Fair Market Value

Fair market value is the value at which estate assets are included in the gross estate for federal estate tax purposes. The IRS defines fair market value as "the price at which property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts."

The taxpayer must determine the fair market value of a piece of property. The fair market value depends on the property’s value in the marketplace, not the intrinsic worth of the item. Because of sentimental value (or to put the estate in the most advantageous tax position), taxpayers may under-value or over-value certain assets.

The IRS frowns upon this practice – to the point of charging penalties for over or under valuation of property. If the IRS disagrees with a taxpayer’s valuation of an asset, courts often settle the matter. Courts determine the value of property using expert appraisals and records of the recent sales of similar property, among other things. Courts usually arrive at a value somewhere between the values established by the taxpayer and the IRS.