How to Calculate Fair Market Value?

Determining the fair market price is crucial when selling or buying property, as well as when one is donating property to charity and requesting tax deductions. In all cases, the first step in determining a fair price depends on how the fair market value was calculated. Fair market value is the maximum and minimum price that an individual or business is willing to pay for an item or service. Knowing how to calculate fair market value is critical in setting business budgets, managing taxes and making successful business deals.

Difficulty: Moderately Challenging

Instructions

1. Understand the difference between fair market price and fair market value. A fair market price is the price you set for an item after calculating its current market value. According to the United States Internal Revenue Service, fair market value is the "price that property would sell for on the open market."

2. Consider all of the various factors that influence the item's value, such as its scarcity and use. There is no set formula or spreadsheet to calculate an absolute market value. For example, many cars are assigned a fair market value when re-sold by deducting a certain percentage of the original cost every year. However, other factors may influence the value, such as if the car is an antique or has had significant modifications done that add to the value rather than subtract from it.

3. Determine the cost of the item when originally purchased. Backup any claims, when possible, with records such as store receipts or credit card statements.

4. Check the price of similar items being sold on the market. This factor is especially true in the sale of real estate. Knowing the current going rate for similar items can give a general picture of the overall desirability of the item.

5. Consult the opinion of individuals with expertise in the field of the item. For example, if one is attempting to calculate the fair market value of an antique, consult an antique inspector to appraise the product.

6. Check the numbers from the previous steps and average them for a general idea of a fair market value.

Tips & Warnings

• Create an Excel spreadsheet to keep careful tabs of the various numbers you need to track, especially when comparing the prices of similar items on the market.
• Be aware of unusual market changes, such as recent stock market crashes or real estate booms, that may affect the value of the item.

Resources

• IRS bulletin on property market value (PDF)