Determining Fair Market Value Part I

Tuesday, May 13, 2025 in Ask an Instructor, Education, For Appraisers

Determining fair market value (FMV) can be a complex process, as it is highly dependent on the specific facts and circumstances surrounding each appraisal assignment. Appraisers must exercise professional judgment, supported by credible data and sound methodology, to determine FMV. This often requires careful analysis of market trends, the availability and reliability of comparable sales, and an understanding of how the property would perform under typical market conditions involving a willing buyer and a willing seller.

This article will address determining FMV for the intended use of taking an income tax deduction for a non-cash charitable contribution in the United States. With that being said, this methodology is applicable to other intended uses. While Canada’s definition of FMV differs from that in the US, there are many similarities that allow this general methodology to be applied to Canadian functions. Part II in this blogpost series will address Canadian language specifically.

Fair market value is defined in 26 CFR §1.170A-1(c)(2) as “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” 26 CFR §20.2031-1(b) expands upon this definition with “the fair market value of a particular item of property… is not to be determined by a forced sale. Nor is the fair market value of an item to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”

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

IRS Publication 561, Determining the Value of Donated Property, is the best starting point for guidance on determining fair market value. While federal regulations can seem daunting, the current version (Rev. December 2024) is only 16 pages and uses clear headings to help you find key information quickly. These concepts are also covered in the 2021 Core Course Manual, beginning at the bottom of page 12-2.

Table 1, found at the top of page 3 on IRS Publication 561, provides an important and concise visual for determining fair market value. It lists the following considerations presented as a hierarchy, with the most reliable indicators of determining fair market value listed first. In other words, the table is presented in a hierarchical order of the strongest arguments.

1. Cost or selling price
2. Sales of comparable properties
3. Replacement cost
4. Opinions of professional appraisers

Let’s explore each consideration individually:

1. Cost or Selling Price: The taxpayer’s cost or the actual selling price received by a qualified organization (an organization eligible to receive tax-deductible charitable contributions under the Internal Revenue Code) may be the best indicator of FMV, especially if the transaction occurred close to the valuation date under typical market conditions. This is most reliable when the sale was recent, at arm’s length, both parties knew all relevant facts, neither was under any compulsion, and market conditions remained stable. 26 CFR §1.482-1(b)(1) defines “arm’s length” as “a transaction between one party and an independent and unrelated party that is conducted as if the two parties were strangers so that no conflict of interest exists."

This aligns with USPAP Standards Rule 8-2(a)(x)(3), which says the appraiser must provide sufficient information to indicate they complied with the requirements of Standard 7 by “summarizing the results of analyzing the subject property’s sales and other transfers, agreements of sale, options, and listing when, in accordance with Standards Rule 7-5, it was necessary for credible assignment results and if such information was available to the appraiser in the normal course of business.” Below, a comment further states: “If such information is unobtainable, a statement on the efforts undertaken by the appraiser to obtain the information is required. If such information is irrelevant, a statement acknowledging the existence of the information and citing its lack of relevance is required.”

The appraiser should request the purchase price, source, and date of acquisition from the donor. While donors may be reluctant to share this information, it is required in Part I of Form 8283 and also appears in the IRS Preferred Appraisal Format for items valued over $50,000. Whether the donor declines to provide these details, or the appraiser determines the information is not relevant, this should be clearly documented in the appraisal report.

2. Sales of Comparable Properties: Comparable sales are one of the most reliable and commonly used methods for determining FMV and are especially persuasive to intended users. The strength of this approach depends on several key factors:

• Similarity: The closer the comparable is to the donated property, the stronger the evidence. Adjustments must be made for any differences in condition, quality, or other value relevant characteristic.
• Timing: Sales should be as close as possible to the valuation date. If you use older sales data, first confirm that market conditions have remained stable and that no more recent comparable sales are available. Older sales can still be used, but you must adjust for any changes in market conditions to reflect the current value of the subject property.
• Sale Circumstances: The sale must be at arm’s length between informed, unpressured parties.
• Market Conditions: Sales should occur under normal market conditions and not during unusually inflated or depressed periods.

To choose appropriate comparables, it's important to fully understand the definition of fair market value (FMV). FMV is the price at which property would change hands between a willing buyer and a willing seller, with neither party under pressure to act and both having reasonable knowledge of the facts. This definition refers specifically to actual completed sales, not listings or estimates. Therefore, only sold results should be used when determining FMV. Asking prices are merely aspirational and do not reflect a consummated transaction.

In order to choose the most common market, the appraiser should consider a broader overview where comparable pre-owned items (i.e., secondary market) are sold to the public. This typically narrows the focus to either auction sales or gallery sales—two distinct marketplaces with different dynamics. It’s important not to combine comparables from both, as doing so fails to clearly identify the most common market for the subject property. Instead, you should consider both markets and then choose the best market and include comparables from that market.

3. Replacement Cost: Replacement cost can be considered when determining FMV, but only if there’s a reasonable connection between an item’s replacement cost and its fair market value. Replacement cost refers to what it would cost to replace the item on the valuation date. In many cases, the replacement cost far exceeds FMV and is not a reliable indicator of value. This method is used infrequently.

4. Opinions of professional appraisers: The IRS allows expert opinions to be considered when determining FMV, but the weight given depends on the expert’s qualifications and how well the opinion is supported by facts. For the opinion to carry weight, it must be backed by credible evidence (i.e., market data). This method is used infrequently. 
Determining fair market value involves more than applying a definition—it requires thoughtful analysis, sound methodology, and reliable market data. By following IRS guidance and considering the facts and circumstances connected to the subject property, appraisers can produce conclusions that are well-supported. Upcoming posts in this series will further explore these concepts through real-world applications and case examples.

Stay tuned for Part II: Understanding and Determining Fair Market Value in Canadian Appraisals.

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