Methods Used to Determine Fair Market Value

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Sometimes you need to know how much an item is worth when it doesn’t have a set price. This is commonly needed when you are trying to determine the value of donated property for your taxes. The IRS allows you to deduct the fair market value of the property, which is the price that the property would sell for in a fair sale between a knowledgeable buyer and seller. Since determining the fair market value is not a matter of plugging numbers into a formula, the IRS has a list of accepted methods.

Selling Price

The selling price is the simplest method, though it is accurate only if the transaction takes place near the time the fair market value is needed. Selling price, according to the IRS, is the actual selling price of the property that is received by an organization. Because market conditions can change, selling price should be used only if the transaction is recent. If a company purchased new computers because it planned to hire new employees but then ended up downsizing shortly afterwards due to poor quarterly sales, they could donate the new computers for the value they paid for them.

Comparable Sales

Comparable sales is a frequently used method for determining the value of real estate. It uses sales of similar properties nearby and assumes an equivalent value of the property in question. For this method to be accurate, the properties should be very similar and the comparable sale needs to have taken place recently. It should also be a fair sale. For instance, foreclosure sales of similar properties are not accurate assessments of the value of a property not being sold at foreclosure.

This method is also useful for determining the value of a donated vehicle. Finding the average cost of cars with the same year, make and model that are in similar condition is a good way to estimate the fair market value of a used vehicle.

Replacement Cost

This method is often used with insurance companies. If the value of an item has changed over time, the cost of replacing the item for the same thing should be taken as an indicator of the fair market value. Hence, if you purchased a home for $200,000 and it burns down, rebuilding the same home may cost $250,000. The $250,000 figure is the fair market value using replacement cost; not the $200,000.

Opinions of Experts

For collectible items such as art and coins, you may want the opinion of an expert for what the fair market value of the property is. In using this method, you will want a true expert in the particular property you are having assessed, and not your neighbor or friend. You may want to have the expert give you a written appraisal of the item if you are citing the value for tax purposes.

This method is particularly useful when dealing with antiques or collectibles that are hard to place an accurate value on otherwise. For example, if a comic book shop were to donate a signed copy of a #1 issue of a popular comic book, an expert would be needed to determine a fair market value.

References

About the Author

James Rada, Jr. was a newspaper reporter for eight years and earned 23 awards from the Maryland Delaware D.C. Press Association, Associated Press, Society of Professional Journalists, Maryland State Teachers’ Association and CNHI. He also worked for 12 years as a marketing communications writer, earning a Print Copywriter of the Year Award from the Utah Ad Federation. He holds a Bachelor of Arts in communications.