Determining fair market price (FMV) can be an intricate procedure, as it is extremely reliant on the specific realities and situations surrounding each appraisal project. Appraisers must work out expert judgment, supported by reputable information and sound method, to identify FMV. This frequently requires cautious analysis of market trends, the availability and reliability of equivalent sales, and an understanding of how the residential or commercial property would perform under typical market conditions involving a ready purchaser and a willing seller.

This post will address determining 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 method is relevant to other desired uses. While Canada's definition of FMV differs from that in the US, there are lots of similarities that allow this general approach to be applied to Canadian functions. Part II in this blogpost series will deal with 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 change hands between a willing buyer and a ready seller, neither being under any compulsion to buy or to offer and both having affordable knowledge of relevant truths." 26 CFR § 20.2031-1( b) broadens upon this meaning with "the reasonable market price of a particular item of residential or commercial property ... is not to be identified by a forced sale. Nor is the reasonable market price of a product to be figured out by the list price of the item in a market besides that in which such product is most frequently offered to the public, taking into account the place of the product anywhere suitable."

The tax court in Anselmo v. Commission held that there need to be no distinction between the definition of fair market price for various tax usages and therefore the combined definition can be utilized 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 guidance on determining reasonable market worth. While federal guidelines can appear overwhelming, the current version (Rev. December 2024) is just 16 pages and uses clear headings to assist you find essential information quickly. These principles are likewise 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 a crucial and succinct visual for determining fair market price. It lists the following considerations provided as a hierarchy, with the most trustworthy indications of identifying fair market worth listed initially. Simply put, the table exists in a hierarchical order of the strongest arguments.

1. Cost or asking price
2. Sales of comparable residential or commercial properties
3. Replacement expense
4. Opinions of professional appraisers

Let's check out each consideration separately:

1. Cost or Selling Price: The taxpayer's cost or the real asking price gotten by a qualified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) might be the very best indicator of FMV, specifically if the deal happened near the evaluation date under normal market conditions. This is most reputable when the sale was recent, at arm's length, both parties understood all appropriate realities, neither was under any obsession, and market conditions stayed stable. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a deal in between one celebration and an independent and unrelated party that is carried out as if the 2 parties 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 must supply enough details to indicate they abided by the requirements of Standard 7 by "summing up the outcomes of examining the subject residential or commercial property's sales and other transfers, contracts of sale, options, and listing when, in accordance with Standards Rule 7-5, it was required for trustworthy assignment results and if such details was readily available to the appraiser in the regular course of company." Below, a remark more states: "If such information is unobtainable, a declaration on the efforts undertaken by the appraiser to get the information is required. If such info is irrelevant, a declaration acknowledging the existence of the info and citing its lack of significance is needed."

The appraiser must ask for the purchase cost, source, and date of acquisition from the donor. While donors may hesitate to share this details, it is needed in Part I of Form 8283 and likewise appears in the IRS Preferred Appraisal Format for items valued over $50,000. Whether the donor declines to provide these information, or the appraiser figures out the info is not relevant, this must be plainly recorded in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are one of the most trusted and frequently utilized techniques for figuring out FMV and are especially convincing to intended users. The strength of this approach depends upon several crucial factors:

Similarity: The closer the similar is to the contributed residential or commercial property, the stronger the proof. Adjustments need to be produced any distinctions in condition, quality, or other worth appropriate quality.
Timing: Sales must be as close as possible to the valuation date. If you use older sales information, initially validate that market conditions have actually remained steady and that no more current similar sales are available. Older sales can still be utilized, but you should change for any changes in market conditions to show the current value of the subject residential or commercial property.
Sale Circumstances: The sale needs to be at arm's length in between informed, unpressured celebrations.
Market Conditions: Sales should take place under typical market conditions and not during uncommonly inflated or depressed periods.

To pick proper comparables, it is essential to fully comprehend the definition of reasonable market price (FMV). FMV is the price at which residential or commercial property would change hands in between a ready purchaser and a ready seller, with neither party under pressure to act and both having affordable knowledge of the realities. This definition refers specifically to real completed sales, not listings or quotes. Therefore, just offered results must be utilized when determining FMV. Asking prices are simply aspirational and do not show a consummated transaction.

In order to select the most common market, the appraiser must think about a more comprehensive overview where comparable pre-owned items (i.e., secondary market) are sold to the public. This usually narrows the focus to either auction sales or gallery sales-two distinct marketplaces with different characteristics. It is necessary not to combine comparables from both, as doing so fails to clearly determine the most common market for the subject residential or commercial property. Instead, you must think about both markets and then select the best market and include comparables from that market.

3. Replacement Cost: Replacement cost can be thought about when determining FMV, but just if there's an affordable connection in between an item's replacement cost and its reasonable market worth. Replacement cost refers to what it would cost to replace the item on the valuation date. Oftentimes, the replacement cost far goes beyond FMV and is not a dependable sign of worth. This method is used infrequently.

4. Opinions of professional appraisers: The IRS enables professional opinions to be thought about when figuring out FMV, however the weight offered depends on the expert's certifications and how well the opinion is supported by facts. For the viewpoint to carry weight, it should be backed by reputable proof (i.e., market data). This technique is utilized rarely.
Determining reasonable market value involves more than using a definition-it requires thoughtful analysis, sound method, and dependable market data. By following IRS guidance and considering the truths 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.