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

For federal tax purposes, fair market value is the price property would change hands for between a willing buyer and a willing seller, with both sides reasonably informed about the property and neither one forced to complete the deal.¹ The IRS uses that “willing buyer, willing seller” standard to measure taxable gifts, estate assets, charitable deductions, and any property you receive instead of cash. Missing the mark in either direction can bring accuracy-related penalties of 20% or 40% of the resulting tax underpayment, so the number is worth getting right.²

FMV is not book value (original cost minus depreciation) and not liquidation value (what a forced quick sale would yield). It’s what the property would actually bring in an open, unhurried market.

When the IRS Requires You to Use FMV

Gifts

Give someone property without receiving full payment in return and the transfer’s FMV on the date the gift is completed measures any potential gift tax. For 2026, the annual exclusion is $19,000 per recipient; gifts to any one person above that threshold get reported on Form 709.³⁴

Bargain sales between related parties get the same treatment. If a parent sells a home to a child for well below market price, the gap between the sale price and FMV is a gift.

Estates

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

Charitable Contributions

Non-cash donations are deductible at FMV on the date of the contribution. The IRS pays close attention here because inflated valuations are among the most common audit adjustments, and documentation requirements scale with the size of the deduction.⁷

Non-Cash Compensation

Property received for work is taxable at its FMV. Stock options are the everyday example: FMV at exercise sets the ordinary income you recognize. Restricted stock units, free use of employer property, and similar benefits follow the same rule.

Why FMV Also Sets Your Future Tax Bill

FMV doesn’t just measure what’s taxable at the moment of a transfer. It fixes the basis of the property, which controls gain or loss when the recipient eventually sells. The rules split sharply depending on how you got the property.

Inherited Property Gets a Step-Up

Property you inherit takes a basis equal to its FMV at the date of death (or the alternate valuation date if that election was made).⁸ If a parent bought stock for $10,000 decades ago and it was worth $200,000 at death, your basis is $200,000. Sell it the next day at that price and there’s no capital gains tax. The accuracy of that date-of-death FMV directly drives what heirs owe later.

Gifted Property Carries the Donor’s Basis

Gifts work differently. Your basis for figuring a gain is generally the donor’s original basis, not the current FMV.⁹ Receive stock the donor bought for $5,000 that’s now worth $50,000, and you’ll owe tax on the full $45,000 gain when you sell.

There’s a special rule when FMV at the time of the gift is lower than the donor’s basis. Your basis for figuring a loss is the FMV on the gift date, which prevents someone from manufacturing deductible losses by handing off depreciated property. Sell for a price between the donor’s basis and the gift-date FMV and you recognize no gain and no loss.⁹

How to Determine FMV, by Asset Type

Publicly Traded Stocks and Bonds

Securities with an active market follow a set formula: FMV is the average of the highest and lowest selling prices on the valuation date, not the open or the close. When the valuation date falls on a weekend or holiday with no trading, you take a weighted average of the mean prices from the nearest trading days before and after, weighted by how many trading days separate each from the valuation date.¹⁰

Mutual fund shares are valued at their public redemption price (net asset value per share) on the valuation date rather than by the high-low method.

The Three General Approaches for Everything Else

For assets without a clean daily price, appraisers rely on one or more of three standard approaches:

The market approach establishes value by looking at recent arm’s-length sales of similar assets. It’s the preferred method when reliable comparable-sales data exists, and it’s the backbone of most real estate appraisals.
The income approach values an asset by the future income it’s expected to produce, typically through a discounted cash flow analysis that reduces projected earnings to present value using a risk-adjusted discount rate. It fits income-producing real estate and closely held businesses.
The cost approach asks what it would cost to replace the asset with one of similar usefulness, minus depreciation for wear, obsolescence, and economic factors. It’s the fallback for specialized or newly constructed property with few comparables.

Vehicles Donated to Charity

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

When a pricing guide does apply, the IRS says to use the private-party sale price, not the dealer retail figure, and only if the guide lists a vehicle of the same make, model, year, condition, and options as yours.¹

Household Goods and Clothing

Used furniture, appliances, electronics, linens, and clothing are typically worth far less than what you paid. The IRS is direct: many used items have little or no market value, and you can’t deduct household items or clothing unless they are in good used condition or better. The one exception: a single item not in good condition can still support a deduction over $500 if you get a qualified appraisal and attach it to your return with Form 8283.¹ For clothing, the best evidence of value is what similar items actually sell for in consignment or thrift shops.

Art and Collectibles

Art gets special scrutiny. Taxpayers can request a Statement of Value for artwork appraised at $50,000 or more, which gives an advance IRS review before filing. The IRS Commissioner’s Art Advisory Panel typically reviews individual works valued above $150,000, though the IRS has discretion to look at less valuable pieces.¹²

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, prices from any prior stock sales, and, where available, market data from comparable public companies.

Two discounts commonly cut the taxable value of a private interest. A discount for lack of marketability (DLOM) reflects that privately held stock can’t be sold as easily as public shares; the IRS’s own guidance surveys restricted stock studies with average discounts around 31% to 33%. A discount for lack of control (DLOC) reflects that a minority holder can’t force dividends, direct strategy, or liquidate the business, and it’s applied separately from the DLOM.¹³

Buy-sell agreements sometimes set a price for a business interest, but the IRS won’t automatically treat that price as FMV. For estate and gift tax purposes, a buy-sell price is disregarded unless the arrangement is a bona fide business one, is not a device to transfer property to family below FMV, and has terms comparable to what unrelated parties would agree to at arm’s length.¹⁴ Family-controlled businesses with below-market buyout provisions routinely fail that test.

When You Need a Qualified Appraiser

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 on estate and gift returns involving closely held businesses, real estate, and collectibles without a ready 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 contribution.

Not just anyone qualifies. The appraiser needs relevant professional-level coursework and at least two years of experience buying, selling, or valuing the type of property involved. The appraiser should hold a designation from a recognized professional appraisal organization or otherwise satisfy the IRS minimum education and experience thresholds. Real estate appraisers must be licensed or certified in the state where the property is located.¹⁵ And the individual can’t have been barred from practice before the IRS during the three years preceding the appraisal date.

Appraisers face their own penalties. If an appraisal produces a substantial or gross valuation misstatement, the appraiser owes the greater of 10% of the resulting tax underpayment or $1,000, capped at 125% of the fee received.¹⁶ The appraiser can escape the penalty by showing the value was more likely than not correct.

Documentation Requirements by Value

For charitable donations, documentation scales with the claimed deduction, and missing a requirement at any tier can cost you the deduction entirely.

Under $250: keep a receipt from the charity showing its name, the donation date, and a description of the property. If no receipt is available (a drop-off at an unattended collection site, for example), keep your own written records with the same information plus the FMV and how you arrived at it.¹⁷
$250 to $500: get 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.¹⁷
Over $500 to $5,000: file Form 8283, Section A, with your return.⁷
Over $5,000: file Form 8283, Section B, backed by a qualified appraisal. The appraiser signs Part IV and the charity signs Part V acknowledging receipt.¹⁸⁷

For estates, Form 706 reports FMV of all assets as of the date of death (or alternate valuation date), and the executor must include appraisals for assets without ready market prices.¹⁹ Gifts above the $19,000 annual exclusion get reported on Form 709 at their FMV.⁴

Penalties When the Valuation Is Off

The IRS uses its own valuation specialists to review reported FMV, focusing on areas where judgment leaves the most room to disagree: closely held businesses, large charitable donations, and unique property. When the IRS concludes a reported value was significantly wrong, accuracy-related penalties come on top of any added tax.²

Two tiers apply. A substantial misstatement carries a 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 correct. A gross misstatement doubles the penalty to 40%: the income tax threshold is 200% or more, and the estate and gift threshold is 40% or less.² Overstating a charitable donation by 50% or more crosses the substantial line on the income tax side, and reporting an estate asset at barely two-thirds of true value triggers the estate equivalent.

The Reasonable Cause Defense

You can avoid valuation penalties by showing reasonable cause and good faith. For charitable property, that specifically means a qualified appraisal from a qualified appraiser and your own good-faith investigation of value.²⁰ Hiring an appraiser and rubber-stamping the number isn’t enough. The IRS expects independent homework, like comparing the appraisal to recent comparable sales or pressing on assumptions that look aggressive.

File the Gift Return to Start the Clock

The IRS generally has three years from when you file a return to assess additional tax.²¹ For gift tax, that clock only starts if the gift was adequately disclosed on a timely filed Form 709. Fail to disclose a gift, or disclose it inadequately, and there is no statute of limitations at all; the IRS can challenge the valuation at any point in the future.²² Reporting a gift properly, even when no tax is owed, closes that window after three years and puts the valuation beyond further challenge.

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, Including Amendments From the One, Big, Beautiful Bill
4
Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
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. Art Appraisal Services
13
Internal Revenue Service. Discount for Lack of Marketability Job Aid for IRS Valuation Professionals
14
Office of the Law Revision Counsel. 26 USC 2703 – Certain Rights and Restrictions Disregarded
15
Internal Revenue Service. Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions Notice 2006-96
16
Office of the Law Revision Counsel. 26 USC 6695A – Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals
17
Internal Revenue Service. Publication 526, Charitable Contributions
18
Internal Revenue Service. Form 8283 Noncash Charitable Contributions
19
Internal Revenue Service. About Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return
20
eCFR. 26 CFR 1.6664-4 – Reasonable Cause and Good Faith Exception
21
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
22
eCFR. 26 CFR 301.6501(c)-1 – Exceptions to General Period of Limitations on Assessment and Collection