Fair Market Value

The price an asset would fetch between a willing buyer and seller in an open market.

QUICK ANSWER

Fair market value (FMV) is the price at which an asset would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any pressure to complete the transaction. It represents the most objective estimate of an asset's true worth in an open and unrestricted market.

In depth

Fair market value is used across a wide range of financial and legal contexts including property transactions, business valuations, estate planning, tax assessments, and charitable donations. For tax purposes, the IRS frequently relies on FMV to determine the taxable value of assets transferred through gifts, inheritances, or non-cash donations. In business valuations, FMV serves as a baseline for determining what a company or its assets are worth in an arm's length transaction, free from any special relationships or circumstances that might inflate or deflate the price.

‍
Determining FMV is not always straightforward, particularly for assets that are not actively traded on public markets. For real estate, appraisers consider comparable sales in the area, the condition of the property, and current market conditions. For private businesses, valuation professionals use methods such as discounted cash flow analysis, comparable company multiples, and asset-based approaches to arrive at a defensible FMV. Because FMV has significant tax and legal implications, businesses and individuals dealing with high-value asset transfers are generally advised to obtain formal appraisals from qualified professionals rather than relying on informal estimates.