IRS Definition of Fair Market Value (FMV)
Fair Market Value (FMV) is an important concept in the valuation and exchange of real property. Fair market value is used to determine the dollar value of charitable donations, assets converted to business use, and various other tax-related matters.
Because of the consequences of FMV, the overarching definition comes from the IRS Publication 561: Fair Market Value is the price that property would sell for on the open market.
It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.
The concept of fair market value exists within a specific period of time for the transaction to occur. The FMV may change if the time period for the transaction changes. The fair market value of property is then a fair valuation or assessment of its worth.
Fair Market Value vs Intrinsic Value
Thus, FMV is an estimate of the market value of property based on what an educated, willing and unpressured buyer and seller, each behaving in their own best interest, could agree on. An estimate of fair market value can be based on either precedent or extrapolation. FMV differs from intrinsic value in that intrinsic value is actual value of a property or asset based on analytical techniques and underlying perceptions of its tangible and intangible factors.
Intrinsic value may or may not be the same as the current market value. For instance, investors analyze securities in the hopes of finding investments where the true or intrinsic value of the investment exceeds its current or fair market value.
Fair Market Value vs Imposed Value
Place, time, comparable precedents and the personal evaluation of each person involved in the transaction play into the formation of FMV.
It is the subjective interpretation of the facts and information available at the time of assessment. This is different, of course, from imposed value, in which a legal authority, such as the rule of law, existing tax regulation, a court decision, etc.) sets an absolute value for the property.
What Fair Market Value is Not
Here are some examples where fair market transactions does not apply:
- Eminent domain – where property is taken in lieu of sale (here, the seller is under duress)
- Liquidation sale
- Deed in lieu of foreclosure
- Distressed sale
Uses of Fair Market Value
The concept of fair market value is used widely in business and in life. FMV is used to determine how much you can write-off for the donations of property you make to charities such as Good Will. Municipal property taxes are often based on FMV. It’s used when filing an insurance claim perhaps as the result of an automobile accident, where the insurance company will cover damages up to the fair market value of the owners vehicle.