Tax Implications of Selling a House Below Market Value

Selling a home below its fair market value can trigger tax considerations beyond those of a standard real estate transaction. When a property is sold at a discount, the IRS may treat part of the difference between the sale price and the market value as a gift. In turn, this can affect gift tax reporting requirements for the seller. Capital gains taxes may still apply, depending on the seller’s cost basis, the sale price and whether the primary residence exclusion applies. The structure of the transaction can also shape the buyer’s future tax basis in the home.

A financial advisor can help evaluate how a below-market home sale may affect gift taxes, capital gains and long-term planning. Connect with an advisor for free.

What Is Fair Market Value?

Fair market value refers to the price a property would typically sell for when both the buyer and seller are willing participants, neither is under pressure to act and both have reasonable knowledge of the home and local market conditions.

In practice, fair market value is often supported by recent comparable sales, a professional appraisal or listing activity around the time of the transaction. If a home sells for less than what these indicators suggest, the IRS may view the difference between the sale price and fair market value as something other than a simple price concession. That distinction becomes relevant when determining whether part of the transaction should be treated as a gift, how capital gains are measured and how the buyer’s tax basis in the property is established.

What Happens When a Home Sells Below Fair Market Value?

When a home sells for less than its fair market value, the transaction can simultaneously assume multiple tax characteristics. Rather than treating it as a straightforward sale, the IRS may view part of the deal as a sale and part as a transfer with separate tax consequences. How those pieces are classified affects both the seller and the buyer.

Gift Tax Treatment

If a buyer pays less than fair market value for a home, the IRS may treat the difference between the sale price and that value as a gift from the seller to the buyer. This does not automatically result in owing gift tax. Instead, the amount may fall under the annual gift tax exclusion or apply against the seller’s lifetime gift and estate tax exemption.

For 2026, only the portion of a gift that exceeds the $19,000 annual exclusion counts against a person’s lifetime exemption, currently $15 million. However, in many cases, the main obligation is filing a gift tax return to report the transaction.

Capital Gains

Selling below market value does not eliminate capital gains exposure. The seller’s gain is generally measured by comparing the actual sale price with the property’s adjusted cost basis. If the home qualifies as a primary residence, the seller may still be able to exclude up to $250,000 of gain ($500,000 for married couples filing jointly), even if the property was sold at a discount.

Buyer’s Tax Basis

How the transaction is classified can affect the buyer’s future tax position. When a home is transferred in a sale with a gift component, the buyer’s basis is generally tied to the amount paid for the property. In certain cases involving part-sale, part-gift transactions, the seller’s adjusted basis may also become relevant if the buyer later sells the property and must calculate taxable gain. These rules can affect how much of a future sale is subject to capital gains tax.

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Reporting and Documentation Requirements

When a home is sold below fair market value and part of the transaction is treated as a gift, the seller may need to report that gift to the IRS. This is typically done by filing Form 709, which documents the value transferred above the sale price. Filing the form does not necessarily mean gift tax is owed. Rather, it allows the IRS to track how much of the seller’s lifetime exemption has been used over time.

Supporting documentation can also matter. Appraisals, comparable sales data and records showing how the sale price was determined may help substantiate the reported fair market value if the transaction is later reviewed. Keeping clear records becomes more relevant when the sale occurs between related parties or involves a sizable discount.

Bottom Line

Selling a home below fair market value often blends elements of a sale and a gift, which can affect tax reporting, capital gains calculations and the future tax treatment of the property. While these transactions are common in family and estate planning contexts, the tax outcome depends on how the price compares to market value and how the deal is documented.

Understanding how the IRS views discounted sales helps clarify why gift tax rules, basis calculations and reporting obligations can apply even when no cash gift is intended.

Tips for Selling Your Home

A financial advisor can help evaluate how selling your home fits into your broader financial plan, including retirement goals, debt payoff strategies and investment allocation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. From there, you can have a free introductory to decide which one feels right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Home sales can trigger capital gains taxes. This will depend both on how long you owned and lived in the property and how much profit you realize. Knowing how the home sale exclusion works, as well as how selling costs affect your gain, can help you estimate potential tax liability and avoid surprises at closing.