What Is Fair Market Value?When put in simple terms, fair market value (FMV) is the price that an asset would sell for in the open market.The fair market value represents the price of an asset under the following conditions -prospective buyers and sellers have reasonable knowledge about the asset, so they will behave in their own best interest, instead of unnecessary pressure to trade, and given a reasonable time period for completing the transaction.With these conditions, the fair market value of an asset should represent an accurate valuation or assessment of its worth.Mainly in tax law and the real estate market, this term is used.Understanding Fair Market Value (FMV)The term, fair market value, considers the economic principles of free and open market activity and it should not be confused with similar terms like market value or appraised value.The term, market value refers to the price of an asset in the marketplace.
Hence a home’s market value can easily be found on a listing, it is not easy to determine the fair market value.The term, appraised value refers to an asset’s value in the opinion of a single appraiser, so it does not immediately qualify the appraisal as fair market value.
An appraisal will usually suffice, in cases where a fair market value is needed.Fair market value, is often used in legal settings because of the thorough considerations made by the term.In the real estate market, the term fair market value is commonly used in divorce settlements and to calculate compensation related to the government’s use of eminent domain.Fair market values are also used in taxation like after a casualty loss it is used to determine the fair market value of a property for a tax deduction.Where is Fair Market Value (FMV) used?Depending on the FMV of the owner’s property the municipal property taxes are often assessed.Depending on the duration for which the owner has owned the home, the difference between the purchase price and the residence’s FMV can be considerable.To determine a home’s FMV professional appraisers use standards, guidelines, and national and local regulations.In the insurance industry also FMV is used.
For example, if in a case of a car accident when an insurance claim is made, the insurance company covering the damage to the owner’s vehicle usually covers damages up to the vehicle’s FMV.Fair Market Value (FMV) and TaxationTax authorities worldwide are continuously ensuring that transactions are realized at FMV, at least for tax purposes.For instance, a retiring father 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.But, if the FMV of the shares is higher, tax authorities such as the Internal Revenue Service (IRS) for tax purposes may characterize the transaction anew, and the father will need to pay taxes on the disposition of the shares in the same way if he had sold them at FMV to a third party.Donation of property, such as artwork to charities is another field of taxation where FMV regularly comes into play.The donor usually receives a tax credit in these cases, for the value of the donation.
Tax authorities would often ask donors to provide independent valuations for their donations just to ensure that the credit given is for the true FMV of the object.As the fair market value of an item that you buy or sell can have a large impact on your finances hence it is important to assess.If the fair market value to taxes correctly applied it ensures that there won’t be adverse monetary implications at a later stage or any claims of fraud by authorities.ConclusionA price an asset would sell for on the open market when certain conditions are met is called the fair market value.The conditions being: the parties involved should be aware of all the facts are acting in their own interest, do not have any pressure to buy or sell, and are not short on time to make the decision.A Fair market value is not the same as market value and appraised value.
The two areas that commonly use fair market value are tax settings and the real estate market.Fair market value, is used by the insurance companies to determine claim payouts.https://www.compareclosing.com/blog/about-fair-market-value-fmv/