Definition of Fair Market Value for charitable donations

Definition of Fair Market Value for Charitable Donations

Charitable giving provides a justified reward for people seeking to donate. But with many different methods of donating, countless charitable organizations to donate to, and the need for accurate tax report filing, the crux of charitable donations often lies in the fair market value.

Qualifying Organizations for Charitable Donation Tax Deductions

Charitable donations may include virtually anything that is capable of substantiated value being assigned to it. A charitable contribution could be donated money (for example, cash or securities), goods, services, clothes, and even deconstructed building materials. However, in order for a tax payer to write off their contribution, their donation must be made to a qualified organization, as mandated by the IRS. In other words, tax payers cannot claim tax deductions for contributions made to “to specific individuals, political organizations, and candidates.” 

Typically, the only types of institutions which make your contributions eligible for tax deductions are nonprofits. Still, not all nonprofits qualify since the IRS requires the recipient of your donation to be classified as religious, educational, literary, charitable, or scientific, and thereby qualifying as a 501(c)(3).

What Is Fair Market Value?

Once you have validated and confirmed the entity is a qualified organization with the help of the IRS’ charity search tool or a tax consultant, the next step is figuring out the fair market value.

You must calculate the fair market value of your charitable donation—on the date you make your contribution—in order to establish the amount you may deduct on your tax return. The fair market value of your contribution is the price that property or asset would sell for on the open market. 

For example, it is how much a free-willed buyer would pay for an item or asset from a free-willed seller in an unrestricted market featuring natural competition and free access amongst merchants and consumers. An open market also assumes both parties involved in the transaction have sufficient knowledge about the item being bought and sold. The fair market value must also account for any restrictions placed on the item or asset, preventing the seller from receiving full value from the sale when the buyer could not actually leverage or benefit from the value or potential of the item or asset.

What Factors Determine Fair Market Value?

There are a number of factors considered as part of determining fair market value, including the cost or selling price of the item, the cost of comparable items or properties, the cost to replace the asset, and the opinions of relevant subject matter experts. Among the most significant distinctions for assigning accurate fair market value to your charitable donations is the age and condition. For example, if you bought a vehicle for $15,000 10 years ago, you could not sell it for $14,000 today due to depreciation starting as soon as the vehicle leaves the manufacturer, and the actual value would be significantly less today. With that, people do make significant upgrades and improvements to their contributions, which actually can increase value. This underlines the importance of having a qualified appraiser assist with valuing more significant items.

The point of tax deductions for charitable contributions is not to make a profit. Not everyone can afford to completely forgo any type of financial compensation, donating something without receiving any type of benefit beyond emotional or societal reward. Tax deductions provide a critical incentive for many, helping ensure nonprofits and qualified organizations receive the funding and support they need to carry on their mission.

To speak to a qualified appraiser about the fair market value of your property, contact Green Donation Consultants. Call (800) 870-3965 for more information