How To Calculate A Property's Fair Market Value We examine the significance of fair market value in terms of tax legislation and how to determine or obtain a property's fair market value. Within the context of income tax regulations, the idea of fair market value is crucial. If the sale/purchase consideration specified in the agreement is less than the fair market value of the property, both the buyer and the seller will be affected. We will go over what fair market value is in this situation and how it affects buyers and sellers.
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Fair market value is significant for income tax purposes. The income tax regulations impose taxes on any profit made from the sale of property. In most cases, the profit is calculated by subtracting the acquisition and improvement costs from the sale consideration. You may profit from indexation on the expenditures if the property has been owned for longer than two years. You have the choice to substitute the fair market value of the property as of April 1, 2001 for the cost of acquisition for properties you purchase before that date. Therefore, the idea of fair market value is crucial when determining the cost of a transaction for the purpose of calculating capital gains. The stamp duty valuation of the property, which serves as a stand-in for the fair market value, is used as the selling consideration instead of the value specified in the agreement if the price stated in the agreement is less than the valuation used for stamp duty purposes.
Therefore, both the buyer & the seller will be affected if the agreement value is less than the fair market value. If the discrepancy is greater than 5% between the agreement value & the fair market value, both the buyer and the seller are subject to taxation under various provisions of the income tax legislation. To prevent paying for such a disparity, it is crucial to determine the fair market value before the agreement is signed.
How to determine a property's fair market value Circle rates or ready Reckoners: The income tax laws do not specify how to determine a property's fair market value through ready reckoner or circular rates. However, there are a few methods you can use to estimate the property's fair market value that would often be accepted by the Income-Tax Department. States have implemented a system of predefined values, based on the region and kind of construction, to prevent under-reporting of the consideration in sale agreements (which is done to evade payment of necessary stamp duty). This is accomplished by the annual announcement of circle rates, the ready reckoner for stamp duty, etc.
The circle rate is the price below which a property in a community cannot be purchased or sold. Remember that circle rates vary from locality to locality at this point. The local governments periodically adjust them to keep the value near to the current market value of real estate in a certain area. You will be required to pay stamp duty based on the standard circle rate even if the seller intends to charge less than the circle rate per square foot. The stamp duty will be computed based on the transaction cost in this situation if the property is being sold for more than the circular rate. So, if the property was purchased before April 1, 2019, you can use the stamp duty ready reckoner of 2001 to determine the fair market value. If the property was given to you, inherited from you, or was built by you in a year that began after April 1, 2001, you can use the ready reckoner value to determine the fair market value of the asset. Finding a property's fair market value is more difficult than it first appears because the real estate market is so diverse that prices can differ greatly even within a single neighbourhood. If you need to determine the fair market value of properties that are older than 2001, it becomes more challenging.
Report on valuation: You have an alternative if the ready reckoner rate is not offered for a specific year. A value who is recognised for assessing fair market value for income tax reasons and who is registered under the wealth tax laws may provide you with a valuation report. The registered value uses a standardized procedure to arrive at the valuation and then delivers a thorough valuation report. A registered value is already allowed to collect a fee that is set forth in the legislation. If you believe the valuation provided by the ready reckoner is excessively high, you can also hire a registered value. This may occur when the rates stated in the stamp duty ready reckoner are the same for the same plot of land, without taking into account the current conditions of the property or any pending legal disputes. The registered value inspects the property and, based on that inspection and other pertinent factors and circumstances, provides a valuation report that includes the property's fair market value as well as the methodology used to determine that value.
Which technique should you use? It is crucial to remember that the stamp duty ready reckoner's rates are only suggestions and not requirements. Therefore, you should get a valuation report from a value to support your claim at the time of closing the deal rather than waiting for your case to be chosen for close examination if you believe the stamp duty/circle rates are higher by more than 105%. The registered value’s valuation report is typically accepted by the Income-Tax Department. Out of the two options available to you, getting the valuation report from a registered value is advised to strengthen and convince your case.
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