What do you mean by Fair Market Value of a property?
Fair Market Value or FMV is the price for which property would sell in an open market. It is a term that is popular among buyers and sellers and very important in income tax and real estate. The buyer, as well as the seller of a property, will be impacted if the sale or purchase of a certain property is lower than its fair market value.
How to determine Fair Market Value?
A property’s market value can be easily found on a listing. However, finding its Fair Market Value is very difficult. The income tax laws do not provide any guidelines on how the fair market value of a property has to be exactly calculated. However, there are certain ways through which you can make an estimation of its fair market value. In order to avoid underreporting of the consideration in sale agreements, various states have introduced the system of predefined prices, depending on the area and nature of construction. This is done through stamp duty ready reckoner or announcement of circle rates – which are generally notified every year.
Finding the Fair Market Value is not an easy task especially because the rates of properties keep fluctuating in real estate, even within the same locality. And it is even more difficult to find out the Fair Market Value of properties that ages back years.
If the ready reckoner rate for a particular area is unavailable, you can obtain a valuation report from a registered valuer who documents the Fair Market Value of properties for income tax purposes. The registered valuer inspects the property and based on his inspection and other relevant considerations and circumstances give the valuation report stating the fair market value of the property, along with the basis for arriving at the valuation. The Income Tax Department readily accepts the valuation report of the registered valuer. Hence this method is the strongest and highly advisable.
How is Fair Market Value important?
Fair Market Value is often used in legal settings. The Fair Market Value of real estate is commonly used in divorce settlements and to calculate compensation connected to the government’s use of the eminent domain. It is often utilized in taxation – when determining the fair market value of a property for a tax deduction after a casualty loss.
Municipal property taxes are often assessed based on the Fair Market Value of the owner’s property. Fair Market Value is also used in the insurance industry.
How important is Fair Market Value in Income Tax laws?
The profit on the sale of any property is taxed under the income tax laws. If the property is held for more than two years, you can avail the benefit of indexation, on the costs. The concept of Fair Market Value is important for finding out the cost of acquisition of a property – for capital gains purposes.
Also, if the price stated in the agreement is lower than the stamp duty valuation, the stamp duty valuation of the property – which is an alternative to the Fair Market Value, is used as the sale consideration, instead of the value stated in the agreement. Hence, both the buyer and the seller will be impacted if the agreement value is lower than the Fair Market Value of the property.
Under different provisions of the income tax laws, the difference between the agreement value and the Fair Market Value – if it is more than 5%, is taxed in the hands of both the buyer and the seller. Hence, it is important to find out the Fair Market Value, before executing the agreement, to avoid the payment on such difference.