Can I Sell My House to a Family Member at Below Market Value?

How selling to a relative differs from a typical sale

First, let’s review the key differences between selling your home to a stranger and selling it to someone in your family.

You’re engaging in a non-arm’s length transaction

Transactions can be treated differently depending on the relationship between parties.

An arm’s length transaction — which is derived from the expression “at arm’s length” — is one in which the buyer and seller don’t already know each other and have no pre-existing relationship.

Most real estate sales are considered arm’s length transactions between strangers, each attempting to negotiate the best outcome.

According to the Cornell Legal Information Institute and other reputable web sources, in an arm’s length transaction, the parties doing business are:

• Unrelated and unaffiliated.
• Have equal bargaining power and symmetric information.
• Acting independently and in their own self-interest.
• Not subject to any pressure or duress from the other party.

In an arm’s length scenario, it’s unlikely that any significant equity would be gifted to the buyer.

By contrast, selling a home to a family member or friend is the classic example of a non-arm’s length or controlled transaction — an arrangement that may lead the parties to make an agreement that diverges from typical market terms.

A blood or familial relationship isn’t the only way that a transaction can become non-arm’s length. Parties related to a business relationship, or an employee purchasing a property from their employer, could also raise similar issues.

Non-arm’s length transactions are legal but can create a higher risk of fraud and require correct tax allocation. Therefore, they may be subject to heightened scrutiny and trigger a tax event for either party.

A price discount is a gift of equity and may be subtracted from your lifetime gift exemption limit

Before we jump into whether you’ll pay gift taxes on the sale of a house to a family member, it’s helpful to have a baseline understanding of how the IRS taxes gifts.

How gift taxes work

When you give someone money or an item of value without being paid in full for it in return, you may be making a gift in the eyes of the IRS. However, that doesn’t mean that you automatically have to pay gift taxes anytime you send your grandkid money. Unless you’re gifting millions of dollars over the course of your lifetime, you likely won’t pay gift taxes under current tax rules. In addition, gifts to your spouse generally aren’t taxable.

The $17,000 annual exclusion for tax year 2023 (or, $18,000 in 2024)

As outlined in the 2023 IRS guidelines, you can generally give up to $17,000 in value to as many people as you want in a given year — or $34,000 if married and filing jointly — without having to report those gifts to the IRS. (Note: The limit was recently adjusted for inflation, so if you’re filing for tax year 2024, the annual exclusion amounts to $18,000 for individual filers or $36,000 for joint filers.)

Example:

Let’s say the fictional Diane gave her son Tyler and daughter-in-law Maryanne each $17,000 in 2023 to help them with their new baby’s expenses. She would have been able to do so without involving the IRS.

It’s generally only when you provide a gift exceeding $17,000 in value that you need to report it on your tax return. Let’s say Diane decided to give Tyler $20,000 rather than $17,000; the $3,000 overage on the gift to one individual would typically mean that Diane has to report that gift.

The lifetime gift exemption limit

That $3,000 must be reported so that the IRS can keep track of the total value of what you’ve given away in your life. Still, that $3,000 overage will not necessarily be taxed.

For tax year 2023, a single individual’s lifetime exemption is $12.92 million. That amount will rise to $13.61 million for tax year 2024. “This means you can gift up to this amount during your life without having to pay a gift tax,” explains Xintian Wang, a CPA with Dimov Tax Specialists, a San Francisco-based tax preparation service. The limit applies to gifts given while the person is alive and after they have died, so taxpayers have to account for their inheritance plans in their gift tax liability.

Gift amounts that exceed the exclusion threshold of $12.92 million (or, in 2024, $13.61 million) are taxed at a rate of anywhere from 18%-40%.

Gift taxes when selling below market value

When you sell a house below market value, the same gift tax rules are likely to apply — only rather than giving someone money outright, the “gift” you’re providing is a discount on the value of the home.

“If you’re selling a home to a family member for less than its fair market value, it is a ‘gift of equity,’” explains Wang. “You, as the seller, have to report the gift to the IRS if the value of the gift exceeds $17,000 as of 2023 (or $18,000 in 2024). The value of the gift is the difference between your selling price and the fair market value of the home. The seller is responsible for paying a gift tax if applicable.”

Example:

Diane sells her home to Tyler and Maryanne for $250,000 despite it having a fair market value of more like $400,000. The sale, including the $150,000 gift of equity (minus any amount Diane is able to subtract as part of the annual exclusion), must be reported and subtracted from Diane’s lifetime exemption limit.

Keep in mind that these examples are purely for educational purposes. When it comes to gift taxes, it’s always wise to consult with a tax advisor about your individual situation.

“Stepped up” tax basis will not transfer if the home is fully gifted

Should a seller choose to gift the entire value of their home to a family member, they should be aware of the potential capital gains tax implications. Here’s a summary:

• When a home is completely gifted, the tax basis of the home — in other words, the original cost of the home plus the value of any major improvements made to it — will not be “stepped up” to the current market value for the new owner.
• The new owner will instead assume the original tax basis of the home, which could result in higher capital gains taxes when they sell the property.
• According to IRS guidance, sellers can exclude up to $250,000 worth of gain (or $500,000 if married and filing jointly) so long as they have owned the house for two years and lived in it for two of the past five years. This applies whether or not the home was gifted.
• However, the tax basis for an owner who received a home as a gift will remain the original purchase value of the home, plus any capital improvements, until it’s sold or passed on.

Example:

Let’s say Diane originally purchased her home for $100,000 five years ago. She elects to gift the entire value of the home to Tyler and Maryanne. As the new owners, Tyler and Maryanne then assume the original tax basis of the home of $100,000. Eighteen months later, they determine the house isn’t right for them and decide to sell it. They earn $425,000 on the sale for a capital gain of $325,000 (sale price of $425,000 minus the tax basis of $100,000).

Due to owning the house for less than two years, Tyler and Maryanne will have to pay short-term capital gains taxes on that gain of $325,000. Because their tax basis wasn’t stepped up to the home’s market value — which could have been upwards of $400,000 when they received it as a gift from Diane — their capital gains tax burden is much heavier than it would have been if they’d paid for some or all of the house.

Given the potential tax implications such as these, it is always best to consult a tax professional to determine what might work best under your given circumstances.

There may be additional mortgage requirements and paperwork involved

If your family member will use a mortgage to finance their purchase, the lender may enforce more stringent rules than they would for an arm’s length transaction. The potential for fraud is generally higher when the buyer and seller know each other, and lenders will want to mitigate that added level of risk.

“Your mortgage company may say it’s not an arm’s length transaction,” shares Myra Beams, a top-selling real estate agent in Hobe Sound, Florida, of her experience coordinating property sales between family members. “So the lender is going to look really hard at the whole transaction.”

Below are a few special mortgage requirements that may apply:

• Paperwork that documents the appraised value of the home versus the purchase price (the difference is considered the gift of equity).
• For FHA loans, a down payment of at least 3.5% if the buyer’s credit score is 580 or higher, or 10% if their credit score falls between 500 and 579.
• Completion of “gift of equity” paperwork if the home sold below market value.
• Note within the settlement statement to record the equity gift.

A cash sale will eliminate lender involvement, but it’s still highly recommended that the seller get an appraisal and save that paperwork for tax purposes. If you sold at market value or below the gift reporting threshold, you may eventually need to show proof of that if the transaction is ever examined by the IRS. You’ll also likely need it as part of the gift of equity paperwork so that the gift amount can be subtracted from your lifetime limit of $12.92 million, if applicable.

Everybody has to be on the same page at all times for the transaction to close successfully. A Realtor can help coordinate the different steps and keep the ball moving forward. And if issues come up, they can guide both the seller and buyer on how to handle them.

• 

  Mike Tchobanian Real Estate Agent

  Close

  

  Mike Tchobanian Real Estate Agent at Vegas Capital Realty

  5.0

  • 
  • 
  • 
  • 
  • 

  • Years of Experience 19
  • Transactions 649
  • Average Price Point $298k
  • Single Family Homes 473

6 steps to selling your home family member

You’ve considered the financial and tax implications of selling your home to a family member and are ready to move forward. Follow these steps to complete the deal while managing the challenges of mixing business with family.

1. Consider hiring a real estate agent for impartiality

If you have a buyer in mind for your home and plan to sell it to them at a fair price, it’s understandable that you wouldn’t see the need to involve a real estate agent. You already found a buyer, so the agent’s typical workload of marketing and showing the home has already been greatly reduced.

But there are some pretty compelling reasons you may still want to hire one:

• In a sale among family members, a real estate agent can still serve a critical role as a transaction coordinator.
• The agent as a go-between creates a safeguard to help prevent familial strain and adds a level of formality and professionalism to an important transaction.
• By acting as a buffer between you and your loved one, for instance, the agent can make sure everyone’s satisfied with the terms of the sale — and will still be on speaking terms once the dust settles.
• A savvy real estate agent can also help make sure every detail of the transaction is handled correctly to prevent the appearance of anything fishy to the IRS if the transaction is examined.
• You’ll likely receive the benefits of an agent’s expertise at a lower cost. In a sale between family members, you should be able to negotiate a fee that’s lower than the usual 5%-6% commission an agent charges since you won’t need help with marketing or showings.

“Everybody has to be on the same page at all times for the transaction to close successfully,” says Mike Tchobanian, a top real estate agent in Las Vegas. “A Realtor® can help coordinate the different steps and keep the ball moving forward. And if issues come up, they can guide both the seller and buyer on how to handle them.”

Example:

In selling her home to her son Tyler and his wife Maryanne, Diane enlists the assistance of a real estate agent. At first, she wasn’t sure if it was worth the extra money, though she was able to reduce the commission fee to 2.5% of the sale price — less than half of what a seller would normally pay in commissions.

But discussions start to get a bit frustrating when Tyler asks Diane to leave certain furniture items as part of the sale that she’d planned to take with her. Suddenly, Diane is glad to have someone outside the family who she can turn to for advice.

Diane engages the agent to express to Tyler on her behalf that she’s unwilling to part with her dining room table and family heirloom rug to add a buffer to an awkward conversation.

For the furnishings Diane is willing to gift, the agent reminds her to make note of those items and their approximate value since they could be subject to the gift tax. This helps to keep Diane’s documentation in order should the deal come under IRS scrutiny.

2. Determine a fair price for the home

You and your family member may already have a ballpark figure in mind for what the home should sell for. But if for nothing other than tax purposes, it’s still important to have an accurate gauge of the home’s fair market value at the time of sale. You can identify the market value of your home in a few different ways.

Begin with an online estimate:

While it doesn’t replace an agent’s comparative market analysis (CMA) or appraisal, our free Home Value Estimator is a great place to start in your determination of home value. Answer a few quick questions about your home, such as how much work it needs and whether it’s a single-family or townhouse. We’ll then comb through public data and relevant property sale histories, providing you with an estimate of home value in under two minutes.

Review your agent’s comparative market analysis (CMA):

One major benefit of bringing in a real estate agent during a family sale is that they will provide you with a CMA for the property. A CMA is a packet of paperwork, in some cases spanning 30-40 pages long. The CMA will list nearby, recently sold homes similar in size and condition to yours to determine what a buyer would be willing to pay for your home today.

This method of analysis allows the agent to develop a price range for your property and then add or subtract value based on its individual characteristics. A CMA will also take into account local market factors like average price per square foot for the area and recent inventory levels. A CMA is considered a best-in-class tool for valuing homes and is what most sellers use to price their property for the market.

Get an appraisal: 

The appraised value isn’t quite the same as the fair market value. The amount a buyer is willing to pay for a home may diverge from the appraiser’s assigned value based on market trends. Nevertheless, the appraised value is considered to be the most official form of home valuation, and obtaining the opinion of value from a licensed appraiser is almost always a critical step in a family sale.

As a CPA and tax specialist, Wang notes that if your sale involves a gift of equity, you must get an official appraisal, so the IRS can determine the actual amount of that equity. “The IRS generally has three years to challenge a return after a gift tax return is filed,” she explains. “Having an appraisal will help substantiate the value of the gift should the IRS challenge it.”

An appraisal is a method of valuation that typically requires a licensed appraiser to perform an onsite visit and review relevant comparable sales. According to HomeAdvisor, the process typically costs $356 on average for a single-family home.

In addition, if your relative needs a mortgage to buy your home, their lender will likely require a separate appraisal to determine how large of a loan they’re willing to provide to the borrower.

3. Be transparent about the family sale, for your neighbors’ sake

One ripple effect of selling a house below market value to a family member is that it can skew local comps. Therefore, records of the sale must be clear as to why your property sold for less. Appraisers, for example, need to know that your home is an outlier among the comps and that its sale price is not an accurate reflection of home values for the area.

Example:

Let’s say Diane sells her home worth $400,000 to her son Tyler for $100,000 less than fair market value. After he moves in, the next-door neighbors decide to sell their home.

The neighbor might have trouble getting their asking price of $400,000 since records show that Tyler bought the neighboring home for well below market value. Thankfully, though, the home was listed as a family sale in the public property records. Appraisers can see that it was a non-arm’s length transaction, and exclude what is now Tyler’s home from their analysis of local home values.

4. Sign the purchase agreement

Like any home sale, one between family members requires a purchase agreement. The information covered in both types of agreements is typically the same.

Among other details, the contract will:

• Identify the buyer and seller.
• Provide a physical description of the property.
• Outline the financial details of the transaction.
• Document the conditions, terms, and specifics of the sale such as the closing date and when the buyer will take possession.

Even among family members, the tax and legal implications involved with the exchange of a house or property are often too complex to transfer by way of a handshake and a smile.

5. Don’t skip the inspection

A home inspection is a critical step in any home sale. To perform the inspection, a professional inspector will visit the home to identify safety issues and any major problems with the home’s core systems, including the roof, plumbing, HVAC, electrical, appliances, and foundation.

When selling to a family member, the inspection may feel like overkill. Perhaps you and the relative feel an underlying sense of trust that you’re aware of the home’s condition and nothing could go wrong. Maybe your relative has even visited the home frequently and is well familiar with it.

It’s almost always a good idea to get the inspection anyway. A formal evaluation will help avoid any suggestions of impropriety about the deal, while you can have the peace of mind that your family member is moving into a safe and functioning home. If significant repairs are needed, you’ll have the opportunity to adjust the price to be more fair or work with your real estate agent on crafting a revised contract.

6. Hire separate attorneys

In addition to hiring a real estate agent, some people hire attorneys for extra legal support during a family sale. If you do, be sure you and your relative each have separate attorneys. Going with a solo attorney can cause friction if one party feels their advice favors the other party. Hiring separate attorneys ensures that each of your interests are being protected. Plus, the two attorneys can work together to come up with solutions to problems that satisfy everyone and minimize legal risk.

FAQs about selling a house to a relative

By now, you’ve probably gathered that family home sales can be complicated. To help yours go smoothly, here are answers to some common questions about the process.

What are the risks of selling my home to a family member?

While selling your house to a relative can be positive for all parties, you should be aware of some common mistakes and take steps to avoid potential fallout.

Underselling your house

Perhaps you intend to sell your house to a family member below market value. You can choose whether to give a large discount or reduce the price to a lesser extent, so long as you keep the tax implications and rules around gift equity in mind.

The main risk here is that down the road, you would have no regrets about gifting such a large and valuable asset. Only you can determine whether you’re confident in that decision and how you’ll feel about it months or years later.

However, if you hope to get full value for your home despite selling it to a family member, you should consider the real possibility that you could get more for it by listing on the open market.

A traditional sale offers exposure and visibility to your home that you’ll simply miss out on when selling to a family member. By boxing yourself into selling to one pre-selected buyer, you won’t have the chance to attract multiple offers and potentially start a bidding war that would drive the price even higher.

Example:

It’s not an exact comparison, but for an idea of how much value you could be sacrificing, we can look at FSBO sales data from the National Association of Realtors (NAR). According to NAR, 57% of FSBO sellers already know the buyer of their home. FSBOs tend to sell for less than other homes, with a median sale price of $310,000 last year — significantly lower than the median sale price of agent-assisted homes, which stood at $405,000.

Ruining a personal relationship

When either the seller or buyer in a family deal has expectations that aren’t met, even close relationships can sour. Avoid a family feud by making sure everyone is on the same page throughout the process. Hiring an impartial expert — whether it’s a real estate agent, attorney, or both — can help keep matters civil and ensure that everyone agrees on the terms of the sale and its financial ramifications.

“You should never skip steps of the home sale process when you’re selling to a relative, or it might create animosity in the future,” advises Beams. “For example, if you skip the home inspection and then later find a termite problem or roof issue, that’s going to cause some resentment.”

Fumbling on taxes

If you’re not up to speed on the taxes associated with a family sale and who’s responsible for paying them, you or your relative could be in for painful penalties down the road. We’ve provided some general guidance on tax rules that may apply earlier in this guide. But to get crystal clear on what the IRS requires for your individual situation, consult with a CPA.

What if I also want to sell the furnishings in my home?

According to Wang, if you plan to include your furnishings as part of the sale, you should factor their value into the total amount “gifted” for the property.

Can I sell my house to my child for $1?

Yes, it is possible to sell your house to your child for $1. Just be sure you file a gift tax return and pay any resulting taxes on time.

Is it illegal to sell a house to a family member?

No. It is perfectly legal to sell your house to a family member if you do it the right way. Keep documentation of the property’s appraised value and how much you sold it for. Follow the regulations around gifts of equity and be aware of the capital gains tax implications. Complete key steps like the inspection, and engage the assistance of a real estate expert and tax advisor. With these guardrails, you can usually sell your house to a family member without any trouble.

Header Image Source: (monkeybusiness/ Depositphotos)