You might have a generous heart, willing and able to support those in need. Perhaps you have items cluttering your home and want to donate them to create space. You gift money to your loved ones at the end of the year. Or, maybe tax deductions are the impetus for your philanthropic efforts.
The Internal Revenue Service often depends on the value attached to your financial transactions to assess tax liability. Therefore, it’s good to have a general understanding of what fair market value is and how it’s determined.
Figure out how much someone else would pay
When you think about an item’s fair market value, consider the amount of money you could get for your property on the open market. In other words, buyers and sellers might reach an agreement based on factors like:
- Sale price
- Expert opinions
- Replacement cost
- The price paid for comparable property
It seems simple enough, right? The problem, however, is that there aren’t necessarily set methods, rules or formulas for determining something’s value.
Real-life application
The concept of fair market value can apply in multiple scenarios. For example:
- Do you want to use your donated items as tax write-offs?
- Are you considering giving substantial amounts of money to your children?
- Would you offer real estate at a reduced price due to known problems?
You might determine the fair market value of your assets while negotiating the terms of a divorce, eminent domain situations or blockchain transactions.
Due to the complex nature of these decisions, experienced legal counsel can help you protect your interests while acting according to what the IRS deems fair.