**Fair Market Value** (noun) — The price that property would sell for on the open market between a willing buyer and willing seller, both having reasonable knowledge of relevant facts and neither being under any compulsion to buy or sell.
Fair market value is what something would actually sell for in a normal transaction between people who both know what they're doing and neither of whom is desperate. It's not what you paid for something, what you think it's worth, or what you'd like to get for it. It's what it would realistically sell for in the current market.
For estate purposes, fair market value is usually determined as of the date of death. If someone dies owning a house, the executor needs to determine what that house would have sold for on the day the person died. This value is used for tax purposes, for dividing assets among beneficiaries, and for various legal and accounting requirements.
Different types of assets require different valuation methods. Real estate might be valued by a professional appraiser. Publicly traded stocks have clear market prices. Family business interests, artwork, collectibles, or unusual assets might require specialist valuations. The executor is responsible for determining fair market value for all estate assets, and may need to hire professional valuators for complex items.
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Accurate valuation at fair market value is crucial for estate administration. The executor uses these values to prepare estate tax returns (in jurisdictions with estate tax), to fairly divide assets when the will calls for percentage distributions, and to ensure all parties receive their proper share.
Beneficiaries sometimes disagree with valuations, particularly for items with emotional significance or for assets without clear market comparables. A family home might be valued at market price, but beneficiaries who grew up there might feel it's "worth more." Conversely, beneficiaries receiving money might scrutinize valuations of property going to others, suspecting overvaluation.
For tax purposes, fair market value creates the cost basis for beneficiaries. If you inherit a house valued at fair market value of five hundred thousand dollars at death, that becomes your cost basis. If you later sell it for six hundred thousand dollars, you only pay capital gains tax on the hundred-thousand-dollar gain, not on the full value. This "step-up in basis" can provide significant tax advantages.
**Related terms:** Valuation, [Estate Administration](/dictionary/estate-administration), Capital Gains Tax
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