Fair Market Value

Aug 07, 2022 By Susan Kelly

FMV, in its simplest form, is the price an asset will sell for on the open marketplace. The price at which an asset would sell given the following circumstances is considered fair market value. Both buyers and sellers have a decent level of information about the item. They are willing to act in their best interests. They also need to be free from undue pressure and allowed to complete the transaction within a reasonable time. These conditions should ensure that an asset's fair value accurately evaluates its worth. This term is used frequently in tax law and real estate markets.

Understanding FMV

Because it considers the economic principles of open and free market activity, fair market value is deliberately distinct from other terms like market value or appraised. On the other hand, market value refers to an asset's price in the marketplace. The fair market value of a home is harder to determine than its market value.

The appraised value also refers to the asset's worth in one appraiser's opinion. This does not automatically make the appraisal fair market value. An appraisal is usually sufficient in cases where fair market value is required. Because of the extensive considerations that go into the term fair market value, it is often used in legal contexts. Fair market value in real property is used to determine compensation for the government's use of the eminent domain. Fair market values are often used in taxation. For example, when determining the fair value of a property, claim a tax deduction for casualty losses.

Practical Uses for FMV

The FMV of an owner's property is often used to calculate municipal property taxes. The difference between the purchase price of a home and its FMV may be significant depending on the length of ownership. To determine the home's FMV, professional appraisers apply standards and guidelines and national and local regulations. Insurance companies often use FMV. When an insurance claim is filed due to a car accident, it usually covers the damages up to the FMV of the owner's vehicle.

FMV and Taxation

The FMV is the minimum tax rate that tax authorities worldwide must realize transactions. A father may decide to sell his shares in his business to his child for $1, so he can continue as the owner of his family business. But, let's say that the FMV of shares is higher. Tax authorities IRS, may recharacterize the transaction for tax purposes.

FMV is also used in taxation to donate property such as artwork to charities. The donor receives a tax credit equal to the donation's value. The credit must be for the FMV of the object. Tax authorities often request independent valuations from donors for donations. The fair market value applied to taxes correctly will ensure no adverse monetary consequences later or claims of fraud.

Assessment of Fair Market Value: Challenges

There are many ways to determine fair market value. If you buy a car from someone who had to sell it quickly due to an imminent job transfer, the fair market value may be much lower than what you paid. You may be eligible for a deduction if you later donate the car to charity.

Similar to the previous sales of similar properties, a real agent's accuracy in estimating comparables depends on their use of these comparable properties. To accurately estimate replacement costs, it is important to account for depreciation. An appraiser's estimation of fair market value can only be as accurate as their expertise and the quality of the information.

Eminent domain is another area in which fair market value is not often relevant because the person who loses their property is subject to compulsion. Unique items, such as art or handmade, can be difficult to determine fair market value because there may not be any comparables. The tricky science of forecasting the future is often used when valuing businesses. Because the value of a business today could depend on its cash flow in the future, it can be difficult to determine the future value. Fair market value is only an estimate.

Fair market value should not be confused with market value or intrinsic value. The intent of determining market value is to sell an asset and then complete the transaction. The fair market value is more hypothetical, and a sale or change in ownership is not always expected.

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