Understanding the Tax Implications of Selling a House Below Market Value
Selling a house is never easy—especially when you’re considering taking less than your home’s market value.
Whether you’re trying to avoid foreclosure, get out from under a bad property or help a family member by giving them a deal, there are tax implications of selling a house below market value to consider before you move forward.
Many homeowners don’t realize that selling a house below market value will raise red flags with the IRS, Franchise Tax Board and even local tax authorities.
These types of real estate transactions—especially when they involve non-arm’s length transactions with family members—will trigger additional forms, audits or gift taxes that most sellers don’t expect.
In this guide we’ll explain how capital gains tax implications, gift tax rules and local tax regulations come into play when you take less than your home’s sale price should command in today’s market and how to protect yourself from unexpected financial consequences.
Why Homeowners Sell Below Market Value
There are many personal and financial reasons why someone would sell their house below market value.
At Property Sales Group we work with homeowners all over California who are facing urgent life events and need to get out of their property—fast.
Some common reasons for selling below market value include:
- Avoiding foreclosure or bankruptcy
- Relocating for a job or family emergency
- Going through a divorce or major life transition
- Selling to a family member to keep the home in the family
- Offloading a distressed property that needs extensive repairs
- Settling an estate, probate or inherited property
- Getting a fair price from a cash buyer based on the home’s condition
Selling below market can be a relief in tough situations but it’s important to understand that these decisions often have taxable income consequences.
By focusing only on the emotional or urgent need, some sellers unknowingly trigger tax events that could cost thousands later. That’s why it’s so important to balance empathy with clarity—and to act in your own self interest when possible.
What Is Fair Market Value?
Before we get into the tax side, let’s define what the IRS means by fair market value.
In real estate FMV means the price a willing buyer and seller would agree to in an open and competitive market with no outside pressure or relationship bias.
Your home’s market value is not your asking price or Zillow estimate. It’s based on:
- Appraised value from a licensed appraiser
- Recent comparable sales in your local market
- Condition, location, upgrades and square footage
- Overall trends in the current market
To determine your property’s true assessed value many homeowners use a comparative market analysis (CMA) which real estate agents and professionals use to price homes competitively.
Whether you’re working with a real estate agent, appraiser or investor understanding your home’s fair market estimate is the foundation of every tax and legal discussion moving forward.
How the Home Selling Process Changes When You Sell Below Market
In a traditional home sale you list with a real estate agent, prepare the property for showings, negotiate with buyers and eventually go through a formal escrow and closing process. You’ll also pay legal fees, closing costs and sometimes thousands in commissions to real estate agents.
When you’re selling a house below market value especially to a family member or a real estate investor the process tends to move more quickly but demands careful attention to legal compliance, tax rules and accurate documentation.
You may need to provide a recent appraisal, justify the price deviation from market value and disclose the nature of your relationship with the buyer.
These transactions may seem simple on the surface but without guidance from a qualified real estate attorney sellers often find themselves facing retroactive tax bills, reassessment notices or even IRS inquiries. It’s not just about getting the deal done—it’s about protecting yourself legally and financially.
Capital Gains Tax: What Sellers Need to Know
Let’s talk about one of the most misunderstood topics in real estate: capital gains taxes.
When you sell your home the IRS compares your home’s sale price to your cost basis (usually what you paid plus improvements). If the property sold for more than your basis you may owe capital gains tax on the difference. This applies even if you’re selling below market value.
For example if you bought your home for $250,000 and sell it for $400,000—even though it’s worth $500,000—you could still be liable for capital gains tax implications on the $150,000 gain.
How to Avoid Capital Gains Tax on a Below-Market Sale
You may qualify to avoid capital gains tax if:
- You lived in the home as your primary residence for at least 2 of the past 5 years
- Your gain is under $250,000 (single filer) or $500,000 (married filing jointly)
- You properly document your home sale with records of purchase price and improvements
Even if you’re selling a house below market value capital gains tax can still apply if the final sale price exceeds your cost basis. And remember: losses on a primary residence sale aren’t typically deductible which can be frustrating for homeowners looking to recoup equity.
Gift Tax Implications of Selling a House to a Family Member
Here’s where things get complicated. When you sell a house to a family member for less than fair market the IRS may treat the difference as a gift.
For instance if your home’s market value is $600,000 and you sell it to your son for $300,000 the IRS sees a $300,000 gift.
This triggers gift tax implications and you may need to:
- File IRS Form 709 (United States Gift Tax Return)
- Apply part of your lifetime gift tax exemption which is $13.61 million in 2025
- Possibly pay gift taxes though most won’t owe out-of-pocket tax unless they’ve already used up their exemption
The IRS also monitors whether you’ve exceeded the annual gift tax exclusion which allows you to gift up to $18,000 per person (in 2025) without triggering reporting requirements. Anything beyond that is applied against your lifetime exemption.
Selling to family members below market value often has good intentions—but failing to follow proper gift tax rules can backfire quickly. Always consult a real estate attorney or CPA before transferring title to a relative for less than fair market value.
Selling to a Cash Buyer for a Fair Price Based on Condition
In many cases homeowners want a quick, hassle-free sale—especially when the property needs work.
At Property Sales Group we offer a fair price based on:
- The current condition of the home
- Necessary repairs or updates
- Comparable sales in the local market
- Your ideal timeline and selling goals
Even if that price is below current market value it’s not an issue—as long as the sale reflects a real negotiation and both sides are acting independently. That’s where arm’s length transactions come in.
When the transaction is done transparently and in good faith and especially when working with an experienced buyer like Property Sales Group the risk of tax complications is significantly reduced.
