Legal Definitions - FMV

FMV stands for Fair Market Value.

Fair Market Value refers to the estimated price at which an asset or property would be bought or sold on the open market. This transaction is assumed to occur between a willing buyer and a willing seller, both acting independently and with full knowledge of all relevant facts, and neither being under any pressure or compulsion to complete the transaction. It represents an objective assessment of an item's worth under normal market conditions.

• Example 1: Real Estate Taxation

  A homeowner decides to sell their house. To determine the property tax assessment, the local government will often use the Fair Market Value of the home. This value is established by considering recent sales of comparable properties in the neighborhood, the home's condition, and market trends, ensuring the tax is based on what the house would realistically sell for today, not just its original purchase price.

• Example 2: Business Acquisition

  A large corporation is interested in acquiring a smaller competitor. During the negotiation process, financial analysts from both sides will work to determine the Fair Market Value of the target company. This involves evaluating its assets, liabilities, intellectual property, customer base, and future earning potential to arrive at a purchase price that reflects its true worth in the current business landscape, ensuring a fair deal for both the buyer and the seller's shareholders.

• Example 3: Insurance Claim for Damaged Property

  After a severe storm, a homeowner's roof is extensively damaged and needs to be replaced. When filing an insurance claim, the payout for the damaged roof might be based on its Fair Market Value at the time of the damage, especially if the policy includes "actual cash value" coverage. This means the insurer would calculate the cost of a new roof, then subtract depreciation based on the age and condition of the old roof, to determine what the damaged roof was worth just before the storm.