> If I buy a house for $100k, and next year some idiot pays $1M for a very similar house three streets down, did I just magically make $900k?

Of course you did! Assuming that "some idiot" is actually representative of the market.

Go sell your house for $1M ASAP, move somewhere else for $100k and keep the $900k profit.

> You simply can't establish value without an actual transaction.

Not perfectly, but you can definitely estimate it pretty decently for tax purposes. And you talk about the highest bidder in a market, but remember it's also the lowest seller. Markets are not generally distorted by "idiots" paying 10x. That's a straw man.