Fair market value
From Wikipedia, the free encyclopedia
Fair market value (FMV) is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation. Fair market value differs from the intrinsic value that an individual may place on the same asset based on their own preferences and circumstances.
Since market transactions are often not observable for assets such as privately held businesses and most personal and real property, FMV must be estimated. An estimate of Fair Market Value is usually subjective due to the circumstances of place, time, the existence of comparable precedents, and the evaluation principles of each involved person. Opinions on value are always based upon subjective interpretation of available information at the time of assessment. This is in contrast to an imposed value, in which a legal authority (law, tax regulation, court, etc.) sets an absolute value upon a product or a service.
An eminent domain taking, in lieu of a property sale, would not be considered a fair market transaction since one of the parties (in this case, the seller) was under undue pressure to enter into the transaction. Other examples of sales that would not meet the test of fair market value include a liquidation sale, deed in lieu of foreclosure, distressed sale, and similar types of transactions.
The term fair market value is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies. In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing. In certain jurisdictions, the courts are required to hold fair market hearings, even if the borrowers or the loans guarantors waived their rights to such a hearing in the loan documents.
Fair market value is not explicitly defined in the Income Tax Act. That said, Mr. Justice Cattanach in Henderson Estate, Bank of New York v. M.N.R., (1973) C.T.C. 636 at p. 644 articulates the concept as follows:
In concert with this decision, the Canada Revenue Agency (CRA) lists the following working definition in its on-line dictionary:
As the definition indicates, the Canadian and American concepts of fair market value are very similar. One obvious difference is that the Canadian working definition refers to “the highest price” whereas the American definition merely mentions “the price.” It is debatable whether or not the presence of the word “highest” distinguishes the Canadian from the American definition.