FMV helps you understand the value of your assets, and you’ll need to figure it when submitting an insurance claim, applying for a loan or filing your taxes. Here’s how it works.
There are many occasions when you might need to calculate an asset’s fair market value (FMV): when selling machinery or livestock, settling an insurance claim, writing off charitable donations, reporting barter income, calculating property taxes or pledging equipment as loan collateral, for example.
But what exactly constitutes a ‘fair’ market value, and what happens when market prices aren’t readily available? Here’s what you need to know.
What is FMV, and how does it work?
An asset’s fair market value (FMV) is the price a willing buyer would pay for it based on current market conditions–essentially, it’s the amount in cash you could expect to earn if you sold that item.
Figuring an asset’s FMV typically starts with looking at market prices for similar goods that have sold recently. For raised commodities, you can often get a good sense of FMV by referring to commodities markets or recent local sales prices. Vehicles and other equipment can be valued based on buyers’/sellers’ guides (e.g. Blue Book value), local dealer listings and auctions.
For some assets, you might have to hire an appraiser to value the property–for example, if you’re looking to write off a charitable donation valued at $5,000 or more. A qualified appraiser is someone designated by an appraiser organization who is competent to appraise the type of property you are donating. (The IRS instructions provide a more detailed breakdown of who qualifies as an appraiser for tax purposes.)
How is FMV calculated for different asset types?
Harvested crops: local market prices (e.g. local grain bid prices, USDA reports, university extension reports, commodity auctions or local sale reports).
Market animals: Use local auction or market prices for animals of similar breed, age, and weight.
Draft, breeding or dairy stock: May require the services of an appraiser to consider genetics, production history and replacement cost.
Machinery and equipment: Look at sale prices of similar used tractors, combines, or implements (e.g. local dealer listings, auctions, classifieds, websites like TractorHouse and Machinery Pete).
Farmland: Use recent sales of similar land in the same area, adjusted for soil quality, irrigation, location, and improvements.
FMV vs. Net Realizable Value (NRV)
In addition to its fair market value, you might also hear accountants refer to an asset’s Net Realizable Value (NRV). An asset’s NRV is its current fair market price, less the estimated cost of completion, disposition, transportation and selling. This is a more conservative measure of an asset’s market value and reflects the amount you could get for it after factoring in selling costs.
Why is calculating FMV important?
Fair market value (FMV) ensures that valuations reflect the economic reality of assets and inventory, rather than simply original purchase cost. There are also certain situations when you’ll need to calculate FMV, including:
Taxes on asset transfers
Farm operations often involve family transfers of property. When a farmer transfers farmland, equipment, breeding livestock or other farm assets, the FMV of those assets is used to determine the taxable value of property passed to heirs.
Read more: Tax Strategies for Farm & Ranch Succession Planning
Insurance claims
In the event of a loss (e.g. fire, flood or other disaster) involving crops or livestock, insurance claims often require FMV to determine the proper compensation. If a flood destroys part of a crop, the payout may be based on the FMV of that crop at the time of the loss.
Read more: Disaster-Proof Your Records: A Checklist
Writing off charitable donations
Charitable contributions you report on Form 8283 must include the fair market value (FMV) of each item or group of similar items you’re donating. The FMV is the amount in cash you could reasonably expect to earn for the sale of the item.
Inventory valuation
If you use accrual accounting, crops, livestock and other farm inventories may be valued at FMV when using certain inventory valuation methods like the lower of cost and market (LCM) method and the ‘farm-price’ method, which ensures the farm’s financial statements better reflect what the assets could reasonably be sold for.
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This resource is provided for general informational purposes only. It does not constitute professional tax, legal, or accounting advice. The information may not apply to your specific situation. Please consult with a qualified tax professional regarding your individual circumstances before making any tax-related decisions.
