Definition

• The IRS defines fair market value as the price you would get for the property if you sold it on the open market. The fair market value is based on the assumption that both parties are willing to make the deal and are aware of all the facts about the property. If you place any restrictions on how the property may be used, your determination of fair market value must consider the restrictions.
  
  

Considerations

• If you donate an item shortly after its purchase, your cost may be a good indicator of its fair market value. Similarly, if the organization receiving your donation sells the item soon after the donation, their selling price may determine fair market value. Other factors to consider include sales of similar items, the replacement cost of the property and expert opinion. You may need to depreciate the value based on the physical condition of the item.
  
  

Possible Problems

• Set the fair market value based on the property's value at the time of your donation. You may not consider unexpected events that increase the property's value after your gift was made, nor rely on past trends to predict future value. If you rely on sales of similar items to determine fair market value, you must select items with a high degree of similarity for the comparison and you must take any unusual market conditions into account.
  
  

Appraisals

• The IRS requires an appraisal for most deductions of $5,000 or more. Exceptions to this rule include business inventory, stock worth $10,000 or less that is not publicly traded, some types of intellectual property and a vehicle that you have valued based on income from its sale. You must also submit an appraisal if you deduct over $500 for a single clothing or household item when the item is not in good used condition or better.
  
  

Penalties

• The IRS may assess a penalty if you overstate the value of your donated property and, because of the overstatement, underpaid your taxes by more than $5,000. The penalty is 20 percent if you claim a value that is 150 percent or more of the correct value and 40 percent if your claim is 200 percent or more of the correct value. The penalty applies only to the underpaid tax caused by your overstatement of value.