What is fair market value?
“Fair Market Value” is the price for property that would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances; it is the highest price a property would bring if it were exposed for sale on the open market for a reasonable period of time. As you can see from the definition above, “fair market value” is a theoretical concept. Many sales occur at prices other than the “fair market value.” Often the sale price is adjusted because of time pressures on the buyer or seller. Other factors that affect sale prices include owner-held mortgages and property transfers within families.
Fair Market Value is defined as: “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. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” Regulation 20.2031-1.
The American Institute of Real Estate Appraisers defines fair market value as “the most probable price for which a property will sell in a competitive market with buyer and seller each acting prudently, knowledgeably and for self interest and assuming that neither is under undue duress”. Sales such as foreclosure and family sales are not considered to be “arms length” or fair market transactions.
