Tax Rules and Consequences of a Part Gift, Part Sale

A part gift, part sale occurs when property is sold for less than its full fair market value. The difference between the market value and the sale price is considered a gift from the seller to the buyer. These arrangements are common within families, like a parent selling a home to a child at a discount, and create unique tax considerations for both the sale and gift portions of the transaction.

Calculating the Sale and Gift Portions

To analyze a part gift, part sale, the transaction must be separated into a sale amount and a gift amount based on the property’s Fair Market Value (FMV). FMV is the price property would sell for on the open market between a willing buyer and seller. Obtaining a qualified appraisal is the standard way to determine FMV and provides a defensible valuation for tax purposes. The appraisal should be conducted by a qualified appraiser and be dated close to the time of the transfer, as the IRS could otherwise challenge the property’s assigned value.

Once the FMV is established, the calculation is direct. The amount the buyer pays is the sale portion, and the gift portion is the amount by which the FMV exceeds that sale price. For example, if a home with an FMV of $500,000 is sold for $200,000, the transaction consists of a $200,000 sale and a $300,000 gift.

Seller’s Tax Obligations and Reporting

For the sale portion, the seller must calculate any taxable capital gain. This starts with the seller’s adjusted basis in the property, which is the original purchase price plus costs of significant improvements, less any depreciation. To determine the gain, the seller subtracts their full adjusted basis from the sale price. If the sale price is higher than the basis, the difference is a capital gain; however, if the sale price is less than the adjusted basis, no loss is recognized.

For example, if a property with a $150,000 adjusted basis is sold for $200,000, the seller has a $50,000 taxable capital gain. This gain is reported on Form 8949, Sales and Other Dispositions of Capital Assets, and summarized on Schedule D of the seller’s income tax return.

The gift portion is subject to federal gift tax rules. For 2025, an individual can give up to $19,000 to any person without gift tax implications under the annual exclusion. This amount is subtracted from the total gift, reducing the taxable portion. Any gift amount exceeding the annual exclusion must be reported on Form 709, United States Gift Tax Return, even if no tax is due.

The reported gift is then applied against the seller’s lifetime gift tax exemption, which is $13.99 million for 2025. Out-of-pocket gift tax is only owed after this lifetime exemption is fully used. On Form 709, the seller must detail the property, its FMV, their adjusted basis, and the sale price.

Buyer’s Basis Determination

The buyer’s basis in the property is used to calculate their capital gain or loss upon a future sale, and a higher basis reduces potential future taxable gains. The rule for determining the buyer’s basis depends on the transaction’s figures. Generally, the buyer’s basis is the greater of either the amount paid for the property or the seller’s adjusted basis at the time of the transfer. For instance, if the buyer paid $200,000 and the seller’s adjusted basis was $150,000, the buyer’s basis is $200,000.

A different “dual basis” rule applies if the property is sold for less than the seller’s adjusted basis. This means the buyer has one basis for calculating a future gain and a different one for a future loss. For calculating a gain, the buyer’s basis is the seller’s adjusted basis at the time of the transfer. For calculating a loss, the buyer’s basis is the property’s lower fair market value at the time of the transfer.

To illustrate, suppose a property with an FMV of $60,000 and a seller’s adjusted basis of $90,000 is sold for $30,000. The buyer’s basis for a future gain is $90,000, while the basis for a future loss is $60,000. If the buyer sells the property for a price between these two figures, such as $75,000, no gain or loss is recognized.