Can I Sell My House for Less Than Market Value?

Selling a home for less than its market value is permissible, but involves important financial and legal considerations. Understanding fair market value is crucial, as it serves as the baseline for assessing potential implications. These implications can extend to tax obligations and financing the transaction. Such a sale requires a clear understanding of its ramifications for both the seller and the buyer.

Determining Fair Market Value

Fair market value (FMV) in real estate refers to the price a property would likely sell for in an open market between a willing buyer and a willing seller. Both parties are assumed to have reasonable knowledge of the relevant facts and neither is under any compulsion to act. This standard is fundamental in various financial contexts, including taxation and real estate transactions.

The most common methods for determining a home’s FMV involve professional appraisals and comparative market analyses (CMAs). A professional appraiser conducts a detailed evaluation, considering factors such as the property’s location, size, condition, and unique features. Appraisers also analyze recent sales data of similar properties, called comparables, in the immediate area. Real estate agents frequently perform CMAs, which similarly rely on recent sales of comparable homes to suggest an appropriate listing price.

Tax Implications of Selling Below Market Value

Selling a property for less than its established fair market value can trigger significant tax consequences, particularly if the transaction is not an arm’s-length sale, such as one between family members. The Internal Revenue Service (IRS) may view the difference between the sale price and the fair market value as a “bargain sale” with a gift component. This gift portion can have implications for both the seller, who is considered the donor, and the buyer.

For the seller, this gift component is subject to federal gift tax rules. For the 2025 tax year, an individual can give up to $19,000 per recipient annually without incurring gift tax or affecting their lifetime gift tax exemption. If the gifted amount exceeds this annual exclusion, the seller must file IRS Form 709, the Gift Tax Return, to report the gift. Actual gift tax is typically only owed if cumulative taxable gifts over a person’s lifetime exceed the lifetime gift tax exemption, which is $13.99 million per individual for 2025.

Regarding capital gains tax, the seller’s gain or loss is generally calculated based on the actual sale price received, subtracted from the property’s adjusted basis. However, in non-arm’s-length transactions where the sale price is significantly below FMV, the IRS might scrutinize the transaction and could potentially assess capital gains tax based on the property’s fair market value rather than the discounted sale price. For the buyer, the gift portion impacts their basis in the property. The buyer’s basis will be the greater of the amount paid or the seller’s adjusted basis at the time of the gift, plus any gift tax paid attributable to the appreciation.

Local property tax authorities may also consider reassessing the property’s value following a sale, even if the transaction occurred below market value. While a lower sale price might suggest a reduced assessed value, some jurisdictions may still base future property tax obligations on the property’s fair market value. Given these complexities, seeking advice from a qualified tax professional or an estate planning attorney before proceeding is advisable.

Mortgage and Other Financial Considerations

Beyond tax implications, selling a home for less than its market value involves practical financial considerations. If an outstanding mortgage exists, the sale price must be sufficient to pay off the entire loan balance, as lenders typically require the mortgage to be fully satisfied at closing. If the sale price is less than the outstanding mortgage, the seller would need to bring additional funds to closing to cover the deficit, unless a short sale has been pre-approved by the lender.

For a buyer who needs to obtain financing, a sale significantly below market value can present challenges. Mortgage lenders rely on independent appraisals to determine the property’s value and will generally only lend up to the appraised value. If the agreed-upon sale price is substantially lower than the appraised value, the buyer’s lender may only approve a loan for the lower appraised amount, requiring the buyer to cover the difference between the loan amount and the sale price out of pocket. This scenario can complicate the buyer’s ability to secure a loan and may necessitate renegotiation of the sale terms.

Despite a lower sale price, standard closing costs and fees remain applicable to the transaction. These typically include expenses such as title insurance, transfer taxes, recording fees, and potentially real estate agent commissions, depending on the agreement. Closing costs can range from 2% to 5% of the loan amount for buyers, and for sellers, they can be approximately 6% to 10% of the sale price, particularly due to real estate commissions. These costs are incurred regardless of the sale price and must be factored into the overall financial outcome.