Can You Sell Your House to Your Child?

Selling a house to a child is a transaction families often consider for financial and personal reasons. This arrangement can facilitate a child’s homeownership, assist with estate planning, or provide financial relief to aging parents. Such a sale involves financial and tax considerations that demand careful attention. Understanding the different transfer methods and their implications is important for both the parent (seller) and the child (buyer). This article explores approaches to selling a home to a child and the associated tax consequences.

Methods for Transferring Home Ownership to Your Child

Transferring home ownership to a child can take several forms, each with distinct financial and legal mechanics. A common approach is an arm’s length sale, mirroring a typical real estate transaction. In this scenario, the child secures traditional financing, like a mortgage, and purchases the home at its fair market value. This method ensures the transaction is treated as a standard sale for tax purposes, avoiding gift tax complications.

Alternatively, parents might consider a partial gift, also known as a below-market sale. This occurs when the property is sold to the child for less than its fair market value, with the difference considered a gift. For instance, if a home valued at $400,000 is sold for $250,000, the $150,000 difference is treated as a gift. This strategy can reduce the financial burden on the child while still providing some compensation to the parents.

A full gift involves transferring the property title to the child without monetary exchange. While not a traditional “sale,” it is a direct method of transferring ownership with significant tax implications. This approach is often chosen when parents wish to fully divest themselves of the property and its associated responsibilities. Gift tax rules require careful consideration for a full gift.

Another flexible option is a private mortgage or installment sale, where the parent acts as the lender to the child. The child makes regular payments to the parent, similar to a traditional mortgage. A formal promissory note must be drafted, outlining the loan terms, repayment schedule, and interest rate. The interest rate charged must be at least the Applicable Federal Rate (AFR) to avoid the IRS recharacterizing the transaction as a partial gift. This structure allows parents to receive ongoing income while facilitating the property transfer.

Establishing Fair Market Value

Establishing the fair market value (FMV) of the property is a foundational step in any family real estate transfer. FMV is defined as the price at which the property would change hands between a willing buyer and seller, neither under compulsion, and both having reasonable knowledge of relevant facts. This valuation is important because transactions between related parties often face increased scrutiny from tax authorities. Without a properly determined FMV, the IRS may recharacterize a portion of the sale as a gift, leading to unexpected tax liabilities.

The most reliable method for determining FMV for tax purposes is a professional appraisal by a licensed appraiser. An independent appraisal provides an objective assessment of the property’s value based on its condition, location, and comparable sales. This document offers evidence to support the transaction’s legitimacy and sale price. It is advisable to obtain an appraisal close to the transaction date to reflect current market conditions accurately.

Real estate agents often use a comparative market analysis (CMA) to estimate a home’s value. While a CMA provides a general idea of market value, it does not carry the same weight as a professional appraisal for tax reporting. For interfamily transfers, especially those with a gift component, relying solely on a CMA may not provide sufficient documentation for an IRS review. A professional appraisal helps ensure compliance and avoid potential tax disputes.

Tax Implications for the Seller

The tax implications for the parent (seller) when transferring a home to a child vary significantly based on the transaction’s structure. If the property is sold at its fair market value, the primary tax concern for the seller is capital gains tax. Capital gains are calculated as the selling price minus the adjusted basis (original purchase price plus cost of improvements) and selling expenses. Homeowners may be eligible to exclude a portion of capital gains from the sale of their primary residence under Internal Revenue Code Section 121.

Internal Revenue Code Section 121 allows single filers to exclude up to $250,000 of gain and married couples filing jointly to exclude up to $500,000. To qualify, the seller must have owned and used the home as their primary residence for at least two of the five years preceding the sale. If the gain exceeds these amounts, the excess is subject to capital gains tax rates, depending on the seller’s income bracket and ownership duration. Maintain thorough records of home improvements, as these can increase the property’s basis and reduce the taxable gain.

When a property is sold below fair market value, a gift element arises, triggering gift tax considerations for the seller. The difference between the fair market value and the sale price is considered a gift. In 2025, individuals can gift up to $19,000 per recipient annually without incurring gift tax or affecting their lifetime exemption. If the gifted amount exceeds this annual exclusion, the excess reduces the donor’s lifetime gift tax exemption.

The lifetime gift tax exemption for 2025 is $13.99 million per individual. If the gifted amount exceeds the annual exclusion, the donor is required to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, by April 15th of the year following the gift. This form reports the gift and tracks the amount of lifetime exemption used. The gift tax is the responsibility of the donor.

If the parent provides a private mortgage to the child, the interest received on the loan is taxable income to the parent. The interest rate charged must be at least the Applicable Federal Rate (AFR). Charging below the AFR could result in imputed interest, where the IRS treats the difference as a taxable gift from the parent to the child. Establishing a formal loan agreement with an appropriate interest rate is important for tax compliance.

Tax Implications for the Child

The tax implications for the child (buyer or recipient) of a home transfer center on the property’s cost basis and future tax liabilities. The cost basis determines the amount of capital gain or loss when the child eventually sells the property. If the child purchases the home at fair market value, their cost basis is the purchase price plus any acquisition costs, such as closing fees.

When a property is purchased below fair market value or received as a partial gift, the child’s cost basis is more complex. For the portion acquired through purchase, the basis is the amount paid. For the gifted portion, the “carryover basis” rule applies, meaning the child’s basis is the same as the parent’s adjusted basis at the time of the gift. This can significantly impact future capital gains, as the child might inherit a very low basis, leading to a larger taxable gain upon their eventual sale.

If the property is received as a full gift, the child’s basis is the parent’s adjusted basis at the time of the gift. For example, if a parent purchased a home for $100,000 and gifts it to a child when it is worth $300,000, the child’s basis for capital gains purposes would be $100,000. This is a distinction from inherited property, which receives a “stepped-up” basis equal to the fair market value on the donor’s death. The carryover basis for gifted property means the child may face substantial capital gains tax if the property has appreciated significantly.

Regarding gift tax, the recipient (child) does not pay federal gift tax. The responsibility for gift tax falls on the donor (parent). Understanding the basis rules for gifted property is essential for the child’s long-term financial planning, helping them anticipate potential future tax obligations when they sell the home.

A change in ownership, even within a family, can trigger a property tax reassessment in many jurisdictions. Property taxes are based on the home’s assessed value, and a transfer can lead to reassessment at current fair market value. This may result in a significant increase in annual property tax bills for the child.

Some local laws offer exemptions or exclusions for interfamily transfers, especially for a primary residence. These vary and often require specific conditions and forms filed with the local assessor’s office. Consult with the local tax assessor’s office to understand specific rules and potential exclusions.