Can You Sell a House for Less Than Its Worth?

Selling a house for less than its perceived market value often raises questions for both sellers and buyers. While property sales typically aim for maximizing profit, sellers may choose to accept an offer below what the property is considered “worth.” This decision involves understanding the difference between a property’s appraised value and its agreed-upon sale price. This type of sale is generally permissible but carries specific financial and legal considerations that both parties should carefully examine.

Understanding the Possibility

A homeowner possesses the freedom to sell their property at any price they and a buyer mutually agree upon. This principle stands as long as there is no evidence of coercion, fraudulent activity, or other illegal undertakings. The concept of “fair market value” represents an estimate of what a property would sell for in a competitive market, assuming both buyer and seller are well-informed and acting in their own best interests. However, the actual sale price can deviate from this estimated value.

A sale below fair market value is not inherently illegal, as the final price is determined by negotiation and agreement. Property owners are not obligated to sell their assets at their highest possible value. Documenting the true intent behind such a sale becomes important, especially when the agreed-upon price is significantly lower than typical market comparisons. This documentation helps clarify the nature of the transaction and can be relevant for various purposes later.

Common Reasons for Such Sales

Several motivations can lead a property owner to sell a house for less than its full market potential. Sales between family members, like parents transferring property to children, are common. Here, sellers prioritize providing a financial advantage or legacy over maximizing profit.

Another reason is the need for a quick sale due to sudden job relocation, financial distress, or to avoid foreclosure. Selling quickly, even at a reduced price, offers faster resolution and prevents further financial strain.

Distressed properties, needing substantial repairs, also often sell below market value. The seller may prefer to sell as-is, reflecting the buyer’s anticipated repair costs.

Some sales involve charitable contributions, where the difference between market value and sale price is intended as a donation. Lastly, properties with sentimental value may be sold for less if the seller prioritizes a specific buyer or keeping the property in certain hands over financial gain.

Tax Considerations for Discounted Sales

Selling a house for less than its fair market value can introduce several tax implications for both seller and buyer. A significantly reduced price, especially to family, may be considered a “bargain sale” by the IRS, potentially triggering gift tax rules. If the difference between the fair market value and sale price exceeds the annual gift tax exclusion, the seller may have made a partial gift.

For 2025, the annual gift tax exclusion is $19,000 per recipient. Amounts above this reduce the donor’s lifetime gift tax exemption, which is $13.99 million per individual for 2025. The seller, as donor, is responsible for any gift tax liability. If the gifted portion exceeds the annual exclusion, the seller must file IRS Form 709 to report the transaction, even if no tax is immediately due.

For the seller’s capital gains or losses, selling a personal residence below fair market value impacts the calculation. The seller’s basis is generally their original purchase price plus improvements. A sale price below this adjusted basis results in a capital loss. However, losses on the sale of a personal residence are generally not deductible for tax purposes. If the sale price is above the adjusted basis but below market value, it might reduce or eliminate a potential capital gain.

For the buyer, the cost basis in a discounted sale is generally the amount paid. In a bargain sale with a partial gift, the buyer’s basis for future capital gains calculations can be complex. For determining a gain, the buyer’s basis is usually the greater of the amount paid or the seller’s adjusted basis in the gifted portion. For determining a loss, the buyer’s basis is generally the fair market value at the time of the gift.

These rules are important for the buyer’s future tax obligations. State laws may also have tax implications, including transfer taxes or assessments based on fair market value rather than the discounted price.

Practical Steps and Safeguards

Executing a sale below market value requires careful planning to protect both seller and buyer. Obtaining an independent, professional appraisal of the property is important. This establishes the fair market value, providing an objective benchmark, especially with a significant discount. This documentation is useful for tax purposes, helping the seller substantiate the gifted portion and both parties establish cost bases.

Thorough documentation of the entire transaction is necessary. This includes a clear sales contract stating the agreed-upon price and any gifted portion. The appraisal report and other related agreements should be preserved. Stating the true intent in writing, such as labeling it a “bargain sale” or identifying a “gift portion,” provides clarity and can be crucial if authorities review the transaction.

Consulting a real estate attorney is recommended to draft or review the sales contract and ensure legal requirements are met. An attorney can advise on structuring the sale, helping to avoid future disputes. Mortgage considerations arise if the sale price is less than the outstanding mortgage balance. The seller may need to bring funds to closing or pursue a short sale with lender approval.

Even in a discounted sale, the buyer should conduct due diligence, including professional home inspections. This helps the buyer understand the property’s condition and potential issues, ensuring they are fully informed. These safeguards ensure the transaction is legally sound and financially transparent.