What Is a Property's Fair Market Value According to the IRS?

The fair market value of property is supposed to be the price that would be agreed to by a willing buyer and a willing seller knowing all the relevant facts about the property. Since this is often a hypothetical consideration, the Internal Revenue Service (IRS) has described various factors that can be applied to determine fair market value for particular types of property.

Cost or Selling Price

• The most objective factor in determining fair market value is the actual cost or selling price of the property. Of course, this is only reflective of the actual fair market value at the time of donation if the benchmark transaction occurred near the time of the donation and in an arm's-length transaction between a willing buyer and willing seller. Additionally, the property should be in the same condition as the benchmark transaction and there should not have been any change in the market, including preference for particular styles or makes, since the transaction.

Comparable Properties

• Valuation based on the sale of comparable properties is similar to valuation by cost or selling price, but it is assumed the properties will not necessarily be identical. This valuation method can be used when the properties are reasonably similar, with the value of the donated property adjusted according to the degree of similarity to the sold property. As with direct valuation by cost or selling price, the weight of this approach depends on the nature of the transaction.

Replacement Cost

• The cost of building or purchasing a replacement for the property can be considered in calculating fair market value if there is a reasonable relationship between the replacement cost and fair market value. It is rare that replacement cost is a relevant consideration, but if it is, it must be discounted for depreciation in value of the donated property due to physical condition or obsolescence.

Expert Opinion

• The opinion of learned experts is generally only relevant to fair market value in relation to property whose value is generally dependent on expert knowledge. This can include property that requires authentication, such as rare coins or collectibles, or the best use of the property, such as in real estate or art. The expert opinion must be supported by facts about the piece and the relevant market.

Deductions of More Than $500

• If you deduct more than $500 for an item of clothing or a household good, you must obtain qualified appraisal. Generally, these items depreciate significantly in value after purchase and it is difficult to obtain comparable sales data. Similarly, jewelry is of a nature that individualized appraisal by a qualified expert is always necessary. Deductions for art of $20,000 or more must be accompanied by an appraisal.