1 Determining Fair Market Value Part I.

Malcolm Hobson edited this page 2025-06-21 15:50:01 +08:00

Determining fair market value (FMV) can be an intricate process, as it is extremely dependent on the specific realities and situations surrounding each appraisal assignment. Appraisers must exercise expert judgment, supported by credible information and sound method, to figure out FMV. This typically requires cautious analysis of market trends, the schedule and reliability 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 prepared seller.
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This article will attend to identifying FMV for the intended use of taking an income tax reduction for a non-cash charitable contribution in the United States. With that being said, this methodology applies to other designated uses. While Canada's definition of FMV varies from that in the US, there are lots of resemblances that allow this basic methodology to be used to Canadian functions. Part II in this blogpost series will resolve Canadian language specifically.

Fair market price is specified in 26 CFR § 1.170A-1( c)( 2) as "the price at which residential or commercial property would change hands between a prepared purchaser and a willing seller, neither being under any compulsion to purchase or to sell and both having reasonable knowledge of relevant 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 fair market price of a product to be determined 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 consideration the place of the product any place suitable."

The tax court in Anselmo v. Commission held that there need to be no distinction between the definition of fair market value for different 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 best beginning point for assistance on determining fair market price. While federal regulations can seem daunting, the existing version (Rev. December 2024) is just 16 pages and clear headings to help you find key info rapidly. These principles are also covered 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 a crucial and succinct visual for determining reasonable market worth. It lists the following factors to consider presented as a hierarchy, with the most dependable signs of determining reasonable market price listed first. Simply put, the table is presented in a hierarchical order of the greatest arguments.

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

Let's explore each consideration individually:

1. Cost or Selling Price: The taxpayer's expense or the real asking price received by a qualified organization (a company eligible to get tax-deductible charitable contributions under the Internal Revenue Code) may be the finest indicator of FMV, especially if the transaction occurred near the valuation date under common market conditions. This is most dependable when the sale was current, at arm's length, both parties understood all pertinent realities, neither was under any obsession, and market conditions stayed steady. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a deal between one celebration and an independent and unrelated party that is carried out as if the 2 celebrations were strangers so that no dispute of interest exists."

This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser should offer enough info to indicate they abided by the requirements of Standard 7 by "summing up the results of evaluating the subject residential or commercial property's sales and other transfers, arrangements of sale, options, and listing when, in accordance with Standards Rule 7-5, it was needed for trustworthy assignment outcomes and if such info was offered to the appraiser in the regular course of company." Below, a comment more states: "If such info is unobtainable, a declaration on the efforts carried out by the appraiser to obtain the information is needed. If such details is unimportant, a statement acknowledging the existence of the info and mentioning its absence of importance is required."

The appraiser ought to ask for the purchase rate, 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 also appears in the IRS Preferred Appraisal Format for products valued over $50,000. Whether the donor declines to provide these details, or the appraiser figures out the info is not pertinent, this must be plainly documented in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are among the most trustworthy and typically utilized methods for determining FMV and are specifically convincing to designated users. The strength of this technique depends upon numerous crucial factors:

Similarity: The closer the equivalent is to the contributed residential or commercial property, the stronger the proof. Adjustments must be produced any distinctions in condition, quality, or other worth pertinent characteristic. Timing: Sales need to be as close as possible to the assessment date. If you utilize older sales information, first confirm that market conditions have actually remained stable which no more recent comparable sales are available. Older sales can still be used, but you need to change for any modifications in market conditions to reflect the existing worth of the subject residential or commercial property. Sale Circumstances: The sale must be at arm's length between informed, unpressured parties. Market Conditions: Sales ought to occur under regular market conditions and not throughout uncommonly inflated or depressed periods.

To pick suitable comparables, it is essential to completely comprehend the definition of fair market price (FMV). FMV is the rate at which residential or commercial property would change hands between a prepared purchaser and a prepared seller, with neither party under pressure to act and both having sensible understanding of the realities. This definition refers specifically to real completed sales, not listings or estimates. Therefore, only offered outcomes should be utilized when identifying FMV. Asking prices are simply aspirational and do not reflect a consummated transaction.

In order to choose the most typical market, the appraiser should consider a broader overview where comparable used items (i.e., secondary market) are sold to the general public. This normally narrows the focus to either auction sales or gallery sales-two distinct marketplaces with different dynamics. It is 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 ought to think about both markets and after that choose the very best market and consist of comparables from that market.

3. Replacement Cost: Replacement expense can be thought about when figuring out FMV, however just if there's a sensible connection in between a product's replacement cost and its fair market worth. Replacement expense refers to what it would cost to replace the product on the appraisal date. In lots of cases, the replacement expense far goes beyond FMV and is not a trusted sign of worth. This method is used occasionally.

4. Opinions of expert appraisers: The IRS permits skilled opinions to be thought about when determining FMV, however the weight provided depends on the expert's certifications and how well the viewpoint is supported by truths. For the opinion to carry weight, it needs to be backed by reputable proof (i.e., market information). This approach is utilized occasionally. Determining fair market worth involves more than using a definition-it requires thoughtful analysis, sound methodology, and trusted market data. By following IRS assistance and thinking about 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 further check out these ideas through real-world applications and case examples.