What is Fair Market Value?
Whenever we go to buy some product in the market, we usually tend to inquire about the market price of such product or service. We try to find out what the other competitor products are selling and at what cost. This is not because we want to purchase the product of the competitors. This is basically because; we would not like to pay more than what the fair market price of the product in the current existing scenario.
The terms Fair Market Price or Fair Market Value are the estimated price of any product, especially products which involve huge costs such as property, gold, and other such assets. This estimated price basically is the price or value which a knowledgeable customer after thoroughly surveying the market is willing to pay for a particular product, especially an asset like property, in a situation where nobody and no situation is creating a pressure on the individual to purchase the asset from a knowledgeable seller who is willing to sell the asset without any undue pressure either from the situation or any other individual.
Like the term suggests, fair market value or fair market price is the justified price or value of the asset paid by the buyer to the seller without any coercion and without the influence of any other factor.
Fair Market Value of Property in India
Fair Market Value of a property in India is the real and legal worth of the property owned by an individual in India. This is the price where the buyer would not feel befooled by other parties present in the market. The aspect of Fair Market Value of the property surfaces at various points and at various junctures such as during selling a property, buying a property, refinancing a property, during obtaining a loan, while collecting stamp duty on such property price, among other purposes. The concept of Fair Market Value is also considered while sorting out issues related to taxation in India or dealing with the law (Family o Matrimonial law).
The concept of Fair Market Value becomes very important especially when an asset is sold. When an asset is sold, a seller makes capital gains on the asset. Capital gains earned by a seller are basically the difference between the selling price of the asset and the Fair Market Value of the asset in India. Capital Gains Tax is then implied on this amount of capital gain calculated from the difference between selling price and fair market value of the capital asset.
How to Determine Fair Market Value for Tax Purpose?
The Fair Market Value of a property particularly for the consideration of tax-related issues would be the price that the said property would be fetching in the open market. Such prices are mutually agreed upon by the willing seller and the willing buyer without getting unduly influenced by any other factor and upon knowing all the relevant details that are supposed to be known in such a transaction.
According to the Income Tax Act of India, the fair market value of any immovable property such as house would be either the cost of acquisition of the property or the price that the property would be ordinarily fetching in the open market on the basis of the report as obtained by the declaring party after getting it justified from a registered valuer, whichever is higher.
How to Estimate Fair Market Value?
Some of the acceptable ways to estimate the Fair Market Value of a property include:
Professional Appraisal: This basically involves a professional appraiser, a certified professional trained adequately in order to evaluate properties fairly. This professional appraiser helps the seller and the buyer to estimate the real value of the property in consideration.
Comparative Analysis: This is the most common way adopted in order to estimate the fair market value and the realistic value of a property. In this method, the valuation of similar models of property preferably in similar locations is compared in order to give a real picture of the property prices in the area. This particular method usually involves a licensed agent (at times also known as the broker) who helps in understanding the ongoing prices of similar properties in the location.
Valuation by Third Party Websites: In the era of technology, how can this field are left untouched by technology. There are specific online third-party websites which deal in property transactions. In order to attract customers, they provide a rough image of the prices and the trends of similar properties in the given locality on their websites. Such third-party website figures come in handy when a third opinion regarding the price of buying or selling a property is considered by any individual.
Factors Affecting Fair Market Value of Property
The various factors affecting the Fair Market Value of the Property include:
Location of the Property: The Fair Market Value of a Property is heavily dependant on the location of such property. If the property is situated in a prime location in a city, the fair market value of the property is supposed to be higher as compared to a property which is not located in such a prime location of the city. Even the connectivity of the location from other location has a bearing on the fair market value of the property.
Site or type of Asset: even in the same prime location of the property, the fair market value of the property depends on what type of property it is. This essentially means that the fair market value of a bungalow built on a piece of land would be higher as compared to an apartment in a society in the same location. Further, the size of the plot on which such construction of property is done also has an influence on the fair market value of the property.
Demand and Supply: Most importantly, the fair market value is decided upon the demand and supply in the locality the property exists and the type of property in consideration. If the influx of people from the locality and the type of property in consideration in higher then the fair market value of the property would be higher since the demand is higher. In the opposite case, where the supply is higher than the demand, the fair market value would obviously be lower.