Fair Market Value
What does fair market value mean?
Updated March 11, 2022
Fair market value is the price a product or property would reasonably sell for on the open market when prospective buyers are acting in their own interest, are given enough time to complete the transaction and are properly informed about the product. The fair market value of an asset should match an assessment of its worth.
Fair market value is a term most commonly used when discussing real estate and tax law, but it can also be used in salary negotiations, by insurance companies or during the sale of businesses.
There are four conditions that need to be met in order to assess fair market value of a property.
- First, the property must have been recently bought or sold in order to obtain a starting price point.
- Secondly, the sale prices of comparable properties are compiled in order to better assess its value.
- Then the cost of replacing the property should be identified, especially for tax purposes.
- And finally, utilizing an expert opinion to determine the professional estimation of value should be factored into the creation of a property’s fair market value.
The term “market value” differs from fair market value because it is the price of a product in the market without the consideration of the conditions that make the price “fair.” The market value of a home, for example, can simply be found on the listing. Fair market value can be more challenging to calculate.
Photo: Syed Hussaini / Unsplash
The term “appraised value” is also different from fair market value because it is the value of an asset based solely on the opinion of one appraiser, which doesn’t meet the condition of it being “fair.”
In real estate, a fair market value can be a very nuanced process that doesn’t have a simple, straightforward formula. Due to supply and demand, the fair market value of a property may depend greatly on what the buyer and seller believe it’s worth. Both parties must be willing to agree upon the property’s value based upon current market trends and their knowledge of the property. A rough estimate of price per square foot should be calculated by looking at comparables and the professional appraiser’s valuation.
Fair Market Value and Taxes
Property taxes are often determined by the fair market value of an owner’s home, which can greatly differ from the purchase price. In this instance, national and local regulations as well as appraisal guidelines are used to determine the fair market value.
Tax authorities also utilize fair market value to assess the price of an asset donated to charity that warrants a tax credit. In this case, the asset’s desirability and scarcity should also be considered when assessing fair market value. That tax credit is based on the fair market value for the object. Incorrect value assessments for tax purposes can lead to fraud claims by the IRS.
Insurance agencies use fair market value to determine the coverage of a property loss when an insurance claim is made. For example, after a car accident, the insurance company will cover the cost of damages to the vehicle up to its fair market value.
Employing the services of an experienced financial advisor can be helpful for individuals looking to assess the fair market value of real estate, a business or an item for tax purposes.