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You must have heard the term ‘Fair Market Value’ at least once in your life while trying to sell or purchase assets like property, car, shares, etc. But do you know what Fair Market Value is, why it is so important, and how to calculate it? This blog covers everything you need to know about the various aspects of Fair Market Value and how to calculate it. So, let’s dive in!
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.
Fair Market Value plays a major role in making informed financial decisions. Below are a few reasons why FMV is important -
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.
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 -
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.
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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!
