What Is Fair Market Value?
One of the most common questions that arise while clients review their appraisal is, “What is fair market value?” It is commonly misunderstood as the price that someone paid for an item initially, but that isn’t true. It is important to note that fair market value (FMV) is much different than market value. If you are thinking about utilizing deconstruction, it can be helpful to fully understand the full meaning of FMV so you can completely understand your appraisal report.
Fair Market Value Defined
The IRS definition of 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.”
The conditions surround the circumstances of the sale rather than the item itself. This includes the knowledge and power of buyer and seller are the same. They both fully understand the item, are not acting under duress, and are acting in their own personal interest.
For example, if you have someone who is selling water, someone who is dying of thirst would pay a much more inflated price compared to someone who wasn’t under time pressure to become hydrated. The inflated price would not be considered FMV.
When Is FMV Used in Deconstruction?
When items are donated to a registered 501(c)(3) non-profit organization, you can receive a tax deduction for the fair market value of that item. It seems simple enough! However, in deconstruction, you can have a lot of different building materials, personal items, appliances, and much more that you need to donate in one transaction. That is when your appraisal report comes in handy.
When the building (commercial or residential) is deconstructed, the non-profit will create a list of all the items and materials donated, including the items’ quantity, quality, and condition. The personal property appraisers have specific knowledge and experience to research and determine the FMV of that donation.
Once you have your appraisal report, you can submit it along with the required IRS forms. You will then be able to receive a tax deduction for the donated materials’ fair market value.