Fair Market Value (FMV) - Explained
What is Fair Market Value?
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Table of ContentsWhat is Fair Market Value?How is Fair Market Value Used?Academic Research on Fair Market Value
What is Fair Market Value?
The price at which the property is sold on the open market is called fair market value (FMV). The Fair market value is different from appraised value or market value. It is based on economic principles of open and free market activity. The term market value only shows assets price in the market. The appraised value depicts the value of asset as per a single appraisers valuation; therefore, it does not necessarily represent the value of the product in a free and open market.
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How is Fair Market Value Used?
As an example, FMV is usually used in real estate scenarios. It presents the property's price with certain conditions understood. These conditions might include: the potential sellers and buyers are well-aware of the property; behave in their best interest; are committing a certain time period for the completion of transaction; and are not subject to undue pressure or influence. Under these conditions, one is most able to accurately determine the propertys fair market value. Fair market value is also used in legal settings such as the taking of property pursuant to eminent domain. Insurance companies also use FMV as a basis to compensate the vehicles damages in accidents. It is also used in taxation when the fair market value of the property is used for tax calculation. For example, the FMV of the property is used to assess municipal property taxes. The global tax authorities prefer transactions to be executed at FMV for tax purposes. FMV is also relevant for tax deductible donations. The donor gets a tax credit or deduction for the donations value.