustments need to be produced any distinctions in condition, quality, or other worth relevant attribute. Timing: Sales must be as close as possible to the valuation date. If you use older sales data, initially verify that market conditions have remained steady and that no more recent similar sales are available. Older sales can still be utilized, however you need to adjust for any modifications in market conditions to reflect the present 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 must happen under regular market conditions and not throughout uncommonly inflated or depressed durations.
   
   To pick proper comparables, it is necessary to fully understand the meaning of reasonable market price (FMV). FMV is the rate at which residential or commercial property would alter hands between a ready buyer and a prepared seller, with neither celebration under pressure to act and both having sensible knowledge of the facts. This meaning refers particularly to actual finished sales, not listings or price quotes. Therefore, only offered results must be utilized when identifying FMV. Asking prices are merely aspirational and do not reflect a consummated deal.
   
   In order to choose the most common market, the appraiser ought to consider a broader summary where similar used products (i.e., secondary market) are sold to the public. This normally narrows the focus to either auction sales or gallery sales-two distinct marketplaces with various characteristics. It's essential not to integrate comparables from both, as doing so stops working to plainly identify the most common market for the subject residential or commercial property. Instead, you need to consider both markets and after that pick the finest market and consist of comparables from that market.
   
   3. Replacement Cost: Replacement expense can be considered when determining FMV, but only if there's a sensible connection between a product's replacement cost and its fair market price. Replacement cost refers to what it would cost to replace the item on the valuation date. Oftentimes, the replacement cost far goes beyond FMV and is not a reliable indication of worth. This method is used occasionally.
   
   4. Opinions of expert appraisers: The IRS enables professional viewpoints to be considered when figuring out FMV, however the weight given depends on the specialist's credentials and how well the opinion is supported by truths. For the viewpoint to bring weight, it needs to be backed by reliable proof (i.e., market information). This approach is utilized infrequently. Determining fair market price involves more than applying a definition-it requires analysis, sound approach, and dependable market information. By following IRS assistance and considering the realities and scenarios connected 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 principles through real-world applications and case examples.