Determining fair market price (FMV) can be a complex procedure, as it is extremely depending on the specific truths and scenarios surrounding each appraisal assignment. Appraisers must exercise expert judgment, supported by reliable information and sound methodology, to determine FMV. This typically needs cautious analysis of market trends, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would carry out under common market conditions including a ready buyer and a prepared seller.
This article will address figuring out FMV for the intended usage of taking an earnings tax deduction for a non-cash charitable contribution in the United States. With that being stated, this methodology is applicable to other intended uses. While Canada's meaning of FMV varies from that in the US, there are numerous similarities that enable this basic methodology to be applied to Canadian functions. Part II in this blogpost series will attend to Canadian language specifically.
Fair market price is defined in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would change hands in between a prepared buyer and a prepared seller, neither being under any obsession to purchase or to offer and both having reasonable understanding of appropriate truths." 26 CFR § 20.2031-1( b) expands upon this meaning with "the fair market worth 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 sale price of the item in a market aside from that in which such item is most frequently offered to the public, taking into consideration 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 value for different tax usages and for that reason the combined meaning 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 starting point for guidance on determining reasonable market price. While federal regulations can appear complicated, the current version (Rev. December 2024) is only 16 pages and uses clear headings to help you discover key information 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 fair market worth. It notes the following factors to consider provided as a hierarchy, with the most trustworthy indicators of determining fair market price noted first. To put it simply, the table is provided in a hierarchical order of the greatest arguments.
1. Cost or selling rate
2. Sales of equivalent residential or commercial properties
3. Replacement cost
4. Opinions of professional appraisers
Let's check out each consideration individually:
1. Cost or Selling Price: The taxpayer's expense or the real asking price gotten by a qualified organization (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the very best indicator of FMV, especially if the deal happened close to the valuation date under typical market conditions. This is most reputable when the sale was current, at arm's length, both celebrations understood all relevant facts, neither was under any compulsion, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a transaction between one party and an independent and unassociated party that is carried out as if the two celebrations 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 needs to provide adequate details to indicate 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, contracts of sale, options, and listing when, in accordance with Standards Rule 7-5, it was essential for trustworthy task outcomes and if such information was offered to the appraiser in the typical course of organization." Below, a comment additional states: "If such details is unobtainable, a statement on the efforts carried out by the appraiser to obtain the details is required. If such details is irrelevant, a statement acknowledging the presence of the details and mentioning its lack of relevance is required."
The appraiser should 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 likewise appears in the IRS Preferred Appraisal Format for items valued over $50,000. Whether the donor declines to supply these information, or the appraiser figures out the details is not appropriate, this need to be plainly recorded in the appraisal report.
2. Sales of Comparable Properties: Comparable sales are one of the most dependable and commonly used approaches for figuring out FMV and are particularly persuasive to intended users. The strength of this technique depends upon several key elements:
Similarity: The closer the comparable is to the donated residential or commercial property, the stronger the evidence. Adjustments must be made for any distinctions in condition, quality, or other worth pertinent quality.
Timing: Sales should be as close as possible to the appraisal date. If you utilize older sales information, first confirm that market conditions have remained steady and that no more current comparable sales are offered. Older sales can still be utilized, however you should adjust for any modifications in market conditions to reflect 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 need to take place under regular market conditions and not throughout uncommonly inflated or depressed durations.
To select appropriate comparables, it's essential to totally understand the definition of reasonable market price (FMV). FMV is the price at which residential or commercial property would alter hands in between a willing purchaser and a prepared seller, with neither party under pressure to act and both having reasonable understanding of the realities. This meaning refers specifically to actual completed sales, not listings or quotes. Therefore, only sold results must be used when identifying FMV. Asking rates are simply aspirational and do not show a consummated deal.
In order to select the most common market, the appraiser must consider a more comprehensive overview where comparable secondhand products (i.e., secondary market) are offered to the general public. This usually narrows the focus to either auction sales or gallery sales-two unique markets with various dynamics. It's crucial not to combine comparables from both, as doing so fails to clearly identify the most common market for the subject residential or commercial property. Instead, you need to consider both markets and after that pick the best market and consist of comparables from that market.
3. Replacement Cost: Replacement expense can be thought about when determining FMV, but only if there's an affordable connection between a product's replacement expense and its reasonable market price. Replacement expense refers to what it would cost to replace the item on the valuation date. In a lot of cases, the replacement expense far goes beyond FMV and is not a trustworthy sign of value. This approach is utilized occasionally.
4. Opinions of expert appraisers: The IRS permits expert viewpoints to be thought about when identifying FMV, however the weight offered depends upon the specialist's qualifications and how well the opinion is supported by facts. For the opinion to bring weight, it must be backed by credible evidence (i.e., market information). This technique is utilized rarely.
Determining reasonable market worth includes more than applying a definition-it needs thoughtful analysis, sound approach, and reliable market data. By following IRS guidance and considering 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 further explore these principles through real-world applications and case examples.
