Where Else Does Fair Market Value Apply?
Fair market value isn’t just for those buying and selling real estate. Realistically, every current homeowner needs to stay knowledgeable on the FMV of their home. This affects their net worth and the value of the asset itself. It also impacts a variety of other potential financial concerns, from taxes to insurance.
Insurance Claims
Homeowners insurance takes into account the fair market value of the home when determining how much to charge for a policy, including how much it would cost to replace the home (in the event of a fire or flood, for example.)
This “cost to replace the home” is an important distinction, as the replacement cost of a home is determined by current fair market value and not necessarily what you paid for a home.
Remember, fair market value is determined by what the buyer and seller both agree to pay. For example, if you had a homeowner who needed to sell the home quickly, maybe the buyer paid less than the home’s actual value at that time. Alternatively, if homes in your neighborhood suddenly become very popular, the replacement cost would go up to accommodate for this fluctuation in circ*mstances.
Property Taxes
Fair market value of a home is also used to calculate a homeowner’s property tax bill each year. Each municipality has its own tax rate. For example, if your home is appraised at $300,000 fair market value and the property tax rate in your county is 3%, you would owe $9,000 in property taxes each year.
Fair market value also affects other taxations where property and real estate are in play: the estate tax, gift tax and inheritance tax. If an heir receives a home in an inheritance, or as a gift, they’ll have to pay taxes on the fair market value of the home – regardless of how they came to own the property or if someone “gifted” it to them for free.
Legal Disputes
Fair market value also becomes a very important (and often hotly contested number) when it comes to settling legal disputes, such as during a divorce settlement, when damages are done to private property or when two heirs are given one piece of property and one needs to buy out the other.
Fair market value keeps all parties on the same page as to the value of any and all shared assets and keeps one party from being able to take advantage of the other.
