Determining reasonable market price (FMV) can be an intricate process, as it is highly based on the particular realities and situations surrounding each appraisal assignment. Appraisers should exercise professional judgment, supported by reliable information and sound approach, to determine FMV. This typically requires careful analysis of market trends, the schedule and dependability of comparable sales, and an understanding of how the residential or commercial property would carry out under typical market conditions involving a ready buyer and a willing seller.

This post will deal with determining FMV for the planned use of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being said, this approach is suitable to other desired usages. While Canada's definition of FMV differs from that in the US, there are numerous resemblances that permit this basic methodology 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 ready purchaser and a willing seller, neither being under any compulsion to purchase or to sell and both having sensible knowledge of appropriate truths." 26 CFR § 20.2031-1( b) broadens upon this definition with "the fair market price of a specific product of residential or commercial property ... is not to be figured out by a forced sale. Nor is the reasonable market price of a product to be figured out by the price of the product in a market besides that in which such product is most commonly offered to the general public, taking into account the place of the product any place suitable."

The tax court in Anselmo v. Commission held that there ought to be no difference in between the meaning of reasonable market value for various 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 starting point for assistance on identifying reasonable market worth. While federal policies can appear complicated, the existing variation (Rev. December 2024) is just 16 pages and uses clear headings to assist you find essential info quickly. These principles 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 an essential and succinct visual for determining fair market price. It lists the following factors to consider presented as a hierarchy, with the most reputable indications of figuring out reasonable market worth noted first. In other words, the table exists in a hierarchical order of the greatest arguments.

1. Cost or selling rate
2. Sales of equivalent residential or commercial properties
3. Replacement expense
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 gotten by a qualified organization (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the finest sign of FMV, specifically if the transaction took place near the evaluation date under common market conditions. This is most reputable when the sale was current, at arm's length, both parties 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 transaction in between one celebration and an independent and unassociated party that is carried out as if the 2 parties were complete strangers so that no conflict of interest exists."

This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser should provide adequate information to show they adhered to the requirements of Standard 7 by "summarizing the outcomes of analyzing the subject residential or commercial property's sales and other transfers, arrangements of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was necessary for trustworthy project results and if such info was readily available to the appraiser in the normal course of company." Below, a remark more states: "If such info is unobtainable, a declaration on the efforts undertaken by the appraiser to obtain the info is required. If such info is unimportant, a declaration acknowledging the existence of the details and citing its absence of significance is required."

The appraiser ought to ask for the purchase rate, source, and date of acquisition from the donor. While donors may be hesitant to share this information, 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 decreases to provide these details, or the appraiser determines the details is not pertinent, this should be clearly documented in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are one of the most reputable and frequently used techniques for figuring out FMV and are specifically persuasive to designated users. The strength of this approach depends on several essential factors:

Similarity: The closer the equivalent is to the donated residential or commercial property, the stronger the evidence. Adjustments must be produced any differences in condition, quality, or other worth appropriate quality.
Timing: Sales ought to be as close as possible to the appraisal date. If you use older sales data, initially confirm that market conditions have remained stable which no more recent similar sales are readily available. Older sales can still be utilized, but you need to adjust 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 notified, unpressured celebrations.
Market Conditions: Sales ought to take place under normal market conditions and not during uncommonly inflated or depressed periods.

To pick appropriate comparables, it is very important to completely understand the meaning of fair market value (FMV). FMV is the cost at which residential or commercial property would alter hands in between a prepared buyer and a ready seller, with neither party under pressure to act and both having affordable knowledge of the truths. This meaning refers specifically to actual completed sales, not listings or estimates. Therefore, just offered results ought to be utilized when figuring out FMV. Asking rates are merely aspirational and do not show a consummated transaction.

In order to pick the most typical market, the appraiser must consider a broader introduction where similar pre-owned products (i.e., secondary market) are offered to the public. This usually narrows the focus to either auction sales or gallery sales-two unique markets with various dynamics. It is essential not to integrate comparables from both, as doing so stops working to plainly identify the most typical market for the subject residential or commercial property. Instead, you must think about both markets and then pick the very best market and consist of comparables from that market.

3. Replacement Cost: Replacement cost can be considered when determining FMV, but only if there's a reasonable connection in between a product's replacement expense and its reasonable market price. Replacement expense describes what it would cost to change the item on the assessment date. In a lot of cases, the replacement expense far surpasses FMV and is not a dependable indication of value. This technique is used occasionally.

4. Opinions of professional appraisers: The IRS allows professional viewpoints to be considered when determining FMV, however the weight provided depends upon the specialist's certifications and how well the viewpoint is supported by truths. For the opinion to carry weight, it should be backed by reliable evidence (i.e., market information). This technique is utilized occasionally.
Determining fair market price involves more than applying a definition-it needs thoughtful analysis, sound approach, and trusted market data. By following IRS guidance and considering the facts and situations connected 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 concepts through real-world applications and case examples.