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Determining reasonable market value (FMV) can be a complicated process, as it is highly depending on the specific facts and circumstances surrounding each appraisal assignment. Appraisers must work out professional judgment, supported by credible data and sound method, to identify FMV. This often needs cautious analysis of market trends, the schedule and dependability of comparable sales, and an understanding of how the residential or commercial property would perform under normal market conditions including a prepared purchaser and a willing seller.

This article will address identifying FMV for the intended usage of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being said, this methodology applies to other desired uses. While Canada's definition of FMV differs from that in the US, there are numerous similarities that permit this general methodology to be applied to Canadian functions. Part II in this blogpost series will address Canadian language particularly.

Fair market worth is specified in 26 CFR § 1.170A-1( c)( 2) as "the rate at which residential or commercial property would alter hands between a prepared buyer and a willing seller, neither being under any compulsion to purchase or to sell and both having affordable knowledge of appropriate facts." 26 CFR § 20.2031-1( b) expands upon this definition with "the fair market price of a specific item of residential or commercial property ... is not to be figured out by a forced sale. Nor is the reasonable market value of a product to be determined by the list price of the item in a market aside from that in which such product is most frequently sold to the general public, considering the location of the item any place suitable."

The tax court in Anselmo v. Commission held that there need to be no difference between the definition of reasonable market price for different tax uses 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 determining fair market price. While federal regulations can appear challenging, the present version (Rev. December 2024) is only 16 pages and utilizes clear headings to assist you find key info rapidly. These concepts are likewise covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.

Table 1, discovered at the top of page 3 on IRS Publication 561, provides a crucial and succinct visual for identifying fair market worth. It notes the following factors to consider presented as a hierarchy, with the most reliable indications of figuring out reasonable market price noted initially. In other words, the table is provided in a hierarchical order of the strongest arguments.

1. Cost or market price

1. Sales of comparable residential or commercial properties
2. Replacement expense
3. Opinions of professional appraisers
   
   Let's explore each factor to consider separately:
   
   1. Cost or Selling Price: The taxpayer's expense or the actual selling cost gotten by a certified organization (an organization eligible to get tax-deductible charitable contributions under the Internal Revenue Code) might be the very best sign of FMV, particularly if the deal occurred near the assessment date under typical market conditions. This is most trusted when the sale was recent, at arm's length, both parties knew all pertinent realities, neither was under any compulsion, and market conditions stayed steady. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a transaction in between one party and an independent and unrelated party that is conducted as if the 2 parties 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 must provide sufficient information to indicate they abided by the requirements of Standard 7 by "summing up 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 task results and if such information was readily available to the appraiser in the normal course of business." Below, a remark additional states: "If such info is unobtainable, a declaration on the efforts undertaken by the appraiser to acquire the details is required. If such information is irrelevant, a statement acknowledging the presence of the details and mentioning its absence of relevance is required."
   
   The appraiser needs to ask for the purchase rate, source, and date of acquisition from the donor. While donors may hesitate to share this info, 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 declines to provide these information, or the appraiser figures out the information is not pertinent, this must be plainly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are among the most reputable and frequently used approaches for identifying FMV and are especially persuasive to desired users. The strength of this approach depends upon a number of key elements:
   
   Similarity: The closer the equivalent is to the contributed residential or commercial property, the stronger the evidence. Adjustments should be produced any differences in condition, quality, or other value pertinent quality. Timing: Sales must be as close as possible to the valuation date. If you use older sales information, first verify that market conditions have stayed steady and that no more current comparable sales are available. Older sales can still be utilized, but you should adjust for any changes in market conditions to show the existing worth 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 should occur under normal market conditions and not during abnormally inflated or depressed periods.
   
   To choose proper comparables, it is very important to completely comprehend the meaning of reasonable market price (FMV). FMV is the rate at which residential or commercial property would change hands in between a ready buyer and a prepared seller, with neither party under pressure to act and both having reasonable understanding of the facts. This definition refers specifically to actual completed sales, not listings or estimates. Therefore, only offered results ought to be utilized when figuring out FMV. Asking rates are merely aspirational and do not show a consummated transaction.
   
   In order to select the most typical market, the appraiser needs to think about a wider summary where similar pre-owned items (i.e., secondary market) are offered to the general public. This typically narrows the focus to either auction sales or gallery sales-two distinct marketplaces with various dynamics. It's essential not to integrate comparables from both, as doing so stops working to clearly recognize the most common market for the subject residential or commercial property. Instead, you should consider both markets and after that choose the finest market and include comparables from that market.
   
   3. Replacement Cost: Replacement expense can be thought about when identifying FMV, however just if there's a sensible connection in between a product's replacement cost and its fair market price. Replacement expense describes what it would cost to replace the item on the assessment date. In most cases, the replacement cost far goes beyond FMV and is not a reliable sign of worth. This technique is used infrequently.
   
   4. Opinions of expert appraisers: The IRS permits expert opinions to be considered when identifying FMV, but the weight provided depends upon the specialist's certifications and how well the opinion is supported by realities. For the viewpoint to carry weight, it must be backed by reliable proof (i.e., market data). This technique is used infrequently. Determining reasonable market price includes more than using a definition-it requires thoughtful analysis, sound method, and information. By following IRS assistance and considering the realities and situations connected to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will even more explore these principles through real-world applications and case examples.