What Is Fair Market Value (FMV) for Tax Purposes? Rules and Basis

Fair market value for tax purposes is the price property would change hands for between a willing buyer and a willing seller, with both reasonably informed about the relevant facts and neither forced into the deal.¹ The IRS uses this single standard, usually abbreviated FMV, to measure taxable income, deductions, and transfers whenever money isn’t the thing changing hands. Miss the mark badly in either direction and the accuracy-related penalty runs 20% to 40% of the resulting tax underpayment.²

FMV is not book value, which subtracts accumulated depreciation from original cost. It’s not liquidation value, which assumes a forced quick sale. The standard aims at what the property would actually bring in an open, unhurried market where neither side has their back against the wall.

When Fair Market Value Decides Your Tax

Gifts

Give property without getting full payment in return and the IRS measures the gift at its FMV on the date the transfer is completed. For 2026, the annual gift tax exclusion is $19,000 per recipient; cross that line to any one person during the year and you file Form 709.³⁴ Bargain sales between relatives get the same treatment: if a parent sells a home to a child for well below market, the gap between the price and FMV is a gift.

Estates

Every asset in a deceased person’s estate is valued at FMV as of the date of death. The 2026 basic exclusion amount is $15,000,000 per individual, so most estates owe no federal estate tax.⁵ An executor can elect an alternate valuation date six months after death, but only if that election reduces both the gross estate and the total estate and generation-skipping transfer taxes owed. The election is irrevocable.⁶

Charitable Contributions

Non-cash donations are deductible at FMV on the date of the gift. The IRS watches these numbers closely because inflated appraisals are a recurring source of audit adjustments, and documentation requirements step up with the claimed value.⁷

Non-Cash Compensation

When you’re paid in property instead of cash, the FMV of that property is taxable income. The classic case is stock options: the FMV at exercise sets the ordinary income you recognize. Restricted stock, free use of employer property, and similar benefits follow the same rule.

Why FMV Keeps Mattering After the Transfer: Basis

FMV doesn’t just measure the moment of transfer. It often sets your basis in the property, which decides how much gain or loss you report when you eventually sell. The rules split sharply between inherited and gifted property.

Inherited Property Steps Up

Property acquired from a decedent takes a basis equal to its FMV at the date of death, or the alternate valuation date if the executor made that election.⁸ This “step-up” is one of the most valuable features in the code for heirs. If your parent bought stock for $10,000 decades ago and it was worth $200,000 at death, your basis is $200,000. Sell the next day at $200,000 and you owe no capital gains tax. The date-of-death FMV directly determines how much you’ll eventually pay.

Gifted Property Carries Over

Gifts work differently. Your basis for calculating a gain on gifted property is generally the donor’s original basis, not current FMV.⁹ If someone gives you stock they bought for $5,000 that’s now worth $50,000, your basis is $5,000, and you owe tax on the full $45,000 gain at sale.

There’s a wrinkle when the FMV at the gift date is lower than the donor’s basis. For calculating a loss, your basis becomes the lower FMV on the gift date, not the donor’s higher cost. The rule stops taxpayers from manufacturing deductible losses by gifting depreciated property. Sell for an amount between the two figures and you recognize no gain and no loss.

Figuring the Number for Publicly Traded Securities

Stocks and bonds with an active market follow a clean formula: FMV is the average of the highest and lowest selling prices on the valuation date, not the open or close.¹⁰ If the valuation date lands on a weekend or holiday with no trades, you take a weighted average of the mean prices from the nearest trading days before and after, weighted inversely to the number of trading days between each date and the valuation date.

Mutual fund shares are valued at the public redemption price (net asset value per share) on the valuation date, because they don’t trade on exchanges with fluctuating intraday prices.

The Three Standard Valuation Approaches

Property without a quoted market price is valued using one or more of three recognized approaches.

Market Approach

The market approach looks at what similar assets recently sold for in arm’s-length transactions and adjusts for differences. It’s the preferred method when reliable comparable sales exist, and the standard for real estate, where appraisers adjust for size, location, condition, and features. For publicly traded securities, this approach is essentially baked into the high-low formula.

Income Approach

The income approach values an asset based on the future income it’s expected to generate. A discounted cash flow analysis projects future earnings and reduces them to present value using a discount rate that reflects risk. This is the standard approach for income-producing real estate and closely held businesses, where a buyer is really buying a stream of future earnings.

Cost Approach

The cost approach asks what it would cost to replace the asset with one of similar usefulness, minus depreciation for physical wear, outdated design, and economic factors. It works best for specialized or newly constructed property with few comparable sales. Replacement cost less depreciation effectively caps FMV, because a rational buyer won’t pay more for an existing asset than it would cost to acquire a new equivalent.

Rules That Trip Up Common Donations

Vehicles

Donate a car, boat, or airplane worth more than $500 to charity and your deduction is generally limited to the gross proceeds the charity receives when it sells the vehicle, not what a pricing guide says.¹¹ The charity has to send you a written acknowledgment within 30 days of the sale certifying the price. You can only deduct full FMV if the charity uses the vehicle in a significant way or makes material improvements before selling, and certifies that intended use.

If you do use a pricing guide, the IRS says to use the private-party sale price, not dealer retail, and only if the guide lists a vehicle of the same make, model, year, condition, and options as yours.¹² Engine trouble, body damage, or high mileage can drop a vehicle well below any guide figure.

Household Goods and Clothing

Used furniture, appliances, electronics, linens, and clothing are almost always worth far less than their original price. The IRS is direct: many used items have little or no market value, and no deduction is allowed for household items or clothing unless they’re in good used condition or better.¹² The one exception: if a single item is not in good condition but you claim a deduction over $500 for it, you can still take the deduction with a qualified appraisal attached to the return along with Form 8283. For clothing, the best evidence of value is what similar items actually sell for in consignment or thrift shops.

Art and Collectibles

Art valuations get special attention. Taxpayers can request a Statement of Value for artwork appraised at $50,000 or more, which gives you an advance review before filing. The IRS Commissioner’s Art Advisory Panel typically reviews individual works valued above $150,000, though the IRS has discretion to review items below that threshold.¹³ Getting a valuable piece reviewed upfront is far less painful than defending the number in an audit.

Closely Held Business Interests

Valuing an interest in a private company is one of the most contested areas of FMV work. The IRS weighs the company’s earnings history and capacity, financial condition, dividend-paying ability, goodwill, industry outlook, and prices from any prior stock sales, along with market data from comparable public companies when available.

Two discounts commonly reduce the taxable value of a private business interest. The discount for lack of marketability reflects the reality that privately held stock can’t be sold as easily as public shares; IRS valuation guidance notes restricted stock studies averaging discounts around 31% to 33%.¹⁴ The discount for lack of control reflects the weaker position of a minority holder who can’t force dividends, direct strategy, or liquidate the company, and it’s applied separately from the marketability discount.

Buy-sell agreements sometimes set a price for business interests, but the IRS won’t automatically accept it. A buy-sell price is disregarded for estate and gift tax purposes unless it meets three tests: it’s a legitimate business arrangement, it isn’t a device to transfer property to family below FMV, and its terms are comparable to what unrelated parties would agree to at arm’s length.¹⁵ Family-controlled businesses with below-market buyout provisions regularly fail that test.

When a Qualified Appraiser Is Required

A qualified appraisal is mandatory for any non-cash charitable contribution where you claim a deduction above $5,000 per item or group of similar items.⁷ It’s also standard practice for estate and gift tax returns involving closely held business interests, real estate, and collectibles without a readily available market price. The appraisal must follow the Uniform Standards of Professional Appraisal Practice, and the appraiser must sign and date it no earlier than 60 days before the date of the contribution.

The appraiser has to meet specific IRS requirements:

Relevant professional-level coursework and at least two years of experience buying, selling, or valuing the type of property in question.¹⁶
A designation from a recognized professional appraisal organization, or satisfaction of the IRS minimum education and experience requirements.
For real estate, licensure or certification in the state where the property is located.
No bar from practicing before the IRS during the three years preceding the appraisal.

Appraisers carry their own exposure. If an appraisal produces a substantial or gross valuation misstatement, the penalty on the appraiser is the greater of 10% of the resulting tax underpayment or $1,000, capped at 125% of the fee received.¹⁷ The appraiser can escape by showing the value was more likely than not correct. Residential appraisals typically run a few hundred dollars for straightforward properties; business valuations run roughly $1,000 to over $8,000 depending on complexity.

Documentation Tiers for Donated Property

The IRS imposes escalating documentation requirements based on the claimed value. Missing a requirement at any tier can cost you the entire deduction.

Under $250: a receipt from the charity showing its name, the date, and a description of the property. If no receipt is available, keep your own written record with the same information plus the FMV and how you calculated it.¹⁸
$250 to $500: a contemporaneous written acknowledgment from the charity before you file, describing the property and stating whether the charity provided any goods or services in exchange.
Over $500 to $5,000: Form 8283, Section A, filed with the return.⁷
Over $5,000: Form 8283, Section B, which requires a qualified appraisal. The appraiser signs Part IV; the charity signs Part V acknowledging receipt.¹⁹

For estates, Form 706 reports the FMV of all assets as of the date of death or alternate valuation date, with appraisals included for assets lacking a market price.²⁰ For gifts over the $19,000 annual exclusion, Form 709 reports the transfer and the FMV of the property.

Penalties When the Number Is Wrong

The IRS employs its own valuation specialists who focus on areas where judgment creates the most room for error: closely held businesses, large charitable donations, and unique property. When a reported value is significantly off, accuracy-related penalties apply on top of the additional tax owed.²

The penalties come in two tiers:

Substantial misstatement, 20% penalty: for income tax, the claimed value is 150% or more of the correct amount; for estate and gift tax, the reported value is 65% or less of the correct amount.
Gross misstatement, 40% penalty: for income tax, the claimed value is 200% or more of correct; for estate and gift tax, the reported value is 40% or less of correct.

In practical terms, overstating a charitable donation by 50% crosses the substantial misstatement line. Reporting an estate asset at barely two-thirds of its actual value triggers the estate equivalent. These thresholds catch more taxpayers than you might expect when donors rely on optimistic appraisals or executors lowball hard-to-value assets.

Protecting Yourself from an IRS Challenge

Reasonable Cause

You can avoid valuation penalties by demonstrating reasonable cause and good faith. For charitable donation property, that defense requires two things: a qualified appraisal from a qualified appraiser, and your own good-faith investigation of value.²¹ Hiring an appraiser and accepting whatever number comes back is not enough. The IRS expects you to do some independent homework, like comparing the appraisal to comparable sales or questioning assumptions that look aggressive.

Statute of Limitations

The IRS generally has three years from the date you file a return to assess additional tax.²² For gifts, that clock only starts if the transfer was adequately disclosed on a timely filed Form 709. Fail to disclose a gift or disclose it inadequately and there’s no statute of limitations at all; the IRS can challenge the valuation at any point in the future.²³ This is one of the strongest reasons to file Form 709 properly even when no tax is owed. Adequate disclosure starts the three-year clock; after that, the IRS can’t revisit the number regardless of how much it might disagree.

1
Internal Revenue Service. Publication 561 (12/2025), Determining the Value of Donated Property
2
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. About Form 709
5
Internal Revenue Service. What’s New – Estate and Gift Tax
6
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
7
Internal Revenue Service. Instructions for Form 8283 (12/2025)
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
9
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
10
eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
11
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
12
Internal Revenue Service. Publication 561 (12/2025)
13
Internal Revenue Service. Art Appraisal Services
14
Internal Revenue Service. Discount for Lack of Marketability Job Aid for IRS Valuation Professionals
15
Office of the Law Revision Counsel. 26 USC 2703 – Certain Rights and Restrictions Disregarded
16
Internal Revenue Service. Notice 2006-96, Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions
17
Office of the Law Revision Counsel. 26 USC 6695A – Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals
18
Internal Revenue Service. Publication 526, Charitable Contributions
19
Internal Revenue Service. Form 8283, Noncash Charitable Contributions
20
Internal Revenue Service. About Form 706
21
eCFR. 26 CFR 1.6664-4 – Reasonable Cause and Good Faith Exception
22
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
23
eCFR. 26 CFR 301.6501(c)-1 – Exceptions to General Period of Limitations on Assessment and Collection