Fair Market Value - What is FMV, and how do you calculate it?

What is Fair Market Value (FMV)?

Fair Market Value (FMV) refers to the price that an asset can fetch in an open market with the assumption that both the buyer and seller have proper knowledge about the asset and are behaving in their interest without any external pressure.

In simple terms, the Fair Market Value of an asset represents a true and accurate valuation of the actual worth of the asset. The term ‘Fair Market Value’ is widely accepted in areas like real estate, bankruptcy, and tax laws.

---

What is the Importance of Fair Market Value?

Fair Market Value plays a major role in making informed financial decisions. Below are a few reasons why FMV is important -

• Purchasing, Disposing, or Selling of Assets - It plays a crucial role in helping taxpayers dispose of their assets. Knowing the fair value of the asset before buying or selling it to ensure that you don’t make the wrong deal. Knowing the correct FMV also helps you record the assets in your books correctly.
• Business Valuation - It also helps in business valuation by presenting the true and correct value of the asset. This is especially important in the case of buying/selling a business, issuing stock options, and raising capital from investors.
• Insurance - It also helps obtain insurance for your assets and helps the banks value your assets accurately.
• Tax Implications - FMV or Fair Market Value is used to establish the value of the sold or bought item for tax purposes. While the initial FMV is used at the time of purchase of the asset, the final FMV is used at the time of sale of the asset to determine the tax consequences.

---

How to Calculate Fair Market Value?

While there is no exact formula using which you can calculate the Fair Market Value of an asset, there are a few ways that can be used to identify the fair market value of an asset held by the taxpayer. The FMV of an asset depends on various factors, like sales, equity, and depreciation. You can consider the sale value of other similar assets. In other words, calculating FMV is a subjective matter and is based on the individual assessment made by the taxpayer.

---

What are the Various Methods for the Valuation of Fair Market Value?

There are a few methods that taxpayers can use to calculate the Fair Market Value of an asset. Given below are the four methods of determining the Fair Market Valuation of various assets -

• Replacement Charge - In this method, you can assess the Fair Market Value by determining the value of building or purchasing an asset using a similar asset. In other words, the current cost of purchasing a similar asset can be used to determine the fair market value of the existing asset.
• Selling Price - The Fair Market Value of an asset can be calculated with the help of information about its recent sale price or purchase price.
• Professional Opinion - Whether you are planning to buy or sell your house, hiring an expert to calculate the fair market value of your asset is the best way to obtain a fair deal on your transaction. The expert can provide you with the FMV of your property.
• Cost of Comparable Assets - Cost of comparable assets refers to the sale prices of similar assets in the neighborhood. For example, while calculating the Fair Market Value of a property, the real estate agents provide you with the sale price of similar properties in the neighborhood. You can determine the Fair Market Value based on these comparable costs.

---

What is the Fair Market Value of Property?

Let's consider the scenario where you're selling your house. If you find a buyer who agrees to purchase it at your specified price or a higher amount, you obtain a Fair Market Value (FMV) for your house. In other words, FMV is determined based on the highest bid received from a buyer.

According to the Indian Accounting Standard, the Fair Market Value of a property is defined as the price a seller obtains when selling it. However, the market value of a property is contingent upon certain conditions. Firstly, both buyers and sellers must be fully informed about the property being sold and act in their own interests without coercion. Secondly, the transaction must be completed within a specified timeframe.

In the process of assessing and taxing a property, the government also needs to ascertain its FMV. The disparity between FMV and the property's purchase price is influenced by its holding period. Generally, FMV tends to exceed the assessed value of a property. Nonetheless, if the FMV surpasses your anticipated Fair Market Value, you have the option to contest it through dispute resolution.

Considering buying or selling a property? Get the best tax planning advice from our tax experts and maximize your tax savings.

---

What is the Fair Market Value of Shares?

The fair market value of shares is calculated by considering the average trading price on a particular day. Thus, a share’s fair market value is determined by a publicly traded company's latest trading price.

Hope this article helped you get deeper insights into the calculation of Fair Market Value. Now that you are aware of the process for calculating the FMV, you can go ahead and determine the fair value of your asset/property. You can also consider getting professional help, as Tax2win’s experts can not only help you calculate the fair market value but also help you plan your taxes on the purchase or sale of capital assets. Maximize your tax savings with Tax Consultancy Services Now!

---