Fair market value is the measure of the worth of an asset or business. It is the price at which the buyer is willing to pay and the seller is willing to sell. FMV is different from market value and appraised value.
We will cover the following:
- What is Fair Market Value?
- How to Determine Fair Market Value?
- Where is Fair Market Value Used for?
- Summary
What is Fair Market Value? 🤔
The fair market value is the price at which the product would change hands between a willing buyer and a willing seller, neither being under any compulsion to sell or buy and both having reasonable knowledge of the same facts. According to the IRS, it is the price that the product would sell for on the open market that would be agreed upon between a willing buyer and a willing seller. Neither would be required to act and have reasonable knowledge of the relevant facts.
When determining the value of public company stock, you can quickly see the price of shares online on the open market. However, it isn’t possible with private companies. Those companies must first determine the fair market value of their common stock before checking it online.
Fair market value is mostly used in real estate and tax matters, but it is also used in salary negotiations, business sales, and many other transactions, which attach with a price that seems reasonable to the concerned persons.
Fair market value is used whenever an item is bought, sold, or donate and has tax issues. The most common examples are:
- Buying or selling your product, other real estate related matters, personal property, or business property
- Establishing values of other company assets like inventory
- Valuing charitable donations of personal goods and property like automobiles or electronics
- Valuing the exchange of services, business ownership transfers, or assets in an estate of a deceased taxpayer
How to Determine Fair Market Value? 🧐
There are four methods to determine fair market value:
- Selling Price
If the product has been recently bought or sold then that can be a good indicator of its fair market value. - Sales of Comparable Products
When a real estate agent presents a prospective house seller with a list of the recent sales prices of nearby houses, that’s called comparable. A way of determining fair market value. - Replacement Cost
This may come into play when resolving an insurance claim as well as preparing for a tax return. It refers to what it would cost to buy or build a similar asset or property or product, whatever it is. - Expert Opinion
When you hire a professional appraiser to give you a value on a piece of asset, the resulting figure will be the fair market value in the expert’s opinion.
Where is Fair Market Value Used for? 🙄
However, fair market value is mostly involving in buying and selling assets or property, there are plenty of places where it is used of.
- Real Estate
Determining the fair market value of your product can be valuable in terms of your ability to sell your product and understand where to improve to get an estimated value. Hence it is crucial to understand the value of your product before you decide to sell so that you can make the appropriate improvements to your product if you want to sell for a high cost.
- Taxes
It is valuable to know the fair market value of your house because municipal property tax is usually based on the FMV of a property. If you own your property or product for a long time and the FMV has gone up, your taxes might be a lot higher than they were when you buy it. The value of your property can also impact various things such as gift tax, estate tax, tax credit, and tax deductions after a casualty loss.
For example, if you plan to gift your property or include it in an inheritance, then the person who gets your property will have to pay taxes on the fair market value of the property. If the person chooses to sell the property and gets more for it than the value at which it was assessed in the inheritance, then they will have to pay capital gain tax on the difference between the fair market value and the sales price.
This also applies to assets and business too.
- Insurance
Fair market value can impact things like insurance claims made when your property is harmed. When calculating your insurance cost per month, the appraisal will be used to calculate the fair market value of the property. Then the insurance company will take into account any liabilities included in the property to determine the coverage and cost of the insurance.
For example, if your property or product is caught in some disaster and it has been evaluated below fair market value, you may not receive the appropriate compensation for your belongings.
- Investment Assets
Knowing the fair market value of your investments like stocks and bonds can be valuable when it comes to managing your financial life.
For example, when you are looking to invest in any product, you should understand the value of the product as well as the asking price on the market. If you are looking at purchasing several shares of a stock but it has recently gone up in price and will not likely continue to increase then the market value for that day is a lot higher than the fair market value. Therefore, it isn’t likely to be a good purchase for you.
Summary
The fair market value is the price at which a property or product or business would change hands between a willing buyer and a willing seller, neither being under any compulsion to sell or buy and both having reasonable knowledge of the same facts.
It is widely used in many finance-related areas, especially in tax matters and real estate deals. But it is also used by auction products and in online for-sale postings. The idea is simple enough, depending on circumstances different sources and tools for estimating fair market value may produce widely varying numbers.
So what do you think about Fair Market Value (FMV), do share it with us at LeadMine.
