What is Fair Market Valuation (FMV)?
A Fair Market Valuation (FMV) is part of the Internal Revenue Service (IRS) reporting requirements that provide value of an asset annually, as well as when a distribution occurs. A prudent determination of the value of an asset such as appraisal or other legitimate means must be submitted to your self-directed IRA administrator to ensure proper tax reporting to the IRS. The value of the asset is based on what a knowledgeable, willing, and unpressured buyer would likely pay to a seller.
Important: Every year, the IRS requires an accurate reporting of the value of your IRA assets. The IRS calls this value the Fair Market Valuation.
Entrust is required to:
- Provide the fair market value (FMV) of your account as of December 31 of each year to the IRS
- Provide the account owner the IRS Form 5498 with the same FMV information for the account
How do I perform valuations (appraisals) for my Fair Market Valuation?
- To properly report the FMV of an asset, a qualified, independent third party should perform the valuation and then complete the Fair Market Valuation Form. A qualified, independent third party may be a:
- Certified Appraiser
- Licensed Real Estate Professional (such as Broker/real estate agent)
- Knowledgeable Party (such as CPA, Attorney, Financial Planner, etc. who is strictly at “arm’s length” to both you and the investment)
- If an appraisal is required, the appraiser does not have to sign the form; the appraisal report is sufficient
- If an appraisal is not required, the third party valuator must also sign and date the form
- The valuation is paid for by the IRA and if your account does not have sufficient un-directed cash to cover the cost, you will have to add cash by making an annual contribution, transfer, or roll over funds from another custodian to pay for the valuation. The fee may not be paid out of your own pocket.
How do I report my Fair Market Valuation to Entrust?
- Download the Fair Market Valuation Form here
- Complete, sign, and date the Fair Market Valuation Form. You must complete one form for each asset held in your account.
- If an appraisal is required, the appraiser does not have to sign the form; the appraisal report is sufficient.
- The FMV Form must be signed and dated by both the client and the valuator, if an appraisal is not required. If the appraisal is required, the appraiser does not have to sign the FMV Form. The appraisal report is sufficient.
- If a third-party valuator is used, the third-party valuator must sign and date the form.
- The form, as a final step, needs to be sent to your administrator with supporting documents, which may include:
- A Real estate fair market value analysis, more commonly known as a Comparative Market Analysis (CMA). This is a detailed report examining the homes currently on the market, under contract, recently sold and recently expired, withdrawn or canceled to determine what a property is worth in the current market.
- A Property Tax Bill is acceptable, as long as it is not used to calculate or take a distribution such as a required minimum distribution.
- Form submission options for The Entrust Group:
Important guidelines for your Fair Market Valuation
- An FMV is also required when you’re taking an in-kind asset distribution, converting an asset and re-characterizing an asset.
- The Fair Market Valuation Form must be signed and dated by you.
- The form must be sent to Entrust with supporting documents.
- A separate Fair Market Valuation Form must be completed for each asset held in your account.
Types of assets and how to report them
For detailed information regarding real estate fair market valuations, please refer to the Real Estate: Fair Market Valuation Instructions & FAQs.
LLCs and Entities
A value of each asset within a limited liability company (LLC) or entity is required in order to determine the value of the LLC or entity. Real estate assets owned in an LLC or entity must be evaluated by a third party. Other assets owned in an LLC or entity, such as bank or brokerage accounts, should have year-end statements proving their value.
The value of the asset may be provided by a qualified third party, but they must provide sufficient supporting documents with the Fair Market Valuation Form.
Precious Metals, Brokerage Accounts, Publicly Traded Assets and Cash
These asset types DO NOT require a fair market valuation because these investment values can be easily determined by the market. If you currently provide regular statements that have unit/share balances on them, we will use those statements for the valuation.
Please indicate the status and value on the Fair Market Valuation Form and sign it yourself. Provide the necessary documentation that will support the status and value. You will not need a qualified, independent third party to perform the valuation. However, in order to zero out assets from your account, the Internal Revenue Code requires specific types of documentation to do so. The following are some acceptable examples:
- A Trustee’s Deed (for a Deed of Trust asset)
- Bankruptcy/Receivership paperwork
- A “cease and desist order” from an entity such as the SEC or a similar state agency
For more information, download the FMV guides and forms below: