There are many variables that make up the fair market value of a property. Because this value depends heavily on the environment and the property itself, it’s crucial in making sure you get the best buying or selling price. Here are some of the biggest things that fair market value affects:
Homeowner’s insurance always uses the fair market value of your home to calculate the price of a policy, which helps the insurance company determine the cost of replacing your home if needed. The cost to replace your home will not always equal the amount you paid for it. This is where fair market value makes a difference. Your homeowner’s insurance policy will provide coverage based on what it will cost them in the current market regardless of the purchase price.
Property taxes are another major reason fair market value matters. Your municipality charges you an amount based on its individual tax rate and the appraised fair market value of the property. This means you’ll be charged a percentage of that value rather than a percentage of the purchase price. Fair market value can also affect other taxes, like estate taxes, inheritance taxes and gift taxes. Even if you get a property as a “gift” or through inheritance, you’ll have to pay taxes based on the fair market value as long as you’re the owner.
There are several legal situations where fair market value can make a big difference. Some of the most important examples would be divorce settlements, which divide assets between two parties. Fair market value also affects issues related to property damage and inheritance. In these cases, the fair market value helps keep everyone discussing the same number for the value of the asset so they can come to the fairest agreement.
Buyers, sellers and investors should know the fair market value of a property to prevent confusion and make the transaction as fair as possible. Knowing these additional reasons fair market value matters will help you understand its importance beyond the actual buying and selling.