Determining the value of donated property is imperative, both for tax purposes and possible resale. This valuation leads to a number known as Fair Market Value. Fair Market Value, or the price that property would sell for on the open market, is determined using a variety of methods. Furthermore, each method has caveats and adjustments for different circumstances. There are so many factors involved in finding the proper value of donated property. Therefore, it is important to hire someone who knows exactly what they are doing.
Four Keys to Determining the Value of Donated Property
There are four key points to determining the value of donated property. These include the cost or selling price, the sales of comparable properties, replacement cost numbers, and the opinions of experts who evaluate the property. Therefore, let’s break down each of these important points.
1. Cost/Selling Price
First of all, the cost or selling price of a donated property can be a good indicator of value depending on a variety of factors:
● To use information tied to the sale date, the transaction must have occurred within a short time of the valuation or donation date. For example, the sale price of a property three years ago is not a good indicator of the current value. The sale of the property must be recent.
● The sale must have occurred at “arm’s length.”
● Both the buyer and the seller must be knowledgeable about the property and the sale.
● Finally, the sale must not need any action on the part of the buyer or seller.
2. Sales of Comparable Properties
Furthermore, the sale of similar properties can be helpful in determining the value of donated property. The validity of such comparisons can change depending on:
● The degree of similarity between properties
● The time of sale (is it close to the donation/valuation date?)
● Circumstances of the sale (was it at arm’s length, were buyers and sellers knowledgeable, was any action required on the part of buyer or seller?)
● The conditions of the market (was it unusually inflated or deflated?)
3. Replacement Cost
Replacement cost is the cost of buying, building, or manufacturing property similar to the current property. The most accurate way to use replacement cost to determine value is to look at the “estimated replacement cost new.” Furthermore, this number is then reduced by the appropriate amount of depreciation to reflect the current condition of the property.
4. Opinions of Experts
Finally, to assist in valuing a property, an appraiser or expert must be knowledgeable and competent and provide a thorough opinion supported by facts and experience.
According to IRS Publication 561, it is necessary to obtain a valid expert opinion. This means you need a detailed appraisal by a qualified professional appraiser. Choose only someone who has a good history of appraisals and holds professional designations. Hence, this can help ensure the satisfaction of all qualifications of the IRS.
The appraisal itself must include:
● An educated valuation of the property
● A thorough description of the property
● The zoning for the property
● The property uses and its potential for higher use
An appraiser uses three methods for determining the value of donated property:
● Comparable sales – adjusted for differences in condition, date of sale, and location
● Capitalization of income if it applies
● Finally, replacement cost – Replacement cost new or reproduction cost minus observed depreciation.
Each of these methods of determining the value of donated property provides an accurate value of the donated property. Therefore, by using this information, an experienced appraiser can determine the Fair Market Value.
The Complications of Valuation
Hence, determining the value of a donated property is not for the faint of heart, and certainly not for the inexperienced. Therefore, you need a company like Global Valuation & Consulting, Inc. to provide an expert opinion when your corporation receives donated property. It is critical to hire a company with a strong history of valuing similar properties in similar situations. Otherwise, you run the risk of a lower valuation than the property deserves. Most of all, that creates a negative outcome for all parties involved.
Global Valuation’s appraisers have completed several appraisals of property donated to government land trusts for conservation. Our expert team completes every appraisal with qualified appraisers. Also, our appraisers each meet the standards set out in IRS Publication 561. In addition, our appraisers have professional appraisal designations from the American Society of Appraisers (ASA), The Appraisal Foundation (TAF) and the Royal Institute of Chartered Surveyors (RICS).
In conclusion, we can help you navigate the complicated road of valuation. Do you have more questions about determining the value of donated property? Do you have specific questions to ask about the process? Contact our friendly experts at Global Valuation today. Call (770) 988-4498.