The Difference Between Market Value and Sale Price

A sale price is a fact: what one buyer agreed to pay one seller, on that contract’s terms, on that day. Market value is an opinion: the price a property would most probably sell for on a given date between a willing, informed buyer and seller dealing at arm’s length after proper marketing. For most sales the two are close. When they are not, tax, duty and super law usually look to market value.

What does market value mean in Australia?

The starting point is a 1907 High Court case, Spencer v Commonwealth. It pictures a voluntary bargain between a willing but not anxious seller and a willing but not anxious buyer, both fully informed about the property and the market, rather than a forced sale. The International Valuation Standards definition says the same thing in modern language, and the ATO treats the two as consistent.

In plain English, market value assumes:

• A specific date. Markets move, so a value is only right for the date it is given.
• A hypothetical buyer and seller. Not your buyer, and not you. The actual owner’s circumstances, such as needing cash quickly, are set aside.
• Arm’s length. No family, business or other relationship that could push the price up or down.
• Proper marketing. The property has been offered to the market in the usual way, for long enough to reach the likely buyers.
• Knowledge and prudence. Both sides know the property’s strengths and weaknesses and the state of the market, and neither is overeager or forced.
• Highest and best use. The value reflects the most valuable use that is physically possible, legally permitted and financially feasible. For a large block that might be redevelopment rather than the house on it.

Market value also leaves out value that only one particular buyer would pay for, and prices pushed up or down by unusual terms such as special finance or a sale and leaseback. The ATO’s guide, Market valuation for tax purposes, lists these exclusions.

Why does a property sell for more or less than its market value?

Each part of the definition is an assumption that a real sale can break:

When a valuer uses a sale as evidence, they look for exactly these things, and either adjust for them or set the sale aside.

Is the price I paid the market value?

Often it is the best single piece of evidence of it. A recent sale of the same property, at arm’s length, after proper marketing and on normal terms, is hard to argue with. Revenue NSW, for example, lists an agreement showing a recent arm’s length sale of the property as acceptable evidence of value for duty.

The older the sale, the less it tells you. The market moves, and the property changes: a renovation, an extension, a subdivision or simply wear and tear. A price paid ten years ago says little about market value today.

When does the law use market value instead of the price?

Usually the price paid is what counts. The law switches to market value where the price may not be genuine, or where there is no price at all:

Revenue offices can get their own valuation. In New South Wales, if Revenue NSW’s valuation differs from yours by at least 10 per cent, or you do not give evidence of value within 60 days of a written request, it may recover the cost of its valuation from you.

What if I sold to family below market value?

The price in the contract does not stop the tax and duty rules looking at market value. For capital gains tax, if you did not deal at arm’s length and the price was below market value, the seller is generally treated as having received market value. For duty, the buyer is generally assessed on the higher figure. An independent valuation at the date of the transfer is the clearest evidence of what that figure was, and it can be prepared after the event as a retrospective valuation.

Why did the bank value the property below the price?

A lender’s valuation is prepared for the lender, to assess the property as security, at the date of the valuation. If the price included things that are not part of the property, such as furniture, or the market moved between signing and settlement, which can happen with off-the-plan purchases that settle years later, the valuation can come in below the price. The lender may then lend less than you expected, and the gap may have to come from your own funds. Talk to your broker or lender before you sign a contract that depends on finance.

Is market value the same as the value on my rates notice?

No. The value on your rates or land tax notice is a statutory value, set under state or territory law for rating and taxing purposes. It is not a market valuation of your property for a sale, tax or legal purpose, and it can differ materially from one. See land valuations.

How does a valuer work out market value?

For a home, mainly by direct comparison. The valuer finds recent sales of similar properties, checks that each was a genuine market sale, adjusts for the differences in size, condition, position and timing, and reasons to a figure for yours. Investment property is also valued on its income. What a property valuer looks at and how commercial property is valued explain the detail.

If you want a valuation for a tax, super or estate purpose, you can request one online. An inspected residential valuation is $339 incl. GST and a Tax, Transfer & Compliance Valuation is $495. A Desktop Property Assessment is from $159, but with no inspection it gives an indicative value only, so check with your accountant, auditor or lawyer whether it is enough for your purpose. Stamp duty and related-party transfer valuations are quoted individually, and a family law valuation is from $1,650. We confirm the valuer’s name, the fee and the timing in writing before anything is booked or charged.