Determining fair market price (FMV) can be a complex procedure, as it is extremely based on the particular truths and circumstances surrounding each appraisal assignment. Appraisers should exercise expert judgment, supported by reliable information and sound methodology, to identify FMV. This frequently requires mindful analysis of market trends, the schedule and dependability of similar sales, and an understanding of how the residential or commercial property would perform under typical market conditions including a ready purchaser and a ready seller.

This post will attend to determining FMV for the intended use of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being said, this method is applicable to other designated uses. While Canada's definition of FMV varies from that in the US, there are lots of resemblances that enable this basic approach to be used to Canadian functions. Part II in this blogpost series will resolve Canadian language particularly.

Fair market value is specified in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would alter hands in between a prepared purchaser and a prepared seller, neither being under any obsession to buy or to offer and both having reasonable understanding of relevant truths." 26 CFR § 20.2031-1( b) broadens upon this definition with "the reasonable market value of a particular item of residential or commercial property ... is not to be figured out by a forced sale. Nor is the fair market worth of a product to be figured out by the price of the product in a market other than that in which such product is most typically offered to the public, taking into account the location of the product wherever suitable."

The tax court in Anselmo v. Commission held that there need to be no distinction in between the meaning of reasonable market price for various tax usages and for that reason the combined meaning can be used 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 assistance on determining reasonable market value. While federal policies can seem daunting, the existing variation (Rev. December 2024) is just 16 pages and uses clear headings to assist you find crucial info quickly. These ideas are also covered in the 2021 Core Course Manual, beginning at the bottom of page 12-2.

Table 1, found at the top of page 3 on IRS Publication 561, provides a crucial and concise visual for identifying fair market price. It notes the following considerations provided as a hierarchy, with the most dependable indications of identifying reasonable market price listed first. Simply put, the table exists in a hierarchical order of the strongest arguments.

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

Let's explore each factor to consider individually:

1. Cost or Selling Price: The taxpayer's expense or the actual market price received by a certified organization (an organization eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) might be the finest indicator of FMV, particularly if the deal occurred near to the valuation date under normal market conditions. This is most reliable when the sale was recent, at arm's length, both celebrations understood all relevant facts, neither was under any obsession, and market conditions stayed stable. 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 conducted as if the two parties were strangers so that no dispute of interest exists."

This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser must provide enough info to suggest they abided by the requirements of Standard 7 by "summing up the outcomes of examining the subject residential or commercial property's sales and other transfers, arrangements of sale, options, and listing when, in accordance with Standards Rule 7-5, it was required for credible assignment results and if such information was readily available to the appraiser in the typical course of business." Below, a comment further states: "If such information is unobtainable, a statement on the efforts carried out by the appraiser to get the information is needed. If such info is unimportant, a statement acknowledging the presence of the details and mentioning its lack of relevance is required."

The appraiser should ask for the purchase price, 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 products valued over $50,000. Whether the donor decreases to offer these information, or the appraiser identifies the details is not relevant, this should be plainly recorded in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are one of the most reputable and commonly used methods for determining FMV and are specifically persuasive to designated users. The strength of this technique depends upon several key aspects:

Similarity: The closer the equivalent is to the contributed residential or commercial property, the stronger the evidence. Adjustments must be produced any distinctions in condition, quality, or other worth pertinent quality.
Timing: Sales ought to be as close as possible to the evaluation date. If you utilize older sales data, initially validate that market conditions have actually remained stable and that no more recent comparable sales are offered. Older sales can still be used, however you should change for any modifications in market conditions to show the current value of the subject residential or commercial property.
Sale Circumstances: The sale needs to be at arm's length between notified, unpressured celebrations.
Market Conditions: Sales must take place under typical market conditions and not during unusually inflated or depressed durations.

To select appropriate comparables, it is very important to completely understand the meaning of fair market price (FMV). FMV is the rate at which residential or commercial property would alter hands between a prepared purchaser and a ready seller, with neither party under pressure to act and both having sensible knowledge of the realities. This definition refers particularly to actual completed sales, not listings or estimates. Therefore, only offered results must be utilized when figuring out FMV. Asking costs are simply aspirational and do not reflect a consummated deal.

In order to select the most typical market, the appraiser needs to think about a broader summary where equivalent pre-owned products (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 dynamics. It's important not to integrate comparables from both, as doing so fails to clearly identify the most common market for the subject residential or commercial property. Instead, you ought to think about both markets and after that pick the very best market and consist of comparables from that market.

3. Replacement Cost: Replacement expense can be considered when identifying FMV, but just if there's a sensible connection between an item's replacement expense and its reasonable market worth. Replacement expense refers to what it would cost to replace the item on the valuation date. In a lot of cases, the replacement expense far surpasses FMV and is not a trustworthy indicator of worth. This approach is utilized rarely.

4. Opinions of professional appraisers: The IRS enables expert opinions to be considered when identifying FMV, but the weight provided depends upon the expert's certifications and how well the opinion is supported by truths. For the opinion to bring weight, it should be backed by reputable proof (i.e., market information). This approach is utilized occasionally.
Determining reasonable market value includes more than applying a definition-it needs thoughtful analysis, sound methodology, and trusted market information. By following IRS assistance and considering 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 check out these concepts through real-world applications and case examples.