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What's "Fair" about Market Value?

Fair market value is a common financial term used in contracts, wills, trusts, court opinions and even in tax returns. But there might be nothing “fair” about a stated fair market value of a particular item depending on where you are looking at it from and for what purpose.

The owner of real estate might want a lower valuation for property tax purposes while pursuing a higher valuation as a seller. A partner buying out a retiring partner’s interest in the partnership would want to pay as little as possible while the retiring partner would want to maximize the value of his or her interest.

Even something as simple as a stock or mutual fund holding could raise questions where, for example, the cost basis of the holding is considerably different from the face value of the shares. Ignoring the impact of income taxes – owed on gains or reflecting a loss – can affect the value of that item in the hands of different persons or entities.

So what is really fair? One approach is to obtain an independent, objective and professional valuation from an appraiser. Disregarding questions about who chooses the appraiser and how, as well as who pays, a thorough professional appraisal of the asset or item of interest should be very helpful. At the least it can provide a starting point for negotiation and discussion.

In the arena of income, estate and gift taxation, an independent professional appraisal is absolutely necessary if any significant value is at stake. This is because the IRS will almost certainly litigate valuations that result in large reductions in tax and the tax court will disregard valuations that are not supported by a meaningful, professional appraisal.

If someone tells you a particular asset or item is worth a specific amount, be skeptical until you see real supporting evidence of that valuation which takes into account the issues and factors relevant to you. Remember, if you transact based on a fair market value that isn’t, you can lose in many ways.

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