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  • Benjamin Finney
  • thailandproperty
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  • #43

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Created Jun 20, 2025 by Benjamin Finney@benjaminfinneyMaintainer

Determining Fair Market Value Part I.


Determining fair market price (FMV) can be a complex process, as it is highly based on the specific facts and circumstances surrounding each appraisal task. Appraisers should exercise expert judgment, supported by reputable data and sound method, to identify FMV. This typically needs cautious analysis of market trends, the schedule and reliability of similar sales, and an understanding of how the residential or commercial property would perform under normal market conditions involving a prepared buyer and a willing seller.

This article will resolve identifying FMV for the intended usage of taking an earnings tax reduction for a non-cash charitable contribution in the United States. With that being stated, this approach applies to other intended usages. While Canada's definition of FMV varies from that in the US, there are lots of resemblances that permit this basic approach to be applied to Canadian functions. Part II in this blogpost series will attend to Canadian language particularly.

Fair market value is defined in 26 CFR § 1.170A-1( c)( 2) as "the rate at which residential or commercial property would change hands in between a prepared buyer and a willing seller, neither being under any compulsion to buy or to sell and both having affordable 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 reasonable market price of an item to be determined by the list price of the item in a market besides that in which such item is most typically sold to the general public, considering the location of the product wherever suitable."

The tax court in Anselmo v. Commission held that there should be no difference in between the definition of reasonable market price for various tax usages and therefore the combined definition can be used in appraisals for non-cash charitable contributions.
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IRS Publication 561, Determining the Value of Donated Residential Or Commercial Property, is the very best starting point for guidance on identifying reasonable market price. While federal regulations can seem difficult, the current version (Rev. December 2024) is only 16 pages and utilizes clear headings to assist you find key details rapidly. These ideas 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, offers an important and succinct visual for figuring out fair market worth. It notes the following considerations provided as a hierarchy, with the most dependable indicators of figuring out reasonable market price noted initially. Simply put, the table exists in a hierarchical order of the greatest arguments.

1. Cost or asking price 2. Sales of comparable residential or commercial properties 3. Replacement cost 4. Opinions of expert appraisers

Let's explore each consideration separately:

1. Cost or Selling Price: The taxpayer's cost or the actual market price gotten by a certified organization (an organization to receive tax-deductible charitable contributions under the Internal Revenue Code) might be the finest sign of FMV, particularly if the deal took place near the assessment date under common market conditions. This is most trustworthy when the sale was current, at arm's length, both celebrations knew all pertinent realities, neither was under any obsession, and market conditions remained stable. 26 CFR § 1.482-1(b)( 1) defines "arm's length" as "a deal in between one party and an independent and unassociated party that is performed as if the two celebrations were complete strangers so that no conflict of interest exists."

This lines up with USPAP Standards Rule 8-2(a)(x)( 3 ), which states the appraiser must offer adequate details to show they complied with the requirements of Standard 7 by "summing up the outcomes of analyzing the subject residential or commercial property's sales and other transfers, contracts of sale, choices, and listing when, in accordance with Standards Rule 7-5, it was required for trustworthy assignment outcomes and if such details was available to the appraiser in the normal course of service." Below, a comment further states: "If such information is unobtainable, a statement on the efforts carried out by the appraiser to acquire the details is needed. If such information is unimportant, a declaration acknowledging the presence of the information and mentioning its lack of importance is needed."
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The appraiser ought to ask for the purchase price, source, and date of acquisition from the donor. While donors may hesitate to share this details, 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 offer these information, or the appraiser identifies the information is not pertinent, this ought to be clearly recorded in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are among the most reputable and frequently used techniques for identifying FMV and are especially convincing to desired users. The strength of this approach depends on numerous key factors:

Similarity: The closer the comparable is to the donated residential or commercial property, the more powerful the proof. Adjustments need to be produced any differences in condition, quality, or other worth relevant quality. Timing: Sales need to be as close as possible to the evaluation date. If you use older sales data, initially verify that market conditions have stayed stable and that no more current comparable sales are readily available. Older sales can still be utilized, but you should change for any modifications in market conditions to show the existing value of the subject residential or commercial property. Sale Circumstances: The sale must be at arm's length in between notified, unpressured parties. Market Conditions: Sales ought to take place under normal market conditions and not during uncommonly inflated or depressed periods.

To choose suitable comparables, it is necessary to totally comprehend the meaning of reasonable market worth (FMV). FMV is the price at which residential or commercial property would change hands in between a ready purchaser and a prepared seller, with neither party under pressure to act and both having sensible understanding of the realities. This definition refers specifically to real finished sales, not listings or price quotes. Therefore, only offered results need to be utilized when identifying FMV. Asking prices are merely aspirational and do not reflect a consummated transaction.

In order to pick the most typical market, the appraiser ought to consider a more comprehensive summary where equivalent used items (i.e., secondary market) are sold to the public. This usually narrows the focus to either auction sales or gallery sales-two unique markets with various characteristics. It's important not to integrate comparables from both, as doing so stops working to clearly identify the most typical market for the subject residential or commercial property. Instead, you should think about both markets and after that select the finest market and consist of comparables from that market.

3. Replacement Cost: Replacement expense can be considered when determining FMV, but just if there's an affordable connection in between a product's replacement cost and its reasonable market price. Replacement cost refers to what it would cost to replace the item on the evaluation date. In a lot of cases, the replacement cost far exceeds FMV and is not a reputable sign of worth. This approach is utilized infrequently.

4. Opinions of professional appraisers: The IRS enables professional viewpoints to be thought about when identifying FMV, but the weight offered depends upon the expert's credentials and how well the viewpoint is supported by facts. For the opinion to bring weight, it must be backed by reputable evidence (i.e., market data). This method is used infrequently. Determining reasonable market price includes more than applying a definition-it requires thoughtful analysis, sound method, and trusted market data. By following IRS assistance and thinking about the facts and circumstances 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 principles through real-world applications and case examples.

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