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. Write-Up

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

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

    Assessed value is the dollar value assigned to a property for ...
  4. Nonaccrual Loan

    A nonperforming loan that is not generating the stated interest ...
  5. Form 8282: Donee Information Return

    An IRS tax form used by organizations to report the sale or disposition ...
  6. Personal Use Property

    A type of property that an individual does not use for business ...
Related Articles
  1. Retirement

    Preparing For Retirement Plan RMD Season

    Paying taxes is inevitable - that's why you need to learn about the rules for required minimum distributions.
  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. Retirement

    Tax Savings with a Roth IRA and Real Estate

    Combining a Roth IRA with an investment in a real estate limited partnership can decrease taxes.
  4. Retirement

    Avoiding Mistakes In Required Minimum Distributions (RMD)

    If you don't calculate your required minimum distributions accurately, you might have to pay an excise tax.
  5. Taxes

    Explaining Fair Market Value

    Fair market value is the price at which a buyer and seller are willing to exchange a good.
  6. 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.
  7. 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.
  8. Managing Wealth

    It Is Better To Give AND Receive

    You give to benefit others, but there can be perks for you too.
  9. Insurance

    Using Life Insurance To Make Charitable Donations

    Your life insurance policy can be a great tool for charitable giving. Find out how.
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 >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center