Fair Market Value (FMV) is the price an arm’s length buyer would pay in the open market for an asset. FMV is often used by government organizations and financial institutions to value assets for use as collateral or for tax.
We’ll see how the JVM works, how it’s calculated, and where you’ll likely find it used.
Understanding fair market value (FMV)
You may know the fair market value if you bought or sold a home and got an appraisal. Technically, appraised value and fair market value are not the same thing, but they should be close to the same amount.
The appraised value is calculated by a certified appraiser who uses inspection, comparables, adjustments and other market research to calculate an amount. FMV is often a more rough calculation of value made using comparables and a more basic understanding of the market.
Note that this direct difference between FMV and appraised value is the case for real estate sales. For some assets, such as equipment, the fair market value will appear alongside the ordered liquidation value in an appraisal as appraised values.
FMV is also different from market value. Market value is the term used to refer to assets that trade in incredibly liquid markets. Assets such as stocks have publicly available values (prices) available on hundreds of websites. Likewise, commodities or products commonly sold will be offered for sale at market value in an open market.
Fair market value is used in some cases by potential buyers, but it is more common in financial industries, such as banking and insurance, to find the value of assets to use as collateral or insurance.
It is also common in government related activities, such as taxation and eminent domain, where the government needs a value for an asset. The IRS uses the FMV for charitable donations and non-arm’s length transactions, that is, related party agreements.
Examples of JVM
Let’s go over a few instances where JVM might come into play.
It’s easy to value a cash or stock donation to charity, but rare artwork, jewelry, or even furniture can be a bigger challenge. If you donate such items, the IRS may require an appraisal to determine the fair market value of the donation.
The government calculates its own fair market value when it appraises and taxes the value of your property. The assessed value is almost always less than the actual fair market value of the property, but you can protest the amount if it is more than what you think is fair market value.
Your insurance company will ask for the fair market value of any content it covers. If you make a claim, they may choose to get a new appraisal to update the FMV using tools like the Kelley Blue Book value for a new or used vehicle.
When the government decides that it needs real estate for something like a road or a government building, it sometimes has the power to acquire that property using a prominent estate. When this happens, he must pay the fair market value of the property.
Technically, this situation would not meet the IRS definition of fair market value because the owner may be a reluctant seller. However, the principles of JVM still apply. The government will hire its own experts to determine fair market value, and the owner of the property can also hire experts to argue the case.
The IRS requires that any gift valued over $ 15,000 be subject to gift tax. If the donation is valued at more than this amount, a donation tax return must be filed. The IRS uses the FMV to calculate the value of gifts.
Possession of action
Private business owners may need to calculate the value of their business. This would be done by a business appraiser who uses techniques such as discounting cash flows to make the appraisal.
If you need the fair market value of the stocks or bonds you own, the current market value on the stock exchange would be used. You won’t need to resort to advanced value investing techniques to find fair market value.
How do you determine the FMV?
Fair market value is not like profit margin or return on equity where you add inputs and take out a number. It’s more art than science. You or the appraiser will need to consider comparable sales, market liquidity, the asset’s depreciation condition, and the uniqueness of the asset to arrive at a fair market value.
Users will take the FMV with a grain of salt because it is not an objective number, which means that the number depends on the subjective decisions of the rater. Banks apply a discount rate to numbers, and businesses are unlikely to offer the full amount to buy an asset. You probably know this if you’ve ever tried to sell a car at a dealership for Kelley Blue Book value.
Be aware of these limitations and use all the information you have available. For example, equipment appraisers provide the JVM and the VLO (Orderly Liquidation Value). The FMV is what the appraiser thinks the equipment is actually worth and should be viewed as the ceiling value of the equipment. The OLV is what the bank would get for the equipment if they took it back and sold it on a clearance sale.