561 Donations
Determining The Value of Donated Property
Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser
is necessary.
The appraiser must be thoroughly trained in the application of appraisal principles and theory. In some instances the opinions
of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions.
The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and
block number, as well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted
uses, and its potential use for other higher and better uses are also relevant.
In general, there are three main approaches to the valuation of real estate. An appraisal may require the combined use of two
or three methods rather than one method only.
1. Comparable Sales
The comparable sales method compares the donated property with several similar properties that have been sold. The selling
prices, after adjustments for differences in date of sale, size, condition, and location, would then indicate the
would then indicate the estimated estimated FMV of the donated property.
If the comparable sales method is used to determine the value of unimproved real property (land without significant
buildings, structures, or any other improvements that add to its value), the appraiser should consider the following factors
when comparing the potential comparable property and the donated property:
- Location, size, and zoning or use restrictions
- Accessibility and road frontage, and available utilities and water rights
- Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements, rights-of-way, leases, etc.,
- Soil characteristics, vegetative cover, and status of mineral rights
- Other factors affecting value.
For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the date of sale
and selling price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and the assessor’s appraised
FMV.
The comparable selling prices must be adjusted to account for differences between the sale property and the donated property. Because differences of
opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary for comparison purposes, an appraiser
should document each item of adjustment.
Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered as comparable to
the donated property.
2. Capitalization of Income
This method capitalizes the net income from the the donation of a property at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved. The key elements are the determination of the income to be capitalized and the rate of capitalization.
3. Replacement Cost New or Reproduction Cost Minus Observed Depreciation
This method, used alone, usually does not result in a determination of FMV. Instead, it generally tends to set the upper limit of value, particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not
pay more for the real estate than it would cost to reproduce a similar property. Of course, this reasoning does not apply if a similar property cannot be created because of location, unusual construction, or some other reason. Generally, this method serves to support the value determined from other methods. When the replacement cost method is applied to improved realty, the land and improvements are valued separately.
The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of square feet or cubic feet in the building. This cost represents the total cost of labor and material, overhead, and profit
After the replacement cost has been figured consideration must be given to the following
factors:
- Physical deterioration—the wear and tear on the building itself
- Functional obsolescence—usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms, or a poor floor plan
- Economic obsolescence—outside forces causing the whole area to become less desirable.
Interest in a Business
The FMV of any interest in a business, whether a sole proprietorship or a partnership, is the amount that a willing buyer would pay for the
interest to a willing seller after consideration of all relevant factors. The relevant factors to be considered in valuing the business are:
- The FMV of the assets of the business,
- The demonstrated earnings capacity of the business, based on a review of past and current earnings
- The other factors used in evaluating corporate stock, if they apply.
The value of the goodwill of the business should also be taken into consideration. You should keep complete financial and other information on which you base the valuation. This includes copies of reports of examinations of the business made by accountants, engineers, or any technical experts on or close to the valuation date.
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