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Fair market value is a term that may be used in a variety of contexts. It might apply to the price of a home, car, or other property, and it can be used in legal ways, for taxation, or by insurance companies to determine the current worth of something. This worth does not take into account personal valuation of property. The fact that a person really likes a home has little to do with this number. Instead, it mainly refers to the monetary worth of the property if sold presently, when the sale is not rushed and prices of the property aren’t reduced for quick sale.
Another way of defining this is to look at what price a home, car or other property would currently fetch on the open market. This is the value typically assigned to the property by other agencies. If a car crashes and is so damaged that repairing it would exceed its fair market value, an insurance company will typically offer that value instead of repairing the car. This is not the same as price of replacing the car — a used car that's not worth much isn’t going to garner enough in replacement money to buy a new one.
Similar valuations may be done for insurance purposes when people lose items in disasters or accidents. A person who insures the contents of his home may receive some money back for these things, but usually not enough to fully replace them. There are some insurance companies that don’t insure on this basis, but instead insure on the basis of cost of replacement, which is typically higher.
There can be a number of different formulas used to determine fair market value. The IRS, for example, has formulas for determining how to deduct value of donations of certain items from taxes. The value of used furniture that is still in reasonable condition, for example, might be approximately 15% of the original purchase price. On the other hand, if the furniture is antique, a person who donates it could have it appraised by an antique dealer first to determine its market value.
Fair market value may also be applied to homes to show why property taxes should be lower. When homes would fetch a much lower price on the open market, people can argue that they owe a smaller amount. On the other hand, if the value of a home increases significantly, property taxes could be raised, based on the higher price it would likely get if it were sold.