So what is fair market value (FMV)? According to the IRS, it’s the price that property would sell for on the open market. This is the price that would be agreed upon between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts.
This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation.
Understand when FMV is used
Fair market value is used whenever an item is bought, sold or donated and has tax consequences. The most common examples are:
- Buying or selling your home, other real estate, personal property or business property
- Establishing values of other business assets like inventory
- Valuing charitable donations or personal goods and property like automobiles
- Valuing bartering of services, business ownership transfers or assets in an estate of a deceased taxpayer
Know how to defend your FMV determination
If the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but also penalties. Here are a few tips to help defend your FMV in case of an audit.
Properly document donations. Fair market value of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt confirming your donations.
Get an appraisal. If you sell a major asset such as a small business, collections, art, or a capital asset, make sure you get the independent appraisal of the property first. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Keep pricing proof for similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisem*nt for a similar items to the one you sold, it can readily support your FMV claim.
Take photos and keep detailed records. The condition of an item is often a key consideration in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount. Keeping copies of invoices for major purchases is also a good idea.
With proper planning, establishing FMV of an item can be done in a reasonably defendable way if ever challenged. If you are unsure about FMV of an item, consult with your tax professional.
FAQs
So what is fair market value (FMV)? According to the IRS, it's the price that property would sell for on the open market. This is the price that would be agreed upon between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts.
How do I prove fair market value to the IRS? ›
Determining FMV
You should consider all the facts and circ*mstances connected with the property, including any recent transactions, in determining value. Value may also be based on desirability, use, condition, scarcity, and mar- ket demand for that property.
What is fair market value and how is it determined? ›
Fair market value (FMV) in real estate is the determined price that a property will sell for in an open market. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.
What does FMV mean in market value? ›
The fair market value (FMV) is the value of property as determined by the marketplace (or objective purchasers) rather than as determined by a subjective individual.
What is my company's FMV? ›
Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller (who are independent, nonfamily members), where both parties have reasonable knowledge of the relevant facts, and neither party is under any compulsion to buy or sell.
How do I determine the fair market value of my business? ›
There are a number of ways to determine the market value of your business.
- Tally the value of assets. Add up the value of everything the business owns, including all equipment and inventory. ...
- Base it on revenue. ...
- Use earnings multiples. ...
- Do a discounted cash-flow analysis. ...
- Go beyond financial formulas.
You can use a CMA (by a real estate agent or broker) for FMV, but the IRS considers the best evidence of FMV to be an appraisal by a certified real estate appraiser.
Is fair market value the same as appraised value? ›
No. A home's appraised value is the opinion of a licensed, objective appraiser. This professional assessment is typically used by the buyer's mortgage lender as a kind of safety precaution, to make sure that the home is worth the loan amount. Appraised values are often lower than fair market values.
What is the difference between fair value and FMV? ›
Part of what differentiates fair market value from fair value is the market and control discounts. Fair market value typically includes the following discounts and premiums: The discount for marketability accounts for the cost in time and money to get the business to market.
What is the difference between FMV and actual value? ›
Fair market value is intentionally distinct from similar terms, such as market value or appraised value, because it considers the economic principles of free and open market activity. In contrast, the term market value refers to the price of an asset in the marketplace.
Look at the last 24 to 36 months to establish an average monthly income. Subtract the company's debts and add the amount of any cash reserves. Multiply this result by a factor mutually agreed upon by the members to get the estimated value of the company. This may vary based on the industry and the company's stability.
How do I get FMV? ›
Here are four ways to find it:
- Go to a site like Zillow or Trulia. One quick way to find the fair market value of a home is to check online real estate sites. ...
- Contact a local real estate agent to run a comparable market analysis (CMA). ...
- Get an appraisal. ...
- Check the taxes.
The fair value of an item is based only on its intrinsic worth, while the market value is based on supply and demand. If the fair value of a tablet is $200, but market supply is high, the cost of the tablet may fall to a lower price.
How does the government determine fair market value? ›
It is determined based on factors such as size, location, condition, comparable home prices, and current market trends. In other words, the fair market value meaning refers to the price that a buyer would offer on it and that a seller would accept in an arms-length transaction.
How do you report fair market value? ›
The IRS requires owners of all retirement plans—self-directed or not—to report the fair market value (FMV) of assets held in their account(s) at the end of each year. The values must be assessed as of December 31st of the reporting year.
What are the tax methods used to determine FMV? ›
Within this approach, there are three methods: The Comparative Transaction Method, which can be applied to both businesses and real property. The Gross Revenue Multiple Method. The Guideline Publicly Traded Company Method.
How to determine fair market value of rental property for taxes? ›
Also known as GRM, the gross rent multiplier approach is one of the simplest ways to determine the fair market value of a property. To calculate GRM, simply divide the current property market value or purchase price by the gross annual rental income: Gross Rent Multiplier = Property Price or Value / Gross Rental Income.
