Determining reasonable market price (FMV) can be an intricate process, as it is extremely based on the specific realities and situations surrounding each appraisal assignment. Appraisers must exercise expert judgment, supported by reliable data and sound approach, to determine FMV. This often requires careful analysis of market trends, the availability and dependability of equivalent sales, and an understanding of how the residential or commercial property would carry out under typical market conditions involving a ready buyer and a ready seller.

This post will resolve identifying FMV for the planned usage of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being stated, this methodology is suitable to other desired uses. While Canada’s definition of FMV varies from that in the US, there are lots of similarities that permit this general approach to be used to Canadian functions. Part II in this blogpost series will address Canadian language specifically.

Fair market price is defined in 26 CFR § 1.170A-1( c)( 2) as “the rate at which residential or commercial property would alter hands in between a prepared buyer and a prepared seller, neither being under any compulsion to purchase or to sell and both having affordable understanding of relevant facts.” 26 CFR § 20.2031-1( b) broadens upon this meaning with “the reasonable market value of a particular product of residential or commercial property … is not to be identified by a forced sale. Nor is the fair market price of a product to be identified by the price of the item in a market besides that in which such product is most frequently sold to the public, considering the location of the item anywhere appropriate.”

The tax court in Anselmo v. Commission held that there ought to be no difference between the meaning of fair market worth for various tax usages and for that reason 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 beginning point for assistance on determining fair market price. While federal policies can appear difficult, the current version (Rev. December 2024) is only 16 pages and uses clear headings to assist you discover essential details rapidly. 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 important and succinct visual for identifying fair market price. It lists the following considerations presented as a hierarchy, with the most reliable signs of determining reasonable market value listed first. In other words, the table exists in a hierarchical order of the strongest arguments.

1. Cost or market price

1. Sales of similar residential or commercial properties
2. Replacement cost
3. Opinions of professional appraisers
   
   Let’s check out each consideration separately:
   
   1. Cost or Selling Price: The taxpayer’s expense or the real market price gotten by a certified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the very best sign of FMV, especially if the transaction took place near the valuation date under typical market conditions. This is most reliable when the sale was current, at arm’s length, both parties knew all appropriate facts, neither was under any compulsion, 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 conducted as if the 2 parties were complete strangers so that no conflict of interest exists.”
   
   This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser should supply adequate info to show 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, arrangements of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was required for reliable project results and if such information was available to the appraiser in the regular course of company.” Below, a remark further states: “If such details is unobtainable, a declaration on the efforts undertaken by the appraiser to obtain the details is needed. If such information is unimportant, a declaration acknowledging the presence of the details and mentioning its absence of relevance is needed.”
   
   The appraiser ought to request the purchase price, source, and date of acquisition from the donor. While donors may hesitate to share this information, it is needed 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 provide these details, or the appraiser determines the information is not appropriate, this should be plainly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are among the most trustworthy and typically used methods for figuring out FMV and are particularly convincing to desired users. The strength of this method depends upon several essential elements:
   
   Similarity: The closer the comparable is to the donated residential or commercial property, the more powerful the evidence. Adjustments must be made for any distinctions in condition, quality, or other worth relevant characteristic. Timing: Sales must be as close as possible to the evaluation date. If you utilize older sales data, initially verify that market conditions have stayed steady and that no more current comparable sales are available. Older sales can still be used, but you should change for any modifications in market conditions to reflect the existing value of the subject residential or commercial property. Sale Circumstances: The sale should be at arm’s length in between notified, unpressured celebrations. Market Conditions: Sales ought to happen under regular market conditions and not during uncommonly inflated or depressed periods.
   
   To select proper comparables, it’s essential to fully comprehend the meaning of reasonable market price (FMV). FMV is the rate at which residential or commercial property would change hands in between a prepared purchaser and a willing seller, with neither party under pressure to act and both having affordable knowledge of the realities. This definition refers particularly to real completed sales, not listings or quotes. Therefore, only offered outcomes should be utilized when figuring out FMV. Asking rates are merely aspirational and do not show a consummated transaction.
   
   In order to pick the most common market, the appraiser ought to think about a wider introduction where similar secondhand items (i.e., secondary market) are sold to the public. This typically narrows the focus to either auction sales or gallery sales-two distinct markets with different characteristics. It is necessary not to integrate comparables from both, as doing so stops working to clearly identify the most common market for the subject residential or commercial property. Instead, you need to think about both markets and after that choose the finest market and include comparables from that market.
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   3. Replacement Cost: Replacement expense can be considered when determining FMV, but just if there’s a sensible connection in between a product’s replacement expense and its reasonable market worth. Replacement expense describes what it would cost to replace the item on the assessment date. In a lot of cases, the replacement expense far surpasses FMV and is not a reputable indicator of value. This technique is used occasionally.
   
   4. Opinions of professional appraisers: The IRS enables expert viewpoints to be thought about when figuring out FMV, however the weight offered depends on the specialist’s qualifications and how well the opinion is supported by facts. For the opinion to carry weight, it needs to be backed by credible evidence (i.e., market information). This approach is utilized rarely. Determining fair market worth includes more than using a definition-it needs thoughtful analysis, sound approach, and reputable market information. By following IRS and thinking about the facts and circumstances connected 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 ideas through real-world applications and case examples.