IRS FAIR MARKET VALUE
What Is Fair Market Value (FMV)?
To figure how much you may deduct for property that you contribute, you must first determine its FMV on the date of the contribution.
FMV. FMV is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. In addition to this general rule, there are special rules used to value certain types of property such as remainder interests, annuities, interests for life or for a term of years, and reversions, discussed below.
Example 1. If you give an item of used clothing that is in good used condition or better to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. Usually, such items are worth far less than what you paid for them.
Example 2. If you donate jewelry to a charity, the FMV of the jewelry is not the value an appraiser determined in an appraisal you obtained so that your insurance company would reimburse you for the insured value of the jewelry in case the jewelry is stolen or destroyed. This insured value does not reflect what a willing buyer and willing seller would pay for the jewelry on the date of the contribution to charity. It reflects only the replacement cost of the jewelry when you obtained the appraisal. See Replacement Cost, later.
Factors. In making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These include, but are not limited to:
- The cost or selling price of the item,
- Sales of comparable properties,
- Replacement cost, and
- Opinions of professional appraisers.
These factors are discussed later. Also, see Table 1 for a summary of questions to ask as you consider each factor.
Date of contribution. Ordinarily, the date of a contribution is the date on which the property is delivered to the charity or the title transfer date, provided you do not retain any right to or interest in the property that would limit the charity’s use of the property.
Stock. If you deliver, without any conditions, a properly endorsed stock certificate to a qualified organization or to an agent of the organization, the date of the contribution is the date of delivery. If the certificate is mailed and received through the regular mail, it is the date of mailing. If you deliver the certificate to a bank or broker acting as your agent or to the issuing corporation or its agent, for transfer into the name of the organization, the date of the contribution is the date the stock is transferred on the books of the corporation.
Options. If you grant an option to a qualified organization to buy real property, you have not made a charitable contribution until the organization exercises the option. The amount of the contribution is the FMV of the property on the date the option is exercised minus the exercise price.
Example. You grant an option to a local university, which is a qualified organization, to buy real property. Under the option, the university could buy the property at any time during a 2-year period for $40,000. The FMV of the property on the date the option is granted is $50,000. In the following tax year, the university exercises the option. The FMV of the property on the date the option is exercised is $55,000. Therefore, you have made a charitable contribution of $15,000 ($55,000, the FMV, minus $40,000, the exercise price) in the tax year the option is exercised.
Determining FMV
Determining the value of donated property depends upon many factors. You should consider all the facts and circumstances connected with the property, including any recent transactions, in determining value. Value may also be based on desirability, use, condition, scarcity, and market demand for that property. Depending on the type of property, there may be other characteristics that are relevant in determining its value.
Cost or Selling Price of the Donated Property
The cost of the property to you or the actual selling price received by the qualified organization may be the best indication of its FMV. However, because conditions in the market change, the cost or selling price of property may have less weight if the property was not bought or sold at a time that is reasonably close to the date of contribution.
The cost or selling price is a good indication of the property’s value if:
- The purchase or sale took place close to the valuation date in an open market,
- The purchase or sale was at “arm’s-length,”
- The buyer and seller knew all relevant facts,
- The buyer and seller did not have to act, and
- The market did not change between the date of purchase or sale and the valuation date.
Example. Bailey Morgan, who is not a dealer in gems, bought an assortment of gems for $5,000 from a promoter. The promoter claimed that the price was “wholesale” even though this dealer and other dealers made similar sales at similar prices to other persons who were not dealers. The promoter said that if Bailey kept the gems for more than 1 year and then gave them to charity, Bailey could claim a charitable deduction of $15,000, which, according to the promoter, would be the value of the gems at the time of contribution. Bailey gave the gems to a qualified charity 13 months after buying them. The selling price for these gems had not changed from the date of purchase to the date Bailey donated them to charity. The best evidence of FMV depends on actual transactions and not on some artificial estimate. The $5,000 paid by Bailey and others is, therefore, the best evidence of the maximum FMV of the gems.
Terms of the purchase or sale. The terms of the purchase or sale should be considered in determining FMV if they influenced the price. These terms include any restrictions, understandings, or covenants limiting the use or disposition of the property.
Rate of increase or decrease in value. Unless you can show that there were unusual circumstances, it is assumed that the increase or decrease in the value of your donated property from your cost has been at a reasonable rate. For time adjustments, an appraiser may consider published price indexes for information on general price trends, building costs, commodity costs, securities, and works of art sold at auction in arm’s-length sales.
Example. Corey Brown bought a painting for $10,000. Thirteen months later, Corey gave it to an art museum, claiming a charitable deduction of $15,000 on their tax return. The appraisal of the painting should include information showing that there were unusual circumstances that justify a 50% increase in value for the 13 months Corey held the property.
Arm’s-length offer. An arm’s-length offer to buy the property close to the valuation date may help to prove its value if the person making the offer was willing and able to complete the transaction. To rely on an offer, you should be able to show proof of the offer and the specific amount to be paid. Offers to buy property other than the donated item will help to determine value if the other property is reasonably similar to the donated property.
Sales of Comparable Properties
The sales prices of properties similar to the donated property are often important in determining the FMV. The weight to be given to each sale depends on the following.
- The degree of similarity between the property sold and the donated property.
- The time of the sale—whether it was close to the valuation date.
- The circumstances of the sale—whether it was at arm’s-length with a knowledgeable buyer and seller, with neither having to act.
- The conditions of the market in which the sale was made—whether unusually inflated or deflated.
The comparable sales method of valuing real estate is explained later under Valuation of Various Kinds of Property.
Example 1. Quinn Black, who is not a book dealer, paid a promoter $10,000 for 500 copies of a single edition of a modern translation of a religious book. The promoter had claimed that the price was considerably less than the “retail” price and gave Quinn a statement that the books had a total retail value of $30,000. The promoter advised that if Quinn kept the books for more than 1 year and then gave them to a qualified organization, Quinn could claim a charitable deduction for the “retail” price of $30,000. Thirteen months later, all the books were given to a house of worship from a list provided by the promoter. At the time of the donation, wholesale dealers were selling similar quantities of books to the general public for $10,000. The FMV of the books is $10,000, the price at which similar quantities of books were being sold to others at the time of the contribution.
Example 2. The facts are the same as in Example 1, except that the promoter gave Quinn Black a second option. The promoter said that if Quinn wanted a charitable deduction within 1 year of the purchase, Quinn could buy the 500 books at the “retail” price of $30,000, paying only $10,000 in cash and giving a promissory note for the remaining $20,000. The principal and interest on the note would not be due for 12 years. According to the promoter, Quinn could then, within 1 year of the purchase, give the books to a qualified organization and claim the full $30,000 retail price as a charitable contribution. Quinn purchased the books under the second option and, 3 months later, gave them to a house of worship, which will use the books for religious purposes. At the time of the gift, the promoter was selling similar lots of books for either $10,000 or $30,000. The difference between the two prices was solely at the discretion of the buyer. The promoter was a willing seller for $10,000. Therefore, the value of Quinn’s contribution of the books is $10,000, the amount at which similar lots of books could be purchased from the promoter by members of the general public.
Replacement Cost
The cost of buying, building, or manufacturing property similar to the donated item may be considered in determining FMV. However, there must be a reasonable relationship between the replacement cost and the FMV.
The replacement cost is the amount it would cost to replace the donated item on the valuation date. In most cases, there is no relationship between the replacement cost and the FMV. If the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important.
To determine the replacement cost of the donated property, find the “estimated replacement cost new.” Then subtract from this figure an amount for depreciation due to the physical condition and obsolescence of the donated property. You should be able to show the relationship between the depreciated replacement cost and the FMV, as well as how you arrived at the “estimated replacement cost new.”
Opinions of Professional Appraisers
Generally, the weight given to a professional appraiser’s opinion on matters such as the authenticity of a coin or a work of art, or the most profitable and best use of a piece of real estate, depends on the knowledge and competence of the professional appraiser and the thoroughness with which the opinion is supported by experience and facts. For a professional appraiser’s opinion to deserve much weight, the facts must support the opinion. For additional information, see Appraisal, later.