Determining fair market value (FMV) can be a complicated process, as it is highly based on the particular facts and scenarios surrounding each appraisal project. Appraisers must work out expert judgment, supported by trustworthy data and sound approach, to identify FMV. This frequently needs careful 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 normal market conditions involving a prepared buyer and a prepared seller.
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This post will address identifying FMV for the meant use of taking an earnings tax deduction for a non-cash charitable contribution in the United States. With that being said, this method applies to other designated uses. While Canada's definition of FMV differs from that in the US, there are lots of similarities that allow this general method to be used to Canadian functions. Part II in this blogpost series will deal with Canadian language specifically.

Fair market worth is specified in 26 CFR § 1.170A-1( c)( 2) as "the rate at which residential or commercial property would change hands between a prepared purchaser and a prepared seller, neither being under any obsession to buy or to offer and both having sensible understanding of appropriate facts." 26 CFR § 20.2031-1( b) expands upon this meaning with "the fair market price of a particular item of residential or commercial property ... is not to be identified by a forced sale. Nor is the fair market worth of a product to be identified by the price of the product in a market other than that in which such product is most typically sold to the general public, considering the location of the item anywhere appropriate."

The tax court in Anselmo v. Commission held that there should be no distinction in between the definition of reasonable market price for different tax usages and therefore 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 beginning point for guidance on identifying reasonable market value. While federal guidelines can appear challenging, the existing variation (Rev. December 2024) is just 16 pages and uses clear headings to help you find crucial information quickly. These principles are also 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 determining fair market value. It notes the following considerations presented as a hierarchy, with the most dependable indications of determining reasonable market value listed initially. In other words, the table exists in a hierarchical order of the strongest arguments.

1. Cost or selling rate

1. Sales of equivalent residential or commercial properties
2. Replacement expense
3. Opinions of expert appraisers
   
   Let's check out each consideration individually:
   
   1. Cost or Selling Price: The taxpayer's cost or the actual selling price gotten by a certified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the best indicator of FMV, particularly if the deal happened near the appraisal date under common market conditions. This is most dependable when the sale was current, at arm's length, both celebrations understood all appropriate realities, neither was under any compulsion, and market conditions stayed stable. 26 CFR § 1.482-1(b)( 1) specifies "arm's length" as "a deal in between one party 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 aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser needs to supply enough info to show they adhered to 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, alternatives, and listing when, in accordance with Standards Rule 7-5, it was necessary for credible task results and if such info was available to the appraiser in the regular course of organization." Below, a remark further states: "If such details is unobtainable, a statement on the efforts carried out by the appraiser to obtain the info is required. If such details is unimportant, a declaration acknowledging the existence of the details and citing its lack of relevance is required."
   
   The appraiser must request the purchase cost, source, and date of acquisition from the donor. While donors may be reluctant 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 offer these information, or the appraiser determines the info is not relevant, this must be clearly documented in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most trustworthy and commonly utilized techniques for figuring out FMV and are particularly persuasive to desired users. The strength of this technique depends upon several key elements:
   
   Similarity: The closer the comparable is to the contributed residential or commercial property, the more powerful the evidence. Adjustments must be produced any distinctions in condition, quality, or other value pertinent quality. Timing: Sales must be as close as possible to the evaluation date. If you utilize older sales information, first confirm that market conditions have stayed steady which no more current equivalent sales are readily available. Older sales can still be utilized, however you need to adjust for any modifications in market conditions to reflect the current worth of the subject residential or commercial property. Sale Circumstances: The sale must be at arm's length in between informed, unpressured parties. Market Conditions: Sales must occur under normal market conditions and not throughout uncommonly inflated or depressed periods.
   
   To choose suitable comparables, it's important to completely understand the definition of fair market worth (FMV). FMV is the price at which residential or commercial property would change hands in between a prepared purchaser and a willing seller, with neither celebration under pressure to act and both having sensible knowledge of the facts. This definition refers specifically to actual finished sales, not listings or estimates. Therefore, only offered results ought to be used when figuring out FMV. Asking prices are merely aspirational and do not show a consummated transaction.
   
   In order to choose the most common market, the appraiser must think about a broader introduction where comparable previously owned items (i.e., secondary market) are sold to the public. This generally narrows the focus to either auction sales or unique marketplaces with various dynamics. It's crucial not to combine comparables from both, as doing so fails to clearly identify the most typical market for the subject residential or commercial property. Instead, you should consider both markets and then choose the very best market and include comparables from that market.
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   3. Replacement Cost: Replacement expense can be thought about when determining FMV, however just if there's a sensible connection between an item's replacement expense and its reasonable market value. Replacement expense describes what it would cost to replace the item on the evaluation date. In most cases, the replacement cost far goes beyond FMV and is not a trusted indication of worth. This method is utilized infrequently.
   
   4. Opinions of expert appraisers: The IRS enables skilled opinions to be thought about when figuring out FMV, however the weight offered depends upon the expert's qualifications and how well the viewpoint is supported by facts. For the opinion to carry weight, it must be backed by credible proof (i.e., market information). This method is used rarely. Determining fair market value includes more than using a definition-it requires thoughtful analysis, sound method, and reliable market information. By following IRS assistance and thinking about the realities and scenarios linked to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will even more explore these ideas through real-world applications and case examples.