Fair Market Value

Business, Legal & Accounting Glossary

Definition: Fair Market Value

Quick Summary of Fair Market Value

The fair market value of a stock or similar commodity is the price which an informed buyer would be willing to pay, and a seller would be willing to sell.

Hypothetically, fair market value is determined by open-market consensus between buyers and sellers who each have full knowledge of the property being sold. In reality, fair market value is often established by buyers and sellers who each have different and (often) incomplete knowledge. Fair market value is often used for tax purposes; fair market value on the date of death may be used to establish a later tax basis for any heirs. For stocks, fair market value is often determined by applying closing prices on a selected day to a portfolio. Fair market value can also be used to help establish an investor’s net worth.

What is the dictionary definition of Fair Market Value?

Dictionary Definition

There are numerous definitions of fair market value for various purposes and jurisdictions.

A highly general definition is:

n. the amount for which property would sell on the open market if put up for sale. This is distinguished from “replacement value,” which is the cost of duplicating the property. Real estate appraisers will use “comparable” sales of similar property in the area to determine market value, adding or deducting amounts based on differences in quality and size of the property.

  • It is the most probable price at which a good or service will exchange, expressed in terms of cash or equivalent, in a free market assuming:
    • A knowledgeable and willing seller unencumbered by undue pressure to sell and acting in his own best interest
    • A knowledgeable and willing buyer unencumbered by undue pressure to buy and acting in his own best interest
    • A reasonable time for exposure in a free and open market.

Under this concept, a real estate sale in lieu of an eminent domain taking would not be considered a fair market transaction since one of the parties (i.e., the seller) was under undue pressure to enter into the transaction. Other examples of sales that would not meet the test of fair market value include a liquidation sale, deed in lieu of foreclosure, distressed sale, and similar types of transactions. There is no longer any such value in real estate appraising as Fair Market Value, the correct term is Market value.

Fair Market Value is only applicable upon services and goods that are offered in series/quantities. Simply, because FMV is based on comparison with identical or similar past, actual or expected service and goods. Briefly, Fair Market Value is an idealistic and unrealistic idea and depends only upon acceptance.

Full Definition of Fair Market Value

Fair Market Value (FMV) is a term in both law and accounting that is based on the economics term of “market value.” It is also a common basis for assessing damages to be awarded for the loss of or damage to the property, generally in a claim under tort or a contract of insurance.

A fair market value is often an estimate of what a willing buyer would pay to a willing seller, both in a free market, for an asset or any piece of property. If such a transaction actually occurs, then the actual transaction price is usually the fair market value. Note that the opinion of people that are not interested in buying or selling an asset has little meaning, because they are not active in the market. Thus, “market value” (which is the same for everyone in the market) is not identical to the “intrinsic value” that different individuals may place on the same asset based on their own preferences and circumstances.

However, market transactions are often not observable for assets such as privately-held businesses and most personal and real property. Thus, FMV must be estimated. An estimate of Fair Market Value is usually subjective due to the circumstances of place, time, the existence of comparable precedents, and the evaluation principles of each involved person. Opinions on value are always based upon subjective interpretation of available information at the time of assessment. This is in contrast to an imposed value, in which a legal authority (law, tax regulation, court, etc.) sets an absolute value upon a product or a service.

Definition In The United States

In the realm of United States tax law, the definition of “fair market value” is found in the United States Supreme Court decision in the Cartwright case:

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. United States v. Cartwright, 411 U. S. 546, 93 S. Ct. 1713, 1716-17, 36 L. Ed. 2d 528, 73-1 U.S. Tax Cas. (CCH) ¶ 12,926 (1973) (quoting from U.S. Treasury regulations relating to Federal estate taxes, at 26 C.F.R. sec. 20.2031-1(b)).

The term “fair market value” is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies.

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Fair Market Value. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. September 24, 2021 https://payrollheaven.com/define/fair-market-value/.
Chicago Manual of Style (CMS):
Fair Market Value. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/fair-market-value/ (accessed: September 24, 2021).
American Psychological Association (APA):
Fair Market Value. PayrollHeaven.com. Retrieved September 24, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/fair-market-value/

Definition Sources

Definitions for Fair Market Value are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th April, 2020 | 4 Views.