Selling a house for less than its market value might sound straightforward, but it’s rarely that simple. When you sell a house below market value, the IRS can treat the difference as a taxable gift, and capital gains tax rules might still come into play. It’s one of those things you don’t want to stumble into blindly – state and federal rules can get complicated fast.
People do this for all sorts of reasons: helping out family, moving a sale along faster, even simplifying inheritance. But let’s be honest, the financial and legal implications can get messy. Gift tax, the buyer’s new cost basis, and possible capital gains for the seller – these aren’t side issues. They shape the real cost of selling below the fair market value selling price.
Can You Sell Your House Below Market Value? (And Why You Might Consider It)
You can absolutely sell your home below current market value, but it’s not just about what you want – there are legal and financial knots to untangle. Your motivation, the buyer’s relationship to you, and the tax angle all factor in.
Primary Reasons For Discounted Sales
There are plenty of real-world reasons for below-market sales. A big one is family home sales for personal relationships – parents selling to kids at a break to give them a leg up. It’s a way to keep the house in the family and ease someone’s financial load.
Sometimes, it’s all about speed. If you’re facing foreclosure, need to relocate ASAP, or just want the hassle over with, a quick real estate sale to a willing buyer or investor (even at a discount) can be worth it.
Other times, it’s about avoiding the headaches and costs of repairs, commissions, or endless back-and-forth. Lowering the price attracts buyers willing to take the place “as is.” Zillow points out that if the cost of fixing up your home outweighs what you’d get back, selling below market value can make sense.
There’s also the charitable route – a bargain, below-market sale lets you support a cause while still pocketing some proceeds. The IRS has a whole set of rules for this, so don’t do it alone. Get help from a tax advisor or a real estate professional.
What Is A Gift Of Equity?
A gift of equity happens when you sell your home for less than its fair market value, and the difference is basically a gift to the buyer. This is common in family deals and can have gift tax implications and throw a wrench into mortgage lenders’ approvals and down payments.
Definition And Calculation: The Difference Between Fair Market Value And Sale Price
A gift of equity is just the gap between what your home’s fair market value (FMV) is and what you actually sell it for. FMV comes from an appraisal; sale price is what changes hands.
Say the assessed value of your place is $400,000, but you sell it to your kid for $300,000. That $100,000? That’s your gift of equity. It’s not cash, but it’s real value.
The IRS treats this as a gift, so if it’s over the annual gift tax exclusion, you’ll need to file a gift tax return. This counts against your lifetime gift and estate exemption.
This calculation matters for taxes and for what the buyer instantly owns in equity.
Practical Example: How A Gift Of Equity Works In A Family Sale
Most often, it’s parents helping kids. If you sell your $350,000 home to your daughter for $250,000, she walks away with $100,000 in equity right off the bat. That can cover or replace her down payment.
You’ll need a gift of equity letter – mortgage lenders and the IRS want this in writing. The family member isn’t on the hook for gift tax, but you might have to report it if you go over the IRS limit.
It’s a handy way to transfer property in the family and make the purchase doable for the buyer.
Gift Of Equity For Lending Purposes
Lenders are generally fine with a gift of equity as a down payment, especially for family sales. FHA and conventional loans both allow it, but they’ll want a written statement confirming the gift and its amount.
This can lower the loan-to-value ratio, which might mean better terms and less mortgage insurance.
But you can’t just eyeball it – the gift has to be documented, and the property needs a proper appraisal. If you skip those steps, the whole deal can fall apart.
Gift Tax Rules When Selling Below Market Value
If you sell a house for less than its appraised value, the IRS is going to see the difference as a gift. That can trigger some tax paperwork, and maybe even liability, depending on the numbers.
Annual Gift Tax Exclusion
The IRS lets you give up to a certain amount per person each year without reporting it. For 2025, that’s $18,000 per recipient.
So, if the property sold is $15,000 under market value to a family member, you’re under the limit – no gift tax return needed. Go over that, and the extra’s a taxable gift. You’ll have to report it, but you probably won’t owe right away.
Lifetime Gift And Estate Tax Exemption
On top of the annual exclusion, there’s a lifetime gift and estate tax exemption – for 2025, it’s $13.61 million per person.
Anything you give above the annual exclusion chips away at this lifetime limit. So if you gift $100,000 over the annual cap, your exemption drops by that amount.
This covers both gifts you make while alive and what you leave behind. Most folks never hit the ceiling, but you do need to keep track, especially with real estate.
Reporting Gifts To The IRS: Requirement For IRS Form 709
If your gift goes over the annual exclusion, you’ve got to file IRS Form 709 (United States Gift [and Generation-Skipping Transfer] Tax Return).
This form tells the IRS how much you gave and applies it to your lifetime exemption. Even if you don’t owe tax because you’re under the lifetime cap, you still have to file.
The deadline matches your ordinary income tax return – usually April 15. If you get a filing extension, it covers Form 709 too. Don’t blow this off; tax complications and penalties are real.
Who Is Responsible For Paying Gift Tax
The giver pays any gift tax and legal fees, not the recipient. So, if you sell your house to your daughter for cheap, you’re on the hook – not her.
She won’t owe tax on the gift, but it’ll affect her cost basis for future capital gains if she sells later.
If you somehow manage to give away more than both the annual and lifetime limits, you might actually owe tax. It’s rare, but it’s your responsibility as the seller.
Capital Gains Tax For The Seller (Giftor)
Sell your house for less than market value, and your tax bill depends on your adjusted basis, exclusions, and how capital gains are calculated. The IRS sees the price difference as a gift, but your taxable gain is still based on what you paid for the place (plus improvements).
Determining The Seller’s Adjusted Basis
Your adjusted basis is basically what you paid, plus improvements, minus things like depreciation or losses. If you bought for $200,000 and put in $40,000 of upgrades, your basis is $240,000.
If you got the property as a gift or inheritance, the rules change – a gifted property keeps the donor’s basis, but an inherited one gets “stepped up” to the value at death. These details matter when you’re selling below market.
Keep your records tight. If you can’t prove your basis, the IRS might just use your original purchase price, and that could mean a bigger tax bite.
Applying The Section 121 Home Sale Exclusion
Section 121 lets you exclude up to $250,000 in gains ($500,000 for married filing jointly) if you lived in the house for two of the last five years. That can wipe out a lot of your tax bill.
If you don’t meet the full residency rule, you might still get a partial exclusion for stuff like job changes or health problems. Knowing if you qualify is key, especially if you’re selling below market.
Calculating Capital Gains In A Discounted Sale Scenario
Even if you sell at a discount, the IRS wants you to use your adjusted basis and the actual sale price to figure your gain. It’s not about the market value.
For example:
| Item | Amount |
| Adjusted Basis | $240,000 |
| Sale Price | $200,000 |
| Capital Gain/Loss | -$40,000 (not deductible if sold to family) |
If you sell to a relative and take a loss, you can’t deduct it. The IRS doesn’t want people gaming the system with family deals.
If you do have a gain, you’ll report it on Schedule D and Form 8949. The IRS has more details in their guidance on gifts and inheritances.
Capital Gains Tax And Adjusted Basis For The Buyer (Giftee)
When you buy below the current market value or get a place as a gift, your future tax bill depends on how your adjusted basis is figured out. This will affect what happens if and when you sell, and how much capital gains tax you could face.
The “Carryover Basis” Principle For Gifted Property
When you gift someone a property, they typically get your adjusted basis – what you paid, plus any improvements, minus depreciation. That’s the carryover basis.
So, say a parent buys a house for $150,000 and gifts it to their kid when it’s worth $300,000. The child’s basis? Still $150,000. If they sell it for $320,000, they’re looking at a tax obligation of $170,000.
This carryover basis rule stops people from resetting the property’s value for tax reasons when gifting. It’s not the same as inherited property, which usually gets a step-up in basis. The IRS also says if any gift tax was paid, it might bump up the basis in certain cases (IRS guidance).