What It Is and How It’s Determined
How is fair market value determined?
There are several methods for determining fair market value, but a buyer, seller, appraiser, automated valuation model (AVM) or other entity might use some or all of the following factors in their valuation:
- Comparative market analyses
- Sales and auctions of similar assets
- Supply and demand for the asset
- Market activity
- Active trading exchanges
- Interest rates
- The condition and age of the asset
- Expert opinion
- Authenticity
- Economic outlook
- Historical data
During the valuation, a buyer, appraiser or other valuation professional might ask for more information. For example, Duffy notes an appraiser determining the fair market value of a business might need to know the assets held by the business, who the other shareholders are and the earnings before and after expenses like salaries, benefits and taxes are paid out.
Additionally, there are also online calculators and guides for certain assets. For example, Kelley Blue Book can help you determine the fair market value of your vehicle, while Goodwill and the Salvation Army offer donation value guides for smaller assets, like donated clothing, electronics, appliances and furniture that might be tax deductible. The IRS also has its own publication for determining the value of donated property, known as Publication 561.
Fair market value vs. market value
Market value is the current price of an asset based on what is happening at that point of time in the real world whereas fair market value is the price a buyer and seller come to based on a comprehensive analysis.
“Market values are easily attainable in a liquid market,” says Maksimovich. “I can go see what Apple’s trading at by the second and quickly determine what the market value is. But think how difficult that would be on a private business or real estate that’s not traded in seconds like [public] stock is.”
Market value might be influenced by urgency and is more concerned with what buyers or sellers are willing to accept rather than what is equitable. Fair market value tends to be determined after thoughtful and deliberate consideration. Where market value is highly reactive, fair market value is more responsive. An asset’s fair market value can be higher or lower than its market value.
Fair market value vs. appraised value
While fair market value is what a buyer would pay a seller in the open market where both parties are willing, knowledgeable and uncoerced, appraised value is what a licensed professional estimates one should pay based on their objective assessment, which follows specific standards and guidelines.
In a competitive market, a buyer might pay more than the appraised value after having time to consider the deal and basing it on what they know about the property. Note that it would not be considered fair market value if they paid over the appraised value because they were under any type of duress. In this scenario, the buyer would need to pay the difference between the appraised value and the fair market value out of their own pocket. That’s because a mortgage lender will only lend up to the appraised value, not the fair market value.
Supply and demand, economic factors and buyer sentiment can all influence appraised and market value, but market value tends to change more frequently. Appraised value is typically only determined once per transaction, so it doesn’t change as frequently.
Why fair market value matters for taxes and investing
In investing, fair market value helps you avoid overpaying for an asset and allows you to spot discounts by comparing it to current asking prices.
For taxes, fair market value ensures the government assesses taxes fairly. It helps the IRS accurately tax sold or donated assets—whether calculating capital gains on a profit or verifying deductions from a loss or charitable donation.
Capital gains: If you sell a stock for more than its purchase price, you might owe capital gains taxes based on that value realization.
Gift taxes: If you gift an asset with a fair market value that exceeds the annual federal gift tax exclusion ($19,000 per recipient for 2026), you must file a gift tax return and potentially pay gift tax.
Inheritance: Fair market value establishes the “stepped-up basis” for inherited property, likely saving them thousands of dollars in capital gains taxes if they decide to sell the inherited property.
Charitable donations: The fair market value of the assets you donate to qualified organizations can be deducted from your income tax liability.
FAQ
How do you calculate fair market value?
You can’t calculate fair market value based strictly on a mathematical formula since it’s determined, in part, by human factors like supply and demand and buyer preferences. Instead, you can get a better idea of fair market value by comparing the sale price of similar assets, getting an appraisal, speaking with an expert on the specific asset, determining whether the asset is in demand and discussing with the buyer or seller what they’re willing to pay or sell the asset for.
Who determines fair market value?
There are several different people who can determine fair market value, but it is ultimately the buyer and seller who agree on a fair price or value.
“It’s not what the buyer thinks it’s worth. It’s not what the seller thinks it’s worth. It’s what they mutually agree that it’s worth,” says Maksimovich.
In situations where there is no buyer or seller, such as with charitable donations, divorce or estate planning, a third-party professional appraiser, real estate agent, AVM or tax assessor might be used to provide an estimate of the fair market value.
When is fair market value used for tax purposes?
Fair market value is used in determining capital gains taxes, inherited property taxes, charitable giving deductions and property tax assessments. If you have questions about fair market value regarding your taxes, talk to a financial advisor, certified public accountant or tax attorney who can provide more information.
What happens if fair market value is miscalculated?
Both experts warn of the pitfalls of miscalculated fair market value. For example, if the asset valuation is too low, it could draw the attention of the IRS and require an audit that results in hefty penalties and interest. On the other hand, if the valuation is too high, there could be a larger tax bill than necessary. Additionally, an incorrect fair market value could result in heirs not receiving an equitable value of assets and lead to family disputes, Duffy points out.
To determine if your fair market value has been miscalculated you can compare the amount you were quoted with the market price of similar assets and review supporting documentation. Working with a third-party appraiser can also be helpful, since they have specific knowledge about the asset and industry you’re trying to buy or sell in.
If your fair market value is miscalculated, you might need to file an appeal or amendment. When you file, you might need supporting evidence, like comparables, photos, sales receipts, official appraisal documentation and historical pricing data, to prove true value.
