Fair Market Value vs. Market Value: The Tax Definition and the Lending Definition

Fair market value and market value describe the same basic idea, a price between informed parties in an open market with no one forced to act, but each is written by a different authority for a different job. The federal tax definition, used for estates, gifts and donations, is the price at which property would change hands between a willing buyer and a willing seller, neither under any compulsion and both with reasonable knowledge of the relevant facts. The lending definition, used for mortgages, is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, with conditions attached. California property tax law has a third version. The differences matter when a CPA, a lender or an appeals board reads the report.

The tax definition, in its own words

For federal estate tax, Treasury Regulation section 20.2031-1(b) says the value of property in a gross estate is its fair market value at the time of death, and defines fair market value 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." The same paragraph adds that fair market value is not to be determined by a forced sale price.

IRS Publication 561, which sets out general valuation principles for income, gift and estate taxes, says the same in plainer words, and adds for real estate that because each property is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary.

The tax definition fixes the date by the event: the date of death for an estate, the date of the gift, the date of a contribution. A report written for that use is often a retrospective appraisal, an appraisal whose effective date, the date the opinion applies to, is in the past.

The lending definition, in its own words

The 2010 Interagency Appraisal and Evaluation Guidelines, issued by the federal banking agencies, define market value, as their appraisal regulations do, as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. The Fannie Mae Selling Guide uses nearly the same words. Implicit in it is a sale as of a specified date, under conditions whereby:

• buyer and seller are typically motivated;
• both parties are well informed or well advised, and acting in what they consider their own best interests;
• a reasonable time is allowed for exposure in the open market;
• payment is made in cash in U.S. dollars or in comparable financial arrangements; and
• the price is the normal consideration for the property, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

The Guidelines add that value in use, or a special value to one user, may not be used as market value for federally related transactions.

California's tax definition: fair market value as full cash value

California property tax has its own text. Revenue and Taxation Code section 110 says "full cash value" or "fair market value" means the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, with both knowing all the uses and purposes the property is adapted to and capable of, and the enforceable restrictions on them. Subdivision (b) adds a rule the federal definitions do not have: on a purchase, the purchase price is rebuttably presumed to be full cash value if the terms were negotiated at arm's length. That definition feeds the assessment rule in section 51. The county assessment it produces is not an appraisal.

Where the definitions differ

Federal tax (Treas. Reg. 20.2031-1)Lending (Interagency Guidelines, Fannie Mae)California property tax (R&T Code 110)

The price

"The price at which the property would change hands"

"The most probable price"

"The amount of cash or its equivalent"

Pressure on the parties

Neither under any compulsion; not a forced sale price

Typically motivated; no undue stimulus

Neither can take advantage of the other's exigencies

Knowledge

Reasonable knowledge of relevant facts

Prudent and knowledgeable; well informed or well advised

Knowledge of all uses and enforceable restrictions

Exposure time

Not stated

A reasonable time on the open market

"Exposed for sale in the open market"

Financing and concessions

Not stated

Price unaffected by special financing or concessions

Cash or its equivalent

Date

Date of death, gift or contribution

A specified date

The lien date or the date of a change in ownership

Exposure time, the reasonable time a property is assumed to have been offered on the open market before the sale, is written into the lending definition and only implied in the others. The lending definition also says aloud what the tax definitions leave to the analysis: the comparable sales an appraiser relies on have to be read for financing and concessions. Fannie Mae's note under the definition says adjustments to comparables must be made for special or creative financing or sales concessions, sized to the market's reaction rather than dollar for dollar.

Does the difference change the number?

Often the evidence is the same: closed sales of similar houses, with gross living area, condition, lot, location and permit history read the same way. What changes is what the report must address. A date-of-death report for an estate states a past effective date and the condition of the house on that date. A lender's report states a current date and works through concessions in the comparables. A report used in a property tax appeal is read against the January 1 lien date set by section 2192. None of that predicts where any number will land, and the CPA, the lender or the board decides how the value is used.

So a report should name its definition and its source; when ordering, say who will read it. The estate and date-of-death appraisal, property tax appeal appraisal and lending and refinance appraisal pages describe how each assignment is scoped, and what the CPA needs for a gift tax appraisal covers the gift side. Nothing here is legal or tax advice; your CPA or attorney decides how a value is used.

Other numbers that are not fair market value

An automated estimate from a portal is not an appraisal; it is a statistical estimate from records and nearby sales. An agent's comparative market analysis, or CMA, a licensed agent's opinion of a likely list or sale price, is not an appraisal. The county assessment is not an appraisal. A cash offer is not an appraisal; it is one buyer's price on stated terms, made with that buyer's own motives. For a Claremont house, the Claremont area page explains why comparable sales are chosen pocket by pocket.

What is market value walks through the lending definition line by line, taxable value, assessed value and full cash value decodes the county's terms, the four different numbers guide compares them all, and the cluster lives in the value types knowledge center. To confirm an appraisal is the right document, start with appraisal vs. estimate or call (909) 324-6122. Fees are set by the scope of the assignment, quoted before work begins, and do not depend on the value.

Sources

• 26 CFR 20.2031-1, Definition of gross estate; valuation of property (Legal Information Institute copy) (accessed November 6, 2026)
• IRS Publication 561, Determining the Value of Donated Property (accessed November 6, 2026)
• Interagency Appraisal and Evaluation Guidelines, 75 Federal Register 77450 (December 10, 2010) (accessed November 6, 2026)
• Fannie Mae Selling Guide B4-1.1-01, Definition of Market Value (accessed November 6, 2026)
• California Revenue and Taxation Code section 110 (accessed November 6, 2026)
• California Revenue and Taxation Code section 51 (accessed November 6, 2026)
• California Revenue and Taxation Code section 2192 (accessed November 6, 2026)

Gordon Hall, California Certified Residential Real Estate Appraiser, BREA No. AR003877 (lookup: https://www2.brea.ca.gov/breasearch/faces/party/view.xhtml?id=23601). Reports are prepared in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP). Nothing here is legal or tax advice; admissibility is always the court's decision.