Fair market value (FMV) is the estimated price at which an asset would be bought or sold in a transaction between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. FMV is often used to determine the value of assets for tax or financial reporting purposes.
For example, let's say a person owns a piece of land that they inherited from a family member. The person wants to determine the FMV of the land so that they can report it on their tax return. To do this, the person could research comparable properties in their area and consider factors such as the size of the land, its location, and any improvements that have been made. Based on this information, the person could determine an estimated FMV for the land.
FMV is an important concept in finance and accounting, as it provides a basis for determining the value of assets. By using FMV, individuals and businesses can ensure that they are reporting the accurate value of their assets for tax and financial reporting purposes. Additionally, FMV is often used in transactions, such as the sale of a business or the valuation of a company, to ensure that the transaction is conducted at a fair price.