Determining reasonable market price (FMV) can be a complicated procedure, as it is extremely reliant on the specific facts and scenarios surrounding each appraisal task. Appraisers need to work out expert judgment, supported by reliable information and sound method, to determine FMV. This often needs careful analysis of market trends, the availability and reliability of comparable sales, and an understanding of how the residential or commercial property would carry out under normal market conditions including a prepared purchaser and a prepared seller.

This post will address identifying FMV for the planned usage of taking an earnings tax deduction for a non-cash charitable contribution in the United States. With that being stated, this methodology applies to other desired uses. While Canada's meaning of FMV varies from that in the US, there are numerous similarities that permit this basic approach to be applied to Canadian functions. Part II in this blogpost series will address Canadian language specifically.

Fair market worth is defined in 26 CFR § 1.170A-1( c)( 2) as "the rate at which residential or commercial property would alter hands in between a willing buyer and a ready seller, neither being under any compulsion to buy or to offer and both having affordable understanding of pertinent facts." 26 CFR § 20.2031-1( b) broadens upon this meaning with "the reasonable market price of a specific product of residential or commercial property ... is not to be identified by a forced sale. Nor is the fair market price of an item to be determined by the price of the product in a market other than that in which such item is most typically sold to the public, considering the place of the item wherever proper."

The tax court in Anselmo v. Commission held that there should be no difference between the definition of reasonable market price for various tax uses 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 figuring out fair market price. While federal guidelines can appear daunting, the present version (Rev. December 2024) is only 16 pages and uses clear headings to help you discover crucial information rapidly. These principles are also covered in the 2021 Core Course Manual, starting at the bottom of page 12-2.

Table 1, discovered at the top of page 3 on IRS Publication 561, supplies an essential and succinct visual for figuring out reasonable market price. It notes the following factors to consider presented as a hierarchy, with the most reliable indications of identifying reasonable market price listed first. Simply put, the table exists in a hierarchical order of the strongest arguments.

1. Cost or market price
2. Sales of comparable residential or commercial properties
3. Replacement expense
4. Opinions of professional appraisers

Let's check out each consideration individually:

1. Cost or Selling Price: The taxpayer's cost or the actual selling rate received by a qualified organization (an organization eligible to get tax-deductible charitable contributions under the Internal Revenue Code) may be the finest indicator of FMV, particularly if the deal happened near the assessment date under typical market conditions. This is most reputable when the sale was current, at arm's length, both celebrations knew all relevant realities, neither was under any obsession, and market conditions remained 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 conducted as if the two parties were strangers so that no dispute of interest exists."

This aligns with USPAP Standards Rule 8-2(a)(x)( 3 ), which says the appraiser must provide adequate details to suggest they abided by the requirements of Standard 7 by "summing up the results of analyzing the subject residential or commercial property's sales and other transfers, agreements of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was required for credible task outcomes and if such info was readily available to the appraiser in the regular course of business." Below, a remark further 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 significance is required."

The appraiser needs to request the purchase price, source, and date of acquisition from the donor. While donors might be hesitant to share this info, it is required 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 provide these information, or the appraiser identifies the details is not pertinent, this need to be clearly documented in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are one of the most trustworthy and frequently used approaches for identifying FMV and are particularly persuasive to intended users. The strength of this technique depends on numerous key factors:

Similarity: The closer the equivalent is to the contributed residential or commercial property, the stronger the evidence. Adjustments should be made for any distinctions in condition, quality, or other worth appropriate attribute.
Timing: Sales need to be as close as possible to the appraisal date. If you use older sales data, first validate that market conditions have stayed stable and that no more recent comparable sales are offered. Older sales can still be utilized, but you must change 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 between notified, unpressured celebrations.
Market Conditions: Sales ought to happen under normal market conditions and not throughout uncommonly inflated or depressed periods.

To choose suitable comparables, it's essential 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 prepared buyer and a willing seller, with neither celebration under pressure to act and both having reasonable knowledge of the truths. This meaning refers specifically to actual finished sales, not listings or quotes. Therefore, just offered outcomes need to be utilized when figuring out FMV. Asking rates are simply aspirational and do not show a consummated deal.

In order to choose the most typical market, the appraiser must consider a more comprehensive overview where comparable previously 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's important not to integrate comparables from both, as doing so fails to plainly identify the most common market for the subject residential or commercial property. Instead, you should consider both markets and then select the finest 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 between a product's replacement cost and its reasonable market price. Replacement expense refers to what it would cost to replace the product on the evaluation date. In most cases, the replacement expense far goes beyond FMV and is not a reputable sign of value. This method is utilized infrequently.

4. Opinions of professional appraisers: The IRS allows skilled opinions to be thought about when identifying FMV, but the weight provided depends on the expert's certifications and how well the viewpoint is supported by realities. For the opinion to bring weight, it should be backed by reputable evidence (i.e., market data). This approach is utilized occasionally.
Determining reasonable market value involves more than using a definition-it requires thoughtful analysis, sound method, and reputable market information. By following IRS guidance 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 further check out these principles through real-world applications and case examples.