Determining fair market worth (FMV) can be an intricate process, as it is extremely based on the specific realities and situations surrounding each appraisal project. Appraisers need to exercise expert judgment, supported by reputable data and sound approach, to determine FMV. This typically needs cautious analysis of market patterns, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would perform under typical market conditions including a willing buyer and a willing seller.

This post will attend to determining FMV for the planned use of taking an income tax deduction for a non-cash charitable contribution in the United States. With that being stated, this methodology is appropriate to other designated uses. While Canada's definition of FMV varies from that in the US, there are numerous 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 between a ready buyer and a prepared seller, neither being under any compulsion to purchase or to sell and both having sensible understanding of pertinent truths." 26 CFR § 20.2031-1( b) broadens upon this meaning with "the fair market value 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 list price of the product in a market aside from that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate."

The tax court in Anselmo v. Commission held that there ought to be no difference between the definition of fair market price for different tax uses and therefore the combined definition 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 guidance on identifying reasonable market price. While federal guidelines can appear complicated, the present variation (Rev. December 2024) is only 16 pages and uses clear headings to help you discover crucial details rapidly. These concepts are also 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, supplies an essential and concise visual for identifying reasonable market value. It lists the following factors to consider presented as a hierarchy, with the most trusted indications of figuring out reasonable market worth listed initially. Simply put, the table exists in a hierarchical order of the strongest arguments.

1. Cost or selling price

1. Sales of equivalent residential or commercial properties
2. Replacement cost
3. Opinions of expert appraisers
   
   Let's explore each consideration separately:
   
   1. Cost or Selling Price: The taxpayer's cost or the real market price received by a qualified organization (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the best indication of FMV, specifically if the deal occurred near to the evaluation date under typical market conditions. This is most trusted when the sale was current, at arm's length, both parties knew all pertinent truths, neither was under any compulsion, and market conditions remained steady. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a transaction between one party and an independent and unassociated party that is performed as if the 2 celebrations were complete strangers so that no dispute of interest exists."
   
   This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser should supply adequate details to suggest they complied with the requirements of Standard 7 by "summarizing the results of evaluating the subject residential or commercial property's sales and other transfers, agreements of sale, alternatives, and listing when, in accordance with Standards Rule 7-5, it was required for credible task outcomes and if such details was readily available to the appraiser in the regular course of business." Below, a remark additional states: "If such information is unobtainable, a statement on the efforts undertaken by the appraiser to acquire the details is required. If such information is unimportant, a declaration acknowledging the existence of the details and mentioning its absence 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 info, 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 figures out the details is not relevant, this need to be clearly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most dependable and commonly utilized techniques for identifying FMV and are particularly persuasive to designated users. The strength of this technique depends on numerous key aspects:
   
   Similarity: The closer the comparable is to the donated residential or commercial property, the more powerful the proof. Adjustments need to be produced any distinctions in condition, quality, or other worth relevant characteristic. Timing: Sales ought to be as close as possible to the assessment date. If you utilize older sales information, first verify that market conditions have actually stayed stable and that no more recent equivalent sales are available. Older sales can still be used, but you should change for any modifications in market conditions to reflect the current worth 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 need to occur under typical market conditions and not throughout abnormally inflated or depressed periods.
   
   To select appropriate comparables, it is essential to totally comprehend the meaning of fair market worth (FMV). FMV is the cost at which residential or commercial property would change hands between a ready buyer and a willing seller, with neither party under pressure to act and both having sensible understanding of the realities. This meaning refers specifically to actual completed sales, not listings or price quotes. Therefore, just sold results should be utilized when figuring out FMV. Asking costs are simply aspirational and do not show a consummated deal.
   
   In order to choose the most common market, the appraiser should consider a wider summary where comparable secondhand products (i.e., secondary market) are sold to the general public. This usually narrows the focus to either auction sales or gallery sales-two unique markets with different characteristics. It's essential not to integrate comparables from both, as doing so stops working to clearly determine the most common market for the subject residential or commercial property. Instead, you should think about both markets and then select the finest market and include comparables from that market.
   
   3. Replacement Cost: Replacement cost can be considered when figuring out FMV, however just if there's an affordable connection between a product's replacement expense and its fair market price. Replacement cost refers to what it would cost to replace the item on the evaluation date. In a lot of cases, the replacement expense far goes beyond FMV and is not a dependable indicator of value. This approach is utilized rarely.
   
   4. Opinions of expert appraisers: The IRS permits professional viewpoints to be thought about when figuring out FMV, but the weight offered depends upon the expert's credentials and how well the viewpoint is supported by truths. For the viewpoint to bring weight, it must be backed by reliable proof (i.e., market data). This approach is used infrequently. Determining reasonable market worth involves more than using a definition-it requires thoughtful analysis, sound approach, and reliable market data. By following IRS guidance and considering the truths 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 concepts through real-world applications and case examples.