What does “fair market value” mean?
Fair market value (FMV) is the price at which a good would be sold on the open market if both parties know enough about the item to make an informed decision, are acting in their own best interests, are not under any unnecessary pressure, and have a reasonable amount of time to complete the deal. If these things are true, then an asset’s fair market value should be a good reflection of how much it’s worth. In tax law, bankruptcy law, and the real estate market, this is the most common way to use the word.
How to Figure Out Fair Market Value (FMV)
The word “fair market value” is meant to be different from similar terms like “market value” or “appraised value” because it takes into account the economic principles of a free and open market. Market value, on the other hand, is the price at which an item can be bought in a market. This means that the market value of a home is easy to find on a website, but the fair market value is harder to find.
Similarly, “appraised value” refers to the value of an item based on the opinion of a single analyst. This does not immediately mean the assessment has “fair market value.” When you need to know what something is worth on the market, an evaluation is usually enough.
The word “fair market value” is often used in court situations because it takes a lot of things into account. For instance, the fair market value of a house is often used in divorce agreements and to figure out how much to pay people when the government takes their land through eminent domain.
Fair market values are also often used in taxes, like when figuring out the fair market value of a property to get a tax break after a loss due to a disaster.
How Fair Market Value (FMV) Can Be Used in Real Life
Most of the time, the FMV of the property is used to figure out the owner’s municipal property taxes.7 The gap between the buying price and the home’s FMV can be significant, depending on how long the owner has had the home. To find out a home’s FMV, professional analysts use rules, guides, and national and local laws.
FMV is also used a lot in the insurance business. For example, if someone files an insurance claim after a car accident, the insurance company usually pays up to the FMV of the damaged vehicle.
How to Tax and Fair Market Value (FMV)
For tax reasons, tax officials around the world always make sure that deals are done at fair market value (FMV). In this case, a retired dad might give his daughter one share of his business for one dollar so she can run the family business.
Let’s say, though, that the FMV of the shares is higher. In that case, tax officials like the Internal Revenue Service (IRS) might change how the trade is taxed. When the dad sells the shares, he’ll have to pay taxes on them as if he had sold them to someone else at their fair market value.
Another area of tax where FMV is often used is when people give things to charity, like art. When this happens, the donor generally gets a tax return for how much they gave. The tax office has to ensure that the credit given is for the actual fair market value (FMV) of the item, and they often ask donors to share their gifts with independent estimates. If you correctly apply fair market value to your taxes, there won’t be any harmful financial effects or claims of fraud by the government in the future.
How do I figure out the fair market value?
There are several ways to judge rather than measure fair market value. The first way is to look at how much the item sold for, a list of sales for items that are similar to the one being sold, or the advice of an expert. For instance, a diamond expert would probably be able to tell what kind of ring it is and how much it’s worth based on their experience.
How do I determine how much my house is worth on the market?
Professional appraisers look at homes and tell you what their fair market value is by using rules, standards, and national and local laws to figure it out.
How can I determine how much my car is worth on the market?
You can find the Kelley Blue Book online. It can help you figure out how much your car is worth on the market by looking at information like its trade-in value, its private party value, and other data.
Conclusion
- If certain conditions are met, an item’s fair market value is the amount it would fetch on the open market.
- The people involved know all the facts, are acting in their own best interests, are not under any pressure to buy or sell, and have plenty of time to make up their minds.
- What is fair market value? It’s not the same as market value or assessed value.
- People often use “fair market value” in tax settings and the real estate market.
- When deciding how much to pay out on specific claims, insurance companies look at the fair market value.
