Suppose you are looking at selling your ancestral property or buying a piece of land or an apartment, the first question that will demand an answer is what the value of the property is. This is different from what the buyer may buy for or the seller may quote as this actually tells us the property’s worth. So, basically, fair market value of a property is not just any calculation but a well-thought of and calculated worth of the property. In this guide, we will focus more about the FMV, factors influencing it and how to calculate FMV of the property.
What is Fair Market Value (FMV) of a property?
The Fair Market Value (FMV) of a property or the fair value of land is the current value of a property if it was sold in the open market. Before agreeing to set the FMV price, the buyer and the seller should be aware about the present condition of the property and must agree for the transaction on their free will.
Note that the Finance Act, 2017, shifted the base year for fixing cost inflation index (CII) from 1981 to 2001. This was done due to the lack of information for calculating FMV of properties as on April 1, 1981.
Why is FMV important?
- The non-banking financial companies (NBFCs) and government organisations take into consideration the FMV when they assess the collateral assets or taxed properties.
- Property tax calculation, insurance claims, charity, ownership of stocks etc. are some transactions that need FMV to be assessed.
Importance FMV to investors
Decisions taken for investments: FMV is extremely significant for investors. This will help them make trading and investment decisions easier. They can time their investments and calculate their holding time and selling time of the property.
Tax benefits: Whenever tax benefits are calculated, FMV is something that all look for. The long term capital gains are calculated as difference between the FMV and the cost price, which the seller pays. In case the investor is inheriting property or assets, the taxes have to be paid on difference between the FMV and the sale price.
Factors that influence Fair Land Value
The fair land value can either appreciate or dip based on the following factors:
Locality
In cities like Mumbai, Delhi, Bangalore and Chennai, the difference in property values between affluent and developing areas is significant. For instance, a property in Malabar Hills, Bandra or Juhu may cost multiple crores, while a similar property in a developing area could be more affordable, priced at Rs 50 lakh.
Site
Even within a great locality, the specific site location of a property matters. Factors like being a corner plot or proximity to the main road can influence future growth and appreciation rates. A bigger parcel will command more substantial value than a smaller piece of parcel.
Amenities
The amenities and facilities associated with a property contribute significantly to its value. Features such as a private swimming pool, elevators, and nearby commercial establishments are viewed more positively post-pandemic and can lead to greater appreciation.
Infrastructure
Properties benefiting from infrastructure updates tend to appreciate more. For example, land rates in Ayodhya, following the inauguration of a grand temple, and areas near the Jewar Airport in Greater Noida have shown substantial growth. The Mumbai Trans Harbour Link (MTHL) that was inaugurated earlier this year has a positive impact on the real estate prices in both Navi Mumbai and Mumbai, owing to the connectivity that it offers. Additionally, the prices in and around the Navi Mumbai International Airport have also seen a spike.
Market trends
The balance between demand and supply is a key metric affecting property appreciation. A property with excellent features may not see significant appreciation if there’s muted demand or an oversupply of similar homes. If there is high demand that is not met with proper supply, the FMV will surge and on the other hand, over supply will make demand less and the property value will dip.
Interest rates
The interest rates paid by borrowers to acquire property directly impact its price growth. High interest rates can adversely affect buyer sentiment and limit a property’s potential for value appreciation.
Time
Real estate investments generally yield profits in the long term. The value of a property is more likely to increase over an extended period compared to short-term fluctuations.
Housing Index
A housing index marks the changes that take place in the residential real estate sector. Some of the popular property indices in India are National Housing Bank’s Residex and Reserve Bank of India’s Housing Price Index (HPI) and Residential Property Price Index (RPPI).
Updated quarterly, these indices give a fair idea about the existing market and price trends across different Indian cities. The indices are updated quarterly based on the revenue department’s transaction data.
However, the disadvantages are that these indices may include figures that may or may not belong to the city you are looking at. Also, since these are updated quarterly, getting recent data to help make decisions is difficult.
Legal status
Clear property titles, compliance with zoning laws, and the absence of legal disputes are essential. Properties with legal complications may experience reduced market value.
Government policies and taxation
Changes in property taxes, housing regulations, and government incentives can directly impact property valuations. For instance, favourable tax policies may boost demand, driving up prices.
Fair market value vs market value
While fair market value and market value are terms often used interchangeably, they have distinct meanings despite certain similarities.
| Parameters | Fair market value | Market value |
| Definition | FMV is the price at which a property would change hands between a willing buyer and a willing seller when both have reasonable knowledge of the relevant facts, and neither is under any compulsion to buy or sell. | Market value is the current value of a property in the open market, considering factors like supply, demand, and prevailing economic conditions. It’s the amount a buyer is willing to pay and a seller is willing to accept in a normal and competitive real estate market.
|
| Considerations | FMV considers the hypothetical scenario of a fair and open market transaction where both parties are acting in their best interests. | Market value is more focused on the practical, current state of the real estate market, taking into account recent sales, comparable properties, and local economic conditions. |
| Use and implications | FMV is often used in legal and tax contexts, such as for determining property taxes, calculating capital gains taxes, or assessing the value of assets in estate planning. | Market value is often used in real estate transactions to determine a property’s listing price or offer amount. Real estate professionals typically use recent comparable sales to assess market value. |
How to calculate Fair Market Value ?
FMV is calculated during
- Sale of an asset
- Transfer of liability
- Not a forced or distressed sale
- when property is clearly market-based not entity based
Standards, guidelines, local and national regulations are made use of to determine a property’s FMV. The difference between purchase price and FMV will be larger when the property’s ownership period is longer.
Different methods to calculate FMV
The difference between purchase price and FMV will be larger when the property’s ownership period is longer. Standards, guidelines, local and national regulations are made use of to determine a property’s FMV.
The methods you can use to calculate Fair Market Value (FMV) include:
Income approach
A registered valuer, recognised under wealth tax rules, can assess your property and provide a detailed valuation report to determine FMV. This is best suited for commercial property. Also known as Discounted Cash Flow (DCF) method, this method calculates the current value of the asset’s projected future cash flows. This includes considering inflows and outflows and then applying a discount rate that will reduce the property’s present value.
For Example: A commercial property expected to generate Rs 10,00,000 in annual rental income with an 8% discount rate will have an FMV of Rs 1,25,00,000 (Rs 10,00,000 ÷ 0.08).
Cost approach
The FMV is calculated based on the cost required to replace the property while accounting for depreciation. This method is particularly helpful for older properties where market comparables are limited.
Example: For a property purchased in 1995, the replacement cost of a similar property in 2024 is estimated at Rs 70,00,000. After accounting for depreciation, the FMV is determined to be Rs 50,00,000.
Comparative method
Real estate agents often provide you with a list of sale prices for neighbouring homes or properties when you intend to sell a property. This is known as a comparable value. You can determine an asset’s FMV using comparable costs.
Government verified Fair Market Value calculation tools
In addition to traditional methods such as market comparisons and professional valuations, taxpayers and property owners can leverage various government-verified tools and software to determine the Fair Market Value (FMV) of their properties accurately. These tools simplify the process, ensure transparency, and reduce the chances of disputes with tax authorities. Mentioned below are some of the tools that can be used for calculating FMV
Stamp duty ready reckoner portals
Most state governments provide online portals that list guidance value, ready reckoner or circle rates for different localities. These rates serve as a baseline for FMV calculations. For instance, you can check the guidance value of Karnataka by logging on the Kaveri 2.0 online portal.
Online valuation tools
Certain tax-related portals or state revenue department websites provide valuation tools that estimate FMV based on property details entered by the user. These tools ensure compliance with government standards.
Income tax department’s guidance
The Income Tax Department often provides guidelines or approved platforms for determining FMV, particularly for older properties or during tax scrutiny.
Benefits of using FMV tools
There are many advantages for using the government verified FMV tools.
- Accuracy: These tools rely on official data, ensuring reliable FMV estimates.
- Convenience: Users can access FMV information online without requiring manual calculations or extensive professional assistance.
- Legal compliance: Using these tools helps taxpayers align with official valuation standards, reducing the likelihood of disputes during audits.
Role of FMV under Income Tax laws
- According to Section 2(22B) of the Income Tax Act, the capital gains price for a relevant period is the fair market value.
- Any profit on the sale of a property is taxed under the income tax laws. The profit is generally arrived at by deducting the cost of acquisition and cost of improvement, from the sale consideration. If the property is held for more than two years, you are allowed to avail of the benefit of indexation, on the costs. However, this has been amended in 2024. Under the new law, all properties registered before July 23, 2024, can avail of both options- long term capital gains tax with indexation at 20% or long term capital gains tax without indexation at 12.5%.
- For properties that are acquired by you prior to April 1, 2001, you have the option to take the fair market value of property in 2001, in place of the cost of acquisition. So, the concept of fair market value is important for finding out the cost of acquisition, for capital gains purposes.
- Likewise, if the price stated in the agreement is lower than the stamp duty valuation of the property, the stamp duty valuation of the property, which is a proxy for the fair market value, is taken as the sale consideration, instead of the value stated in the agreement. So, if the agreement value is lower than the fair market value of property, both the buyer and the seller will be impacted.
- If the difference between the agreement value and the fair market value of the property is more than 5%, it is taxed in the hands of the buyer, as well as the seller, under different provisions of the income tax laws. Hence, it is important to ascertain the fair market value of the property, before executing the agreement, to avoid the payment on such difference.
See also: All about sale deed and agreement to sale
Benefits of Fair Value of Land
Knowing about the importance of the fair value of land is important for all stakeholder- investors, owners or buyers. Mentioned are the advantages.
- Acquisition of assets: The Fair Value of Land or the Fair Market Value gives a benchmark of the asset that is useful before buying or selling a property. By finding the right FMV, one can avoid financial risks and ensure good property returns.
- Value of the business: FMV helps assess the value of business. This can be anything from capital raising to mergers etc.
- Insurance: FMV is used to calculate the insurance coverage that a property can get. This is also used when a property is used as a collateral so that corresponding loans can be disbursed.
- Tax: FMV is used to calculate all taxes related to the property. It is also used to calculate the stamp duty and registration charges of a property. At the time of asset acquisition, the first FMV helps calculate the asset amortisation or depreciation. The last FMV during sale of the property helps in identifying whether the property determines capital gains or loss.
- Decision making: The FMV provides valuable data to investors and developers on land and property acquisition. With this price, the buyer will know that they won’t overpay. They can also gauge the return on investment (RoI) through this.
- Financial planning: With the FMV, one can plan their finances with respect to property investments in a better way. The comparisons between actual market value and the FMV can help take decisions regarding market entry and exit.
- Calculation of property tax: With accurate FMV, the government (local municipal body) can calculate the property tax accurately based on the present property condition.
- Ability to negotiate: With the information in FMV available, one can easily negotiate while buying property as the base price is available.
- Prevents market speculations: Real estate gets affected by speculations and the presence of FMV puts a pause to market speculations with respect to rise and decrease in prices.
- Transparency in the real estate segment: Of the many factors that help bring transparency in the real estate segment is the FMV. By knowing the FMV one cannot create artificial price points for a property.
Challenges of assessing FMV of property
Arriving at the fair market value poses a significant challenge as there’s no universal formula applicable to all situations. This isn’t a one-size-fits-all scenario. The accuracy of determining the FMV depends heavily on the appraiser’s expertise and the information at their disposal. Unlike a fixed valuation, fair market value is more of an estimation due to its dependence on numerous factors.
What are the challenges in valuing FMV of old properties?
Assessing the Fair Market Value (FMV) of unique or very old properties can be significantly more complex compared to standard residential or commercial properties.
Absence of market comparables
- Very old properties, such as heritage homes or rural land, often lack recent sales data or similar properties in the vicinity for comparison.
- Example: A 100-year-old bungalow in a heritage zone may have architectural significance but no direct market benchmarks for valuation.
Condition and depreciation
- The condition of older properties can vary widely, requiring expert judgment to account for wear, tear, and historical preservation.
- Example: A property built in the 1950s might need extensive repairs, significantly affecting its valuation under the cost approach.
Legal complications
- Disputed ownership, incomplete documentation, or zoning issues can complicate the valuation process, as these factors are not reflected in standard ready reckoner rates.
- Example: Agricultural land with unclear title deeds may require a valuer to adjust FMV for potential legal risks.
Location-specific factors
Rural or remote properties often have inconsistent or outdated circle rates, making it harder to align FMV with current market realities.
Subjectivity in valuation
Unique properties may have a wider margin of error in valuation, as professional valuers must rely on qualitative assessments and adjustments based on limited data.
Housing.com POV
Determining the fair land value is a multifaceted process that involves considering various factors. Adhering to legal guidelines, leveraging professional valuation services and staying informed about market dynamics are crucial elements for a fair and successful property transaction. Arriving at the right value helps sellers find buyers a lot quicker than sellers who rely on guesswork and wishful thinking when it comes to valuation of their property. Using professional assistance can help owners know the exact fair land value and can rate it accordingly.
Key takeaways of Fair Market Value
- FMV represents the true worth of an asset that is mutually agreed by the buyer and the seller.
- FMV is different from market value that depends on the market conditions and necessarily not focus on what the actual worth of the property is.
- FMV can be valued on the basis of income, cost, hybrid and market approaches.
- FMV can be calculated on the basis of comparative analysis, selling price, replacement costs etc.
FAQs
How to find value of property in 2001?
By using methods like a property’s selling price, comparing price with other assets, hiring professional help etc.
Cite some examples where Fair Market Value calculation is used.
Fair Market Value is calculated in share market, gifts, property taxes etc.
What is the difference between fair value and market value?
While market value depends on the market behaviour, fair value is a price that is agreed by a seller and a buyer.
What is market value of property?
The market value is the price at which a property can be sold. So, at a particular time, this is the fair price that the property commands.
Is fair market value recorded?
All assets that are sold or bought at fair market value should be recorded by accountants.
How to find fair market value of property?
You can assess the fair market value of property on the basis of circle rate or RR rate.
What is fair market value?
Fair market value is important for finding out the cost of acquisition, for capital gains purposes.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
