Determining fair market price (FMV) can be an intricate process, as it is extremely based on the particular realities and circumstances surrounding each appraisal project. Appraisers should work out professional judgment, supported by reliable data and sound method, to figure out FMV. This often requires careful 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 buyer and a prepared seller.
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This article will deal with determining FMV for the intended usage of taking an income tax deduction for a non-cash charitable contribution in the United States. With that being stated, this methodology applies to other intended usages. While Canada's meaning of FMV varies from that in the US, there are many similarities that allow this general approach to be used to Canadian functions. Part II in this blogpost series will address Canadian language particularly.

Fair market price is specified in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would alter hands between a prepared buyer and a prepared seller, neither being under any compulsion to purchase or to sell and both having sensible understanding of appropriate realities." 26 CFR § 20.2031-1( b) broadens upon this meaning with "the fair market value of a particular product 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 price of the product in a market aside from that in which such item is most typically offered to the public, considering the location of the item any place proper."

The tax court in Anselmo v. Commission held that there must be no distinction between the meaning of fair market value for various tax uses and therefore the combined definition can be used in appraisals for non-cash charitable contributions.

561, Determining the Value of Donated Residential Or Commercial Property, is the finest starting point for assistance on determining reasonable market price. While federal regulations can appear challenging, the present variation (Rev. December 2024) is only 16 pages and uses clear headings to assist you discover key information quickly. These ideas 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, provides an important and concise visual for figuring out reasonable market price. It notes the following factors to consider presented as a hierarchy, with the most trusted indicators of figuring out reasonable market price listed initially. In other words, the table is presented 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 expert appraisers
   
   Let's explore each consideration separately:
   
   1. Cost or Selling Price: The taxpayer's expense or the actual market price gotten by a qualified organization (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the finest indication of FMV, particularly if the deal happened close to the evaluation date under typical market conditions. This is most reliable when the sale was recent, at arm's length, both parties understood all relevant facts, neither was under any obsession, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a deal between one party and an independent and unrelated party that is performed as if the two parties were complete strangers so that no conflict of interest exists."
   
   This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser should supply sufficient info to show 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 essential for credible task outcomes and if such info was readily available to the appraiser in the normal course of organization." Below, a remark more states: "If such info is unobtainable, a statement on the efforts carried out by the appraiser to acquire the info is needed. If such info is irrelevant, a statement acknowledging the presence of the details and citing its lack of relevance is needed."
   
   The appraiser must ask for the purchase cost, source, and date of acquisition from the donor. While donors might hesitate to share this information, it is needed 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 provide these details, or the appraiser determines the info is not appropriate, this need to be clearly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most trusted and frequently utilized techniques for determining FMV and are particularly convincing to designated users. The strength of this approach depends upon numerous essential elements:
   
   Similarity: The closer the comparable is to the donated residential or commercial property, the more powerful the evidence. Adjustments should be produced any differences in condition, quality, or other worth appropriate quality. Timing: Sales should be as close as possible to the evaluation date. If you use older sales information, initially verify that market conditions have actually stayed stable and that no more recent similar sales are readily available. Older sales can still be used, but you should change for any changes in market conditions to reflect the present worth of the subject residential or commercial property. Sale Circumstances: The sale must be at arm's length in between notified, unpressured parties. Market Conditions: Sales should happen under regular market conditions and not throughout uncommonly inflated or depressed durations.
   
   To pick appropriate comparables, it is very important to completely understand the definition of reasonable market worth (FMV). FMV is the cost at which residential or commercial property would change hands in between a prepared purchaser and a prepared seller, with neither party under pressure to act and both having reasonable understanding of the realities. This meaning refers specifically to actual finished sales, not listings or quotes. Therefore, only sold results must be used when determining FMV. Asking prices are simply aspirational and do not reflect a consummated deal.
   
   In order to pick the most typical market, the appraiser must think about a wider introduction where equivalent used products (i.e., secondary market) are sold to the public. This usually narrows the focus to either auction sales or gallery sales-two unique marketplaces with different dynamics. It's essential not to integrate comparables from both, as doing so stops working to plainly determine the most common market for the subject residential or commercial property. Instead, you need to consider both markets and then choose the very best market and include comparables from that market.
   
   3. Replacement Cost: Replacement expense can be considered when identifying FMV, however just if there's an affordable connection in between an item's replacement expense and its reasonable market price. Replacement expense describes what it would cost to replace the product on the valuation date. In most cases, the replacement cost far surpasses FMV and is not a reliable indicator of value. This method is utilized rarely.
   
   4. Opinions of professional appraisers: The IRS allows expert viewpoints to be considered when determining FMV, however the weight given depends upon the professional's qualifications and how well the viewpoint is supported by realities. For the viewpoint to carry weight, it must be backed by reliable evidence (i.e., market information). This technique is utilized occasionally. Determining fair market price includes more than using a definition-it needs thoughtful analysis, sound method, and reputable market data. By following IRS guidance and considering the facts and situations connected 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 ideas through real-world applications and case examples.