Fair Market Valuations: What They Are and How To Report Them
Estimated reading time: 2 minutes
The end of the year is in sight, and with that comes fair market valuations. The fair market value of an IRA must be reported to the IRS by the IRA’s custodian by December 31 each year.
So what is a FMV anyway?
Fair market value (FMV) is an estimate of the market value of an asset, based on what a knowledgeable, willing, and unpressured buyer would likely pay to a knowledgeable, willing, and unpressured seller. It’s used to assign or change the value of an asset.
What the IRS Requires
The requirements of the fair market valuations themselves vary from asset to asset, but here’s what the IRS requires from the FMV overall:
- A Self-Directed IRA administrator (such as Entrust) must provide the FMV of the account as of Dec. 31 of each year.
- The valuation must be paid for by the IRA. If your account doesn’t have sufficient undirected cash to cover the cost, you’ll have to add cash by making an annual contribution, transfer, or rollover of funds from another custodian to pay for it.
- The FMV Form must be provided to your IRA custodian on a yearly basis to ensure proper tax reporting.
You also need to submit a FMV when:
- Taking an in-kind distribution
- Converting an asset held in a tax-deferred account to a post-tax account
- Converting an entire tax-deferred account to a post-tax account
- Demonstrating an asset no longer has value
It’s your responsibility to obtain the investment values of your self-directed assets and send them to your custodian so they can report your account’s fair market value to the IRS. Depending on the type of asset you hold, a qualified, independent third party might need to perform the valuation and complete a section of the FMV.
Qualified third parties who can perform your valuation include:
- Managing partner (or equivalent) of investment sponsor
- Certified appraisers
- Licensed real estate professionals (such as brokers/real estate agents)
- Knowledgeable parties (such as CPAs, Attorneys, Financial Planners, etc.)