Determining fair market worth (FMV) can be an intricate procedure, as it is extremely depending on the particular truths and situations surrounding each appraisal assignment. Appraisers must work out expert judgment, supported by credible data and sound method, to determine FMV. This typically needs careful analysis of market patterns, the accessibility and reliability of similar sales, and an understanding of how the residential or commercial property would perform under common market conditions involving a prepared purchaser and a prepared seller.

This post will attend to determining FMV for the intended usage of taking an income tax reduction for a non-cash charitable contribution in the United States. With that being said, this approach applies to other intended uses. While Canada's definition of FMV differs from that in the US, there are many resemblances that permit this general methodology to be used to Canadian functions. Part II in this blogpost series will resolve Canadian language particularly.

Fair market price is specified in 26 CFR § 1.170A-1( c)( 2) as "the rate at which residential or commercial property would change hands in between a ready buyer and a ready seller, neither being under any obsession to purchase or to offer and both having sensible knowledge of relevant realities." 26 CFR § 20.2031-1( b) broadens upon this definition with "the reasonable market price of a particular item of residential or commercial property ... is not to be determined by a forced sale. Nor is the reasonable market price of a product to be determined by the sale rate of the item in a market other than that in which such product is most commonly sold to the public, taking into consideration the area of the item any place proper."

The tax court in Anselmo v. Commission held that there ought to be no distinction between the meaning of reasonable market worth for various tax usages and therefore 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 best beginning point for assistance on figuring out fair market value. While federal policies can seem overwhelming, the existing variation (Rev. December 2024) is only 16 pages and uses clear headings to help you discover essential details quickly. 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 identifying fair market value. It notes the following factors to consider presented as a hierarchy, with the most reputable signs of determining fair market price noted first. To put it simply, the table exists in a hierarchical order of the strongest arguments.

1. Cost or market price

1. Sales of comparable residential or commercial properties
2. Replacement cost
3. Opinions of professional appraisers
   
   Let's explore each factor to consider separately:
   
   1. Cost or Selling Price: The taxpayer's cost or the real market price gotten by a certified organization (a company eligible to get tax-deductible charitable contributions under the Internal Revenue Code) might be the finest indication of FMV, specifically if the transaction took place near to the valuation date under conditions. This is most reliable when the sale was current, at arm's length, both celebrations knew all pertinent realities, neither was under any compulsion, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a transaction between one party and an independent and unrelated celebration that is performed as if the 2 celebrations were strangers so that no conflict of interest exists."
   
   This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser should provide adequate information to indicate 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, options, and listing when, in accordance with Standards Rule 7-5, it was needed for reliable assignment results and if such details was offered to the appraiser in the regular course of business." Below, a remark more states: "If such details is unobtainable, a statement on the efforts undertaken by the appraiser to get the information is required. If such information is irrelevant, a declaration acknowledging the existence of the info and mentioning its lack of significance is needed."
   
   The appraiser ought to request the purchase rate, source, and date of acquisition from the donor. While donors might hesitate 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 decreases to supply these information, or the appraiser figures out the info is not pertinent, this need to be clearly documented in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are among the most reputable and frequently utilized approaches for figuring out FMV and are specifically convincing to intended users. The strength of this approach depends upon numerous key aspects:
   
   Similarity: The closer the similar is to the contributed residential or commercial property, the stronger the proof. Adjustments should be produced any distinctions in condition, quality, or other worth appropriate quality. Timing: Sales ought to be as close as possible to the evaluation date. If you use older sales data, first verify that market conditions have remained steady and that no more recent similar sales are readily available. Older sales can still be used, but you need to change for any changes in market conditions to reflect the current value of the subject residential or commercial property. Sale Circumstances: The sale should be at arm's length between notified, unpressured parties. Market Conditions: Sales need to happen under typical market conditions and not during uncommonly inflated or depressed periods.
   
   To choose suitable comparables, it is essential to totally understand the meaning of fair market price (FMV). FMV is the cost at which residential or commercial property would change hands between a willing purchaser and a willing seller, with neither party under pressure to act and both having affordable knowledge of the truths. This meaning refers particularly to real completed sales, not listings or price quotes. Therefore, just sold outcomes ought to be utilized when identifying FMV. Asking prices are simply aspirational and do not reflect a consummated deal.
   
   In order to select the most common market, the appraiser must consider a wider overview where comparable secondhand products (i.e., secondary market) are offered to the public. This typically narrows the focus to either auction sales or gallery sales-two distinct markets with different dynamics. It's important not to integrate comparables from both, as doing so fails to plainly recognize the most common market for the subject residential or commercial property. Instead, you need to consider both markets and after that pick the very best market and include comparables from that market.
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   3. Replacement Cost: Replacement cost can be considered when figuring out FMV, but just if there's a reasonable connection in between a product's replacement expense and its fair market value. Replacement expense describes what it would cost to replace the item on the valuation date. Oftentimes, the replacement expense far exceeds FMV and is not a reputable sign of worth. This method is utilized infrequently.
   
   4. Opinions of professional appraisers: The IRS enables expert opinions to be thought about when identifying FMV, but the weight offered depends on the professional's credentials and how well the viewpoint is supported by facts. For the opinion to carry weight, it needs to be backed by reliable proof (i.e., market information). This approach is used rarely. Determining reasonable market worth includes more than applying a definition-it requires thoughtful analysis, sound method, and reputable market information. By following IRS guidance and thinking about the truths and scenarios 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.