A property's fair market value defines what you could expect to receive if you were to sell it privately that day. This value is important not just for sale purposes, but also to determine your home's equity and investment strength. If you plan to sell, refinance or borrow against your home or its equity, you'll need to determine the fair market value first.
Conversely, if you plan to buy a home in the near future, calculating the property's fair market value first can help you avoid paying too much--or help you spot an amazing deal.
Provide honest information to achieve accurate results. Remember to include any upgrades or remodeling work done in your home since you purchased it, as this can raise the value of your home, sometimes significantly. The FMV is agreed upon between a willing buyer and seller, both of whom are reasonably knowledgeable about the property in question.
If only it were that easy! Because pieces of real estate are sold on the open market, the value of these financial assets are subject to the fluctuations of that market. Namely, supply and demand. Realistically, every current homeowner needs to stay knowledgeable on the FMV of their home, as this not only affects their net worth and the value of the asset itself, but a variety of potential financial concerns, from taxes to insurance.
Homeowners insurance takes into account the fair market value of the home when determining how much to charge for a policy, including how much it would cost to replace the home in the event of fire or flood, for example.
Remember, fair market value is determined by what the buyer and seller both agree to pay. Alternatively, if homes in your neighborhood suddenly become very popular, the replacement cost would go up to accommodate for this fluctuation in circumstances. Each municipality has its own tax rate. Fair market value also affects other taxations where property and real estate are in play: the estate tax, gift tax, and inheritance tax. Fair market value also becomes a very important and often hotly contested number when it comes to settling legal disputes: such as during a divorce settlement , when damages are done to private property, or when two heirs are given one piece of property and one needs to buy out the other.
Fair market value keeps all parties on the same page as to the value of any and all shared assets and keeps one party from being able to take advantage of the other. For example, fair market value in real estate is commonly used in divorce settlements and to calculate compensation related to the government's use of eminent domain.
Fair market values are also often utilized in taxation, such as when determining the fair market value of a property for a tax deduction after a casualty loss. Municipal property taxes are often assessed based on the FMV of the owner's property. Depending on how long the owner has owned the home, the difference between the purchase price and the residence's FMV can be substantial.
Professional appraisers use standards, guidelines, and national and local regulations to determine a home's FMV. FMV is also often used in the insurance industry. For example, when an insurance claim is made as a result of a car accident, the insurance company covering the damage to the owner's vehicle usually covers damages up to the vehicle's FMV.
Worldwide tax authorities are always ensuring that transactions are realized at FMV, at least for tax purposes. However, if the FMV of the shares is higher, tax authorities such as the Internal Revenue Service IRS may well recharacterize the transaction for tax purposes, and the father will need to pay taxes on the disposition of the shares as though he had sold them at FMV to a third party.
Another field of taxation where FMV regularly comes into play is the donation of property, such as artwork to charities. In these cases, the donor usually receives a tax credit for the value of the donation. Tax authorities need to ensure that the credit given is for the true FMV of the object and often ask donors to provide independent valuations for their donations.
It's important to assess the fair market value of an item that you buy or sell as it can have a large impact on your finances. Correctly applying fair market value to taxes ensures there won't be adverse monetary implications later on or any claims of fraud by authorities. Home Ownership. Car Insurance. Real Estate Investing. Your Privacy Rights. With more than 15 years of small business ownership including owning a State Farm agency in Southern California, Kimberlee understands the needs of business owners first hand.
When not writing, Kimberlee enjoys chasing waterfalls with her son in Hawaii. By Kimberlee Leonard Updated February 01, Who Does the Appraisal of the Inventory in a Probate? Market Value Vs. Warning Assets that don't have a common market or are unusual may need specialized evaluation to determine a fair market value. Keep an eye on economic or industry news that may increase or decrease the fair market value of an asset. This may include stock market trends for equities or mortgage rates for real estate.
Real estate is valued as soon as is feasible when dealing with inheritance.
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