Fair Market Value: Definition and Example

Fair market value (FMV) is the price an asset would be expected to sell for between a willing buyer and a willing seller, with both parties informed and under no compulsion to act.

It is one of the most widely used valuation concepts in taxation, estate planning, property transfers, and general financial analysis.

How It Works

Fair market value depends on the assumptions that:

• both parties have reasonable knowledge
• neither side is forced to transact
• the asset has been exposed to the market in a normal way

That makes FMV different from a distressed sale price, a sentimental price, or a value based purely on historical cost.

Worked Example

Suppose comparable homes in a neighborhood are selling near $520,000 after ordinary marketing periods. If a similar home changes hands between unrelated parties at about that level, the fair market value is likely in that range.

Scenario Question

An owner says, “I would never sell my asset for less than $900,000, so that must be its fair market value.”

Answer: No. Fair market value depends on what the market would support between informed willing parties, not only on one owner’s preference.

Related Terms

• Market Value: FMV is a specific market-based valuation concept.
• Current Market Value: Current market value emphasizes the present market moment.
• Open Market Value: Another closely related transaction-based valuation idea.
• Taxable Value: Taxable value can differ from fair market value because of assessment rules and exemptions.
• Appraised Value: Appraisals often aim to estimate fair market value.

FAQs