Determining reasonable market value (FMV) can be a complex process, as it is highly reliant on the particular truths and circumstances surrounding each appraisal task. Appraisers must work out expert judgment, supported by reliable data and sound method, to determine FMV. This typically needs careful analysis of market trends, the availability and dependability of comparable sales, and an understanding of how the residential or commercial property would perform under common market conditions involving a prepared purchaser and a prepared seller.

This article will deal with identifying FMV for the intended use of taking an income tax reduction for a non-cash charitable contribution in the United States. With that being stated, this method is appropriate to other designated uses. While Canada's meaning of FMV differs from that in the US, there are numerous similarities that permit this general approach to be used 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 price at which residential or commercial property would alter hands between a willing purchaser and a ready seller, neither being under any obsession to buy or to sell and both having sensible understanding of pertinent truths." 26 CFR § 20.2031-1( b) broadens upon this definition with "the reasonable market price of a particular product of residential or commercial property ... is not to be identified by a forced sale. Nor is the reasonable market price of an item to be figured out by the price of the item in a market aside from that in which such item is most commonly offered to the public, considering the location of the item wherever appropriate."

The tax court in Anselmo v. Commission held that there must be no distinction between the definition of reasonable market price for different tax uses and therefore the combined definition can be utilized in appraisals for non-cash charitable contributions.

IRS Publication 561, Determining the Value of Donated Residential Or Commercial Property, is the best starting point for guidance on determining reasonable market worth. While federal policies can appear daunting, the present variation (Rev. December 2024) is only 16 pages and uses clear headings to help you find key details rapidly. These ideas are likewise 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, offers an important and concise visual for figuring out reasonable market worth. It notes the following factors to consider presented as a hierarchy, with the most dependable signs of identifying fair market price listed initially. To put it simply, the table is provided in a hierarchical order of the greatest arguments.

1. Cost or asking price

1. Sales of similar residential or commercial properties
2. Replacement cost
3. Opinions of professional appraisers
   
   Let's explore each consideration separately:
   
   1. Cost or Selling Price: The taxpayer's cost or the real market price received by a certified company (a company eligible to get tax-deductible charitable contributions under the Internal Revenue Code) might be the best indication of FMV, specifically if the transaction happened close to the evaluation date under normal market conditions. This is most reliable when the sale was recent, at arm's length, both celebrations understood all relevant facts, neither was under any compulsion, and market conditions remained steady. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a transaction in between one party and an independent and unrelated celebration 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 should offer adequate info to indicate they abided by the requirements of Standard 7 by "summing up 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 necessary for credible assignment results and if such details was readily available to the appraiser in the typical course of company." Below, a comment more states: "If such info is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is needed. If such details is unimportant, a statement acknowledging the presence of the information and citing its lack of significance is needed."
   
   The appraiser must request the purchase rate, source, and date of acquisition from the donor. While donors might hesitate 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 decreases to provide these information, or the appraiser determines the info is not relevant, this should be clearly recorded in the appraisal report.
   
   2. Sales of Comparable Properties: Comparable sales are one of the most trustworthy and frequently utilized approaches for figuring out FMV and are specifically convincing to desired users. The strength of this technique depends upon several essential elements:
   
   Similarity: The closer the equivalent is to the donated residential or commercial property, the more powerful the evidence. Adjustments must be made for any differences in condition, quality, or other value pertinent attribute. Timing: Sales ought to be as close as possible to the appraisal date. If you use older sales data, first verify that market conditions have actually remained steady which no more current equivalent sales are readily available. Older sales can still be used, but you should change for any modifications in market conditions to reflect the current worth of the subject residential or commercial property. Sale Circumstances: The sale should be at arm's length in between notified, unpressured parties. Market Conditions: Sales ought to take place under regular market conditions and not during uncommonly inflated or depressed durations.
   
   To select proper comparables, it is very important to fully understand the meaning of reasonable market worth (FMV). FMV is the rate at which residential or commercial property would alter hands in between a willing purchaser and a ready seller, with neither celebration under pressure to act and both having reasonable understanding of the facts. This definition refers specifically to real completed sales, not listings or quotes. Therefore, just sold results need to be used when determining FMV. Asking rates are simply aspirational and do not show a consummated transaction.
   
   In order to select the most typical market, the appraiser needs to consider a more comprehensive overview where equivalent used items (i.e., secondary market) are to the public. This typically narrows the focus to either auction sales or gallery sales-two distinct marketplaces with different characteristics. It is essential not to combine comparables from both, as doing so fails to plainly identify the most common market for the subject residential or commercial property. Instead, you should think about both markets and then choose the finest market and include comparables from that market.
   
   3. Replacement Cost: Replacement cost can be thought about when determining FMV, however only if there's a sensible connection in between a product's replacement cost and its fair market price. Replacement cost describes what it would cost to change the product on the assessment date. In numerous cases, the replacement cost far surpasses FMV and is not a trusted indication of worth. This technique is used rarely.
   
   4. Opinions of expert appraisers: The IRS permits professional viewpoints to be thought about when identifying FMV, however the weight offered depends upon the professional's qualifications and how well the viewpoint is supported by realities. For the opinion to bring weight, it should be backed by reputable proof (i.e., market information). This method is used rarely. Determining reasonable market price includes more than applying a definition-it needs thoughtful analysis, sound method, and reputable market information. By following IRS assistance and thinking about the realities 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 ideas through real-world applications and case examples.
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