The fair market value of an asset is the price an asset would be sold for if it is in an open market. There are conditions to consider when determining the fair price of an asset.
- Buyers and sellers need to have enough knowledge about the asset in question
- Their decisions about the asset are in the best of their own interests
- They are not affected by trade pressure or market conditions
- There is enough time to rethink and finish the transaction
When an asset is evaluated under these conditions, the resulting value will be the best value of the asset. It takes into account free trade rules and free-market activities. The fair market value is different from the market value which only considers the price buyers are willing to pay on an asset in an open market.
Benefits of fair market value
Fair market values help companies and individuals in many ways. The following are some of the ways the fair market value can help you save money or grow financially.
- Financial statement improvements: Companies can gain value by using fair market values of assets listed on their balance sheet. For example, properties they acquired in the past appreciated due to current market conditions. By updating this information on the balance sheet, the company’s value will increase. It is not only companies that benefit. If you are selling your house and it appreciated over time, you can use the fair market value when listing it for sale.
- Tax benefits: If the market conditions changed in the current tax year, you could save money by paying less tax. For example, your house depreciated due to a slowdown in economic activities. You can factor in the depreciation value and use the new value of the house on your tax. In the end, you will pay less tax because your house lost the value. The annual depreciation allowance can be used to determine how much you can write off on your tax return.
- Take advantage of capital gain: If your house appreciated over time, you can sell it at the peak of the seller’s market. This way you will cash in the difference between the purchase price and the price you sold it for. This difference will be your capital gain on the property.
- Pay a fair price on an asset: You could save money on a house purchase if you use the fair market value. This is because it will be the best price close to reality.
