In simple terms, fair market value is generally what a buyer is willing to pay for a property whose owner is not selling under duress -- a variation of that time-honored trading axiom, "what the market will bear."Naturally, factors such as market demand, a home's condition and "location, location, location" play big roles in determining fair market value in residential real estate. Most real estate agents can calculate a reasonably accurate price based on "comps," short for a comparative (or competitive) market analysis.

You can create your own "comps" based on information from your local property tax office and perusal of Internet and newspaper sale ads, but this strategy probably won't give you as accurate a picture as actual recent neighborhood sales in your price and size range.City and county tax assessors, not surprisingly, tend to abide by the notion that the higher-priced recorded sales best represent true market value, while those lower-priced sales probably represent distressed sales. However, this is an inexact science that often results in higher assessments and tax protests by homeowners.

The Supreme Court defined fair market value in the 1973 case, United States vs. Cartwright, as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Some states have legal codes that present more refined (and longer-winded) definitions.It's important to note that value opinions are based on the subjective interpretation of available information, in contrast to imposed market values, which can set by the IRS or by legal action such as eminent domain.

With the IRS, fair market value of real estate can be a very important consideration. For example, if you were to sell your home to your daughter for a sum that's considerably under local comps, the difference between that reduced price and what the IRS considers fair market value will be treated as a gift for tax purposes.