Loading the player...

What is 'Fair Market Value'

Fair market value (FMV) is, in its simplest expression, the price that a person reasonable interested in buying a given asset would pay to a person reasonably interested in selling it for the purchase of the asset or asset would fetch in the marketplace. To establish FMV, it must be assumed that prospective buyers and sellers are reasonably knowledgeable about the asset, that they are behaving in their own best interests, that they are free of undue pressure to trade and that a reasonable time period is given for completing the transaction.

BREAKING DOWN 'Fair Market Value'

Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.

Practical Uses of FMV

The concept of FMV is widely used across many areas of commerce. For example, municipal property taxes are often assessed based on the FMV of the owner's property. Depending on how long the owner has owned the home, the difference between the purchase price and the residence's FMV can be substantial. Professional appraisers use standards, guidelines, and national and local regulations to determine a home's FMV.

FMV is also often used in the insurance industry. For example, when an insurance claim is made as a result of a car accident, the insurance company covering the damage to the owner's vehicle usually covers damages up to the vehicle's FMV.

FMV and Taxation

Worldwide tax authorities are always ensuring that transactions, especially those made between people not dealing at arm's length, are realized at FMV, at least for tax purposes. For example, a father who is retiring may sell the shares of his business to his daughter for $1 so that she can carry on as the owner of the family business. However, if the FMV of the shares is higher, tax authorities such as the Internal Revenue Service (IRS) may well recharacterize the transaction for tax purposes, and the father will need to pay taxes on the disposition of the shares as though he had sold them at FMV to a third party.

Another field of taxation where FMV regularly comes into play is the donation of property, such as artwork, to charities. In these cases, the donor usually receives a tax credit for the value of the donation. Tax authorities need to ensure that the credit given is for the true FMV of the object and often ask donors to provide independent valuations for their donations.

RELATED TERMS
  1. IRS Publication 561: Determining ...

    A document published by the Internal Revenue Service (IRS) that ...
  2. Write-Up

    An increase made to the book value of an asset, because its carrying ...
  3. Property Tax

    A tax assessed on real estate by the local government. The tax ...
  4. Assessed Value

    The dollar value assigned to a property for purposes of measuring ...
  5. Tax Base

    The assessed value of a set of assets, investments or income ...
  6. Wealth Tax

    It is a tax based on the market value of assets that are owned. ...
Related Articles
  1. Taxes

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  2. Taxes

    Trade Properties To Keep The Taxman At Bay

    Like-kind exchanges can mean a much lower tax bill on real estate for savvy investors.
  3. Investing

    Your Property Tax Assessment: What Does It Mean?

    The amount of a property tax bill is based on the property’s value, the exemptions it qualifies for, its use and the local property tax rate.
  4. Investing

    Your Property Tax Assessment: What Does It Mean?

    Property taxes are a primary source of revenue for governments, and they’re a big expense for homeowners. They can vary widely depending on where you live.
  5. Financial Advisor

    How to Value Art and Dodge the IRS on Death Taxes

    Appraising artwork can be a very inexact process, and an estate could face penalties from the IRS for undervalued works. Here's how to best price art.
  6. Taxes

    'Tis the Season to Donate Your Way to Lower Taxes

    Holiday season is the traditional time to donate to charity. Here are some ways to help maximize tax relief from charitable donations.
  7. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  8. Financial Advisor

    How to Grow Your Business with Donation Strategies

    Advisors who offer clients expertise in how to charitably donate will likely build a stronger practice and capture more business. Here's why.
  9. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  10. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
RELATED FAQS
  1. How is market value determined in the real estate market?

    Learn how fair market value is determined during a real estate appraisal and how market values are really decided by professional ... Read Answer >>
  2. How are real estate taxes calculated?

    Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ... Read Answer >>
  3. How is a deferred tax asset taxed?

    Find out how the IRS and FASB treat deferred tax assets, which a company can recognize in order to reduce its future tax ... Read Answer >>
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center