How is fair market value (FMV) defined?

Fair market value (FMV) is defined as the price that a willing buyer and a willing seller, both knowledgeable about the relevant facts and neither under any compulsion to buy or sell, would agree upon in an open and unrestricted market. This definition emphasizes the importance of both parties having access to information and being in a position to negotiate freely.

In practical terms, FMV reflects the price that the market will realistically bear, considering the asset’s condition, location, and other useful characteristics. It is essential in various contexts, including real estate transactions, tax assessments, and valuations for investment or sales purposes.

The other options do not fully encompass the essence of FMV. For instance, just looking at the average price of assets does not account for individual negotiations between buyers and sellers. A company's listed stock price might not reflect the actual value that a buyer would be willing to pay or a seller willing to accept, as it is influenced by market perceptions, supply and demand, and investor sentiment. The assessed value of property for tax purposes is typically determined using specific methodologies and may not align with current market conditions, negating its role as an indicator of true fair market value.