Determining Fair Market Price Part I.
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Determining fair market price (FMV) can be a complicated process, as it is extremely based on the particular truths and situations surrounding each appraisal project. Appraisers need to exercise professional judgment, supported by reputable data and sound approach, to identify FMV. This typically requires careful analysis of market patterns, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would carry out under normal market conditions including a ready buyer and a ready seller.

This post will deal with identifying FMV for the planned usage of taking an income tax deduction for a non-cash charitable contribution in the United States. With that being said, this methodology is suitable to other intended usages. While Canada's definition of FMV varies from that in the US, there are numerous resemblances that allow this basic approach to be applied to Canadian functions. Part II in this blogpost series will attend to Canadian language particularly.

Fair market price is defined in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would alter hands in between a prepared buyer and a willing seller, neither being under any compulsion to buy or to offer and both having sensible knowledge of pertinent facts." 26 CFR § 20.2031-1( b) expands upon this definition with "the reasonable market worth of a specific product of residential or commercial property ... is not to be determined by a forced sale. Nor is the reasonable market value of a product to be determined by the sale cost of the item in a market besides that in which such item is most typically sold to the general public, considering 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 therefore 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 best starting point for guidance on figuring out reasonable market value. While federal policies can seem difficult, the existing variation (Rev. December 2024) is only 16 pages and uses clear headings to help you discover key info quickly. These ideas are likewise covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.

Table 1, found at the top of page 3 on IRS Publication 561, supplies a crucial and concise visual for figuring out reasonable market price. It lists the following factors to consider provided as a hierarchy, with the most trusted indications of determining reasonable market price noted initially. Simply put, the table exists in a hierarchical order of the greatest arguments.
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1. Cost or asking price

  1. Sales of comparable 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 cost or the actual selling cost received by a qualified organization (an organization eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the very best indication of FMV, specifically if the transaction occurred near to the assessment date under conditions. This is most trustworthy when the sale was current, at arm's length, both parties knew all pertinent realities, neither was under any obsession, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a transaction between one party and an independent and unrelated celebration that is performed as if the 2 celebrations were strangers so that no conflict of interest exists."

    This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser needs to offer sufficient details to show they adhered to 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 necessary for credible project results and if such information was readily available to the appraiser in the typical course of business." Below, a comment additional states: "If such info is unobtainable, a declaration on the efforts carried out by the appraiser to get the details is required. If such details is irrelevant, a statement acknowledging the presence of the info and mentioning its lack of significance 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 information, it is required 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 information, or the appraiser identifies the details is not pertinent, this should be plainly recorded in the appraisal report.

    2. Sales of Comparable Properties: Comparable sales are one of the most trusted and frequently utilized approaches for identifying FMV and are specifically persuasive to desired users. The strength of this method depends on several essential elements:
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    Similarity: The closer the similar is to the contributed residential or commercial property, the stronger the evidence. Adjustments must be produced any differences in condition, quality, or other value appropriate attribute. Timing: Sales should be as close as possible to the evaluation date. If you use older sales information, first verify that market conditions have actually stayed steady which no more current similar sales are offered. Older sales can still be utilized, but you need to adjust for any changes in market conditions to reflect the present worth of the subject residential or commercial property. Sale Circumstances: The sale needs to be at arm's length in between notified, unpressured celebrations. Market Conditions: Sales should occur under normal market conditions and not during uncommonly inflated or depressed durations.

    To choose proper comparables, it is necessary to totally comprehend the meaning of reasonable market price (FMV). FMV is the cost at which residential or commercial property would alter hands between a willing purchaser and a prepared seller, with neither celebration under pressure to act and both having affordable understanding of the truths. This meaning refers specifically to real completed sales, not listings or estimates. Therefore, just sold outcomes ought to be used when determining FMV. Asking costs are merely aspirational and do not reflect a consummated deal.

    In order to pick the most common market, the appraiser needs to consider a wider summary where equivalent pre-owned items (i.e., secondary market) are offered to the public. This generally narrows the focus to either auction sales or gallery sales-two distinct markets with various dynamics. It is essential not to combine comparables from both, as doing so fails to plainly determine the most common market for the subject residential or commercial property. Instead, you need to think about both markets and after that select the very best market and consist of comparables from that market.

    3. Replacement Cost: Replacement expense can be thought about when determining FMV, but just if there's a reasonable connection between an item's replacement cost 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 exceeds FMV and is not a dependable indication of worth. This method is utilized occasionally.

    4. Opinions of professional appraisers: The IRS allows skilled opinions to be considered when identifying FMV, but the weight given depends on the professional's credentials and how well the viewpoint is supported by truths. For the viewpoint to carry weight, it must be backed by credible proof (i.e., market information). This method is used infrequently. Determining fair market price involves more than applying a definition-it requires thoughtful analysis, sound methodology, and dependable market data. By following IRS guidance and considering the truths and scenarios linked 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.