Determining reasonable market price (FMV) can be a complex process, as it is extremely based on the specific realities and situations surrounding each appraisal task. Appraisers need to work out professional judgment, supported by reputable data and sound approach, to identify FMV. This frequently requires mindful analysis of market patterns, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would perform under common market conditions including a willing buyer and a ready seller.

This article will attend to identifying FMV for the meant usage of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being said, this methodology applies to other desired usages. While Canada's definition of FMV differs from that in the US, there are numerous similarities that enable this general approach to be applied to Canadian functions. Part II in this blogpost series will resolve Canadian language particularly.
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Fair market price is specified in 26 CFR § 1.170A-1( c)( 2) as "the cost at which residential or commercial property would change hands between a willing purchaser and a prepared seller, neither being under any obsession to buy or to sell and both having sensible understanding of relevant truths." 26 CFR § 20.2031-1( b) expands upon this definition with "the fair market price of a specific item of residential or commercial property ... is not to be identified by a forced sale. Nor is the reasonable market value of a product to be identified by the sale rate of the item in a market other than that in which such product is most typically sold to the general public, taking into consideration the area of the item any place proper."

The tax court in Anselmo v. Commission held that there must be no distinction between the definition of fair market price for various tax uses and for that reason 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 very best starting point for guidance on identifying fair market value. While federal regulations can appear overwhelming, the current variation (Rev. December 2024) is just 16 pages and uses clear headings to help you discover crucial information quickly. These concepts are also covered in the 2021 Core Course Manual, beginning at the bottom of page 12-2.

Table 1, discovered at the top of page 3 on IRS Publication 561, supplies a crucial and succinct visual for figuring out reasonable market price. It lists the following considerations provided as a hierarchy, with the most reliable indications of determining fair market value noted first. To put it simply, the table exists in a hierarchical order of the greatest arguments.

1. Cost or selling price

1. Sales of similar residential or commercial properties
2. Replacement cost
3. Opinions of expert appraisers
   
   Let's explore each factor to consider separately:
   
   1. Cost or Selling Price: The taxpayer's expense or the real asking price received by a certified company (a company eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the finest indication of FMV, particularly if the deal took place close to the evaluation 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) specifies "arm's length" as "a deal in between one celebration and an independent and unrelated party that is conducted 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 states the appraiser needs to offer enough information to suggest they complied with the requirements of Standard 7 by "summarizing the results of examining 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 necessary for reputable assignment outcomes and if such info was readily available to the appraiser in the normal course of business." Below, a remark additional states: "If such info is unobtainable, a declaration on the efforts carried out by the appraiser to get the information is needed. If such information is unimportant, a statement acknowledging the existence of the details and citing its lack of importance is needed."
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   The appraiser ought 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 likewise appears in the IRS Preferred Appraisal Format for products valued over $50,000. Whether the donor decreases to supply these information, or the appraiser determines the info is not appropriate, this should be plainly documented in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most dependable and commonly used approaches for determining FMV and are especially convincing to desired users. The strength of this approach depends upon a number of key aspects:
   
   Similarity: The closer the equivalent is to the donated residential or commercial property, the stronger the evidence. Adjustments need to be made for any distinctions in condition, quality, or other value pertinent characteristic. Timing: Sales need to be as close as possible to the appraisal date. If you utilize older sales data, first validate that market conditions have actually stayed steady and that no more current comparable sales are offered. Older sales can still be utilized, but you should change for any modifications in market conditions to reflect the present value of the subject residential or commercial property. Sale Circumstances: The sale must be at arm's length between notified, unpressured parties. Market Conditions: Sales should take place under normal market conditions and not throughout abnormally inflated or depressed durations.
   
   To pick suitable comparables, it is very important to totally comprehend the meaning of fair market price (FMV). FMV is the rate at which residential or commercial property would alter hands in between a prepared purchaser and a willing seller, with neither celebration under pressure to act and both having sensible understanding of the truths. This meaning refers specifically to real completed sales, not listings or price quotes. Therefore, only sold outcomes must be used when identifying FMV. Asking costs are simply aspirational and do not reflect a consummated deal.
   
   In order to pick the most typical market, the appraiser ought to consider a broader summary where equivalent previously owned items (i.e., secondary market) are offered to the general public. This normally narrows the focus to either auction sales or gallery sales-two unique markets with various characteristics. It is essential not to combine comparables from both, as doing so stops working to plainly recognize the most typical market for the subject residential or commercial property. Instead, you ought to think about both markets and then select the best market and consist of comparables from that market.
   
   3. Replacement Cost: Replacement expense can be considered when determining FMV, however only if there's an affordable connection in between an item's replacement expense and its fair market price. Replacement cost refers to what it would cost to change the item on the evaluation date. In most cases, the replacement cost far exceeds FMV and is not a dependable indicator of value. This method is used rarely.
   
   4. Opinions of expert appraisers: The IRS allows skilled viewpoints to be thought about when figuring out FMV, however the weight provided depends upon the specialist's certifications and how well the viewpoint is supported by realities. For the viewpoint to bring weight, it must be backed by reputable proof (i.e., market information). This approach is utilized rarely. Determining fair market price includes more than using a definition-it needs analysis, sound method, and dependable market information. By following IRS guidance and considering the facts and situations linked to the subject residential or commercial property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will further explore these ideas through real-world applications and case examples.