The IRS defines Fair Market Value (FMV) as 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. (Source: IRS Publication 561)

FMV is the standard the IRS uses to determine that the value of an item you sold or donated is valued correctly for income tax purposes. If the IRS determines that your opinion of the FMV for an item is wrong, you’re not only subject to more tax but you could also incur penalties.

Fair Market Value is used whenever an item is bought, sold or donated that has tax consequences. Examples include:

  • Buying or selling a home or other real estate
  • Buying or selling personal property
  • Buying or selling business property
  • Establishing the value of a business’s assets like inventory
  • Valuing non-cash donations of goods or property
  • Valuing transfer of ownership of a business
  • Valuing the assets of a deceased tax payer

Once you’ve determined Fair Market Value, here’s how you can defend it:

    1. Document your non-cash donations. Ensure your donated items are in good (or better) condition. Properly document the items donated and ask for a receipt.
    2. Donate capital items to the right charities. If you donate a car, you can use the FMV only if the charity will use the item you donated themselves or will provide it to someone that will use it. If the charity resells the vehicle, the FMV will be limited to what the charity received when they sold it.
    3. Get an appraisal from an independent appraiser. The appraisal will still be open to interpretation by the IRS, but it can be a solid basis for defending any differences between your valuation and the FMV determined by the IRS.
    4. Keep copies of similar items and transactions. If you have a copy of an ad for an item similar to the one you sold, this can help to support your FMV claim. This is especially important if you barter goods or services.
    5. Take photos of your item. The item’s condition is a key element in establishing its FMV so visual documentation of its condition can be used to support your FMV claim.
    6. Keep good records. This includes invoices for major purchases and bills for any improvements. If you sell your property, be sure you keep a dated bill of sale that clearly states the transfer of ownership and the amount paid for the item.

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