What is the fair market value of a property and is it important in tax laws?

We better understand the importance of fair market value under tax regulations. And also how to calculate or obtain a property’s fair market value.

How to determine a property's fair value or why it important in income tax laws

Under income tax laws, the idea of fair market value is critical. If the sale/purchase amount indicated in the agreement is less than the fair market value of the property. Both the buyer and the seller will be impacted. We’ll talk as to what fair value is and how it affects sellers and buyers in this context.

 


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Under the income tax laws, fair market value is quite important.

Income tax laws apply to any profit made on the sale of a property. The profit is usually computed by deducting the purchase and improvement costs from the proceeds of the sale. If you own a home for more than 2 years, you can take advantage of the cost annual inflation benefit. You have the option of using the fair value of a property as of April 1, 2001, rather than the acquisition cost, for properties purchased prior to April 1, 2001. As a result, the idea of fair market value is critical for determining the purchase price for cap gains reasons.

Similarly, if the price specified in the agreement will be less than the council tax valuation of the property. Which is a proxy for the reasonable price. The stamps duty valuation of the property is being used as the selling consideration rather than the price stated in the agreement. Both the buyer and the seller would be impacted if the agreed value is less than the fair market value.

 

How to determine a property’s fair market value

How to determine a property's fair value or why it important in income tax laws

 

Rates calculated with a ready reckoner or a circle:

The income tax regulations do not give any standards for determining a property’s fair market value. However, there are several methods for estimating the reasonable price of a property. That is typically acceptable to the Income-Tax Department.

States have implemented a system of predefined prices based on the region. And kind of construction to avoid under-reporting of the consideration in sale agreements (which is done to avoid payment of proper stamp duty). This one is accomplished by the use of stamp duty ready reckoner or the declaration of circle rates. Among other methods, which are normally announced once a year.

The circle rate is the price below which property in a given area could be bought. It’s important to note at this point that circle rates vary by location. Local authorities adjust them from time to time to ensure the value close to the current market price of the property in a given location. Even if the seller plans to charge far less than the per sq ft circle rate. You will be obligated to pay income tax at the current circle rate. The sales tax will be calculated based on transaction cost if the property is being sold at a higher rate than the circle price.

 

How about a report on the value of your property?

Many experts believe that instead of calculating the fair market value of a property randomly. Sellers should take the guidance of a registered property valuer. The tax department will not accept any assumptions for the process of ascertaining value. In the event of a query, the department will give a value mentioned in the financial statement from a registered valuer more significance.

In addition to other parameters, government-approved valuers use a prescribed method for valuation and provide a detailed report. A valuer considers the property’s area and aspects, whether it is freehold or leases if there is any restrictive covenant regarding its use. Insurance of the property and land, or whether the land falls under any government development plan when determining the reasonable price of a property.

 

The registered valuer’s valuation report is generally accepted by the Tax Department. The way of getting a valuation report from a registered valuer is favored among the methods discussed above since it enhances and satisfies the argument.

 

What role does fair market value have in income tax laws?

Income tax laws apply to any profit made on the sale of a property. If you have already owned a home for more than two years, you can profit from indexation on the costs. The notion of fair market value is essential in determining the cost of purchasing a property for capital gains reasons.

In addition, if the quoted price is less than the stamp duty valuation, the stamp duty valuation of the property – which is an alternative to the Fair Market Value – is utilized as the sale consideration instead of the agreed amount. As just a result, if the agreed value is less than the property’s Fair Market Value, the both buyer as well as the seller would suffer.

How to determine a property's fair value or why it important in income tax laws

The difference between the agreement value and the Fair Market Value – if it is more than 5% – is taxed in the hands of both the buyers and sellers under various provisions of the income tax laws. As a result, it is critical to determine a reasonable price before signing the deal in order to avoid paying for the difference.

 


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