Fair market value is the monetary value of a property if sold on the open market, used by insurance companies and for taxation purposes. It does not take into account personal valuation and can be determined by various formulas. It can also be used to argue for lower property taxes.
Fair market value is a term that can be used in a variety of contexts. It can be applied to the price of a home, car, or other property, and can be used legally, in taxation, or by insurance companies to determine the current value of something. This value does not take into account the personal valuation of the property. Whether a person really likes a house has little to do with this number. Rather, it primarily refers to the monetary value of the property if currently sold, when the sale is not rushed and property prices are not reduced for a quick sale.
Another way to define this is to look at the price that a house, car or other property would currently fetch on the open market. This is the value normally assigned to the property by other agencies. If a car crashes and is so badly damaged that the repair exceeds its fair market value, an insurance company will usually offer that amount in lieu of repairing the car. This is not the same as the price of replacing the car – a used car that isn’t worth much isn’t going to earn you enough replacement money to buy a new one.
Similar assessments can be made for insurance purposes when people lose items in disasters or accidents. A person who insures the contents of their home may get some money back for these things, but usually not enough to completely replace them. There are some insurance companies that do not insure on this basis, but on the basis of replacement cost, which is generally higher.
There can be several different formulas used to determine fair market value. The IRS, for example, has formulas for determining how to deduct the value of donations from certain tax items. The value of used furniture that is still in fair condition, for example, can be approximately 15% of the original purchase price. On the other hand, if the furniture is antique, a person donating it may have it appraised by an antique dealer first to determine its market value.
Fair market value can also be applied to homes to show why property taxes should be lower. When homes command a much lower price on the open market, people may argue that they owe less. On the other hand, if a home’s value increases significantly, property taxes may be raised, based on the higher price it would likely fetch if sold.
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