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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.
A general definition of "Fair Market Value" (FMV) is determined by Investopedia as being the price, for which a specified asset or property would be sold in the marketplace. However, this condition would be founded on the following principles; that prospective purchasers possess a reasonable knowledge related to the asset or property; are acting in their own best interests and are not subject to unwarranted pressure in the trading process. Secondly, there is a reasonable amount of time allocated for completion of the transaction. If these terms are applied, then a Fair Market Value should determine a true valuation of the worth related to a property, or other asset.
Many and varied segments of commerce and industry utilize the principles of Fair Market Value; for example, the assessment of municipal property taxes are often based on this formula. The difference in a purchase price and the FMV can be considerable, depending on the period of ownership by the present owner. A regular example of Fair Market Value in practice, is shown in the case of an insurance claim, made in respect of a motor vehicle accident. The responsible insurance company for a vehicle will generally extend cover for damages, but only within the FMV of the vehicle.
When the concept of Fair Market Value is used in support for the valuation of a property, all and any factors that are relevant must be taken into consideration. Among them are:
Assessing the FMV of a donated property is not only reliant upon pre-determined formulas, methods and rules, as they rarely provide an acceptable Fair Market Value. It is necessary that all aspects and circumstances relating to a property, including market attraction, usage and uniqueness are taken into account. The selling price of an asset is a reasonable indication of the FMV, provided the following criteria are observed:
Additional criteria related to the terms of a purchase, or sale, should be given careful attention, regarding whether they were influential regarding the actual price. Such terms, will include any prevailing restrictions, agreements, understandings, or covenants that exercise limitations on the usage or character of a property. Failure to show unusual circumstances would be regarded as confirmation that an increase or decrease in the Fair Market Value of a donated property from the cost, was reasonable. For the purpose of adjustments related to the time factor, an appraiser could refer to published price indexes that include general price trends, building and commodity costs.
There are various issues regarding the purposes of FMV for a donated property, which can include unusual market related conditions. It has been established that the selling price of a property in a distanced transaction on the open market is generally the preferred evidence of its value. When reliance is placed on the sales of comparable properties, it must be on the basis that those sales were also conducted on an open market. In the event of those transactions being made in market conditions that were artificially created, supported or stimulated, to the extent they were not genuinely representative, then the prices at which the sales were finalized would not be indicative of fair market value.
Relating sales of comparable properties is an important method for determining the fair market value of donated properties, but the degree of credibility given to a sale depends on the level of similarity between the donated properties and those determined to be comparable. There should be a degree of similarity that is adequate for the selling price to have received due consideration from buyers or sellers of the property, who were reasonably well informed.
Fair market value issues related to artistic creativity and work dating back to 1969 have been raised by the Harvard Education faculty. From this year it has been possible for creators donating their own work to only deduct their costs (instead of the FMV of the donation) from their taxable income. Originally, this ruling was designed to prevent politicians capitalizing on their public service and inspired by the actions of President Richard Nixon.
In effect, it has mainly imposed limits on the charitable contribution deductions of artists to material costs, such as paint and canvas, but excludes any deduction for the creative efforts of their work. The disallowance of fair market value related deductions has highlighted the fact that most of the funding for museums is used in meeting operating expenses, with an estimated 80% of all works acquired by museums being donated. Previous FMV deductions had the effect of motivating artists to donate their work to museums, enabling the institutions to extend and improve their collections. Since 1969, donations of self-created artistic works to museums and libraries have almost ceased. However, collectors of art are able to deduct the full amount of the determined fair market value.
The Small Business Administration (SBA) in the United States makes reference to the fact that plan assets are required to be valued at fair market value and not by their cost factor. Therefore, it is crucial that a true assessment of the FMV value is made, in order to adhere to Internal Revenue regulations, as well as being compliant with the Employee Retirement Income Security Act of 1974 (ERISA). This is a Federal law, that determines minimum standards for the majority of voluntarily established pension and health plans in private industry and which provide security for its members.
By example; the fair market value of assets should be accurately assessed for the purpose of precluding, among others, any illicit dealings, benefit exclusivity violations under IRC section 401(a) and violations pertaining to section “414” that determines the limits regarding benefits and contributions. Also applicable to the FMV process are factors concerning excess deductions under IRC section 404; discriminatory violations related to IRC section 401(a) (4) and violations in respect of the IRC section 412 minimum funding requirements
When associated with a profit-sharing, a stock bonus plan, or money purchasing, the Fair market Value will determine the account value of a participant, and eventually their distribution. The FMV related to a specified criteria will ascertain the funding adequacy of the plan and if the funding predictions of it are reasonable and achievable. These factors will influence the deductions made by an employer and the status of their funding. . In a determined benefit plan, IRC section 412 requires that annual FMV are conducted for funding purposes. In accordance with Treas. Reg. section 1.401–2(b), These valuations are required to be based on reasonable actuarial forecasts.
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:
The statute does not define the expression "fair market value", but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to "fair market value" and "market value" and it is doubtful if the word "fair" adds anything to the words "market value."
In concert with this decision, the Canada Revenue Agency (CRA) lists the following working definition in its on-line dictionary:
Fair market value generally means the highest price, expressed in dollars, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.
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.