Selling a house below market value means that you are letting go of your property for a price that is lower than what most buyers would be willing to pay for a similar property in the same area.

Various personal or financial reasons might drive this decision, including helping a family member or friend or even contributing to a charitable cause.

However, this choice can have significant tax implications that you should be aware of. This blog will walk you through the tax implications of selling a house below market value.

What Are Tax Implications:

Tax implications are the potential consequences of a financial transaction on a taxpayer's liability to pay taxes. Governments levy taxes on individuals and businesses to generate revenue to fund public services and programs.

Here are some examples of common financial transactions with tax implications:

Income: All income is taxable, regardless of its source. This includes wages, salaries, commissions, bonuses, investment income, and rental income.

Investments: When you sell an investment, you may have to pay capital gains tax on the profit. Capital gains tax is a tax on the difference between the purchase price and the sale price of an asset.

Real estate: When you sell real estate, you may have to pay capital gains tax on the profit. You may also be able to deduct certain expenses from your capital gains tax liability, such as closing costs and real estate commissions.

Gifts: When you give a gift to someone, you may have to pay gift tax. Gift tax is a tax on gifts that are valued over a certain amount.

Estate: When you die, your estate may have to pay estate tax. Estate tax is a tax on the value of your assets at the time of your death.

What is Market Value?

Market value is the estimated price at which a property would sell in a competitive market when both the buyer and seller are acting prudently and with full knowledge of the market conditions. Factors like location, size, condition, and recent sales of comparable properties in the area influence it.

Tax implications of selling a house below market value:

There are two types of tax implications of selling a house below market value.

1. Capital Gains Tax:

Capital gains tax is a tax on the profit you make when selling an asset like a house. When you sell a property, you typically calculate your capital gain by subtracting the purchase price from the sale price.

How is it Calculated When Selling a House?

To calculate capital gains on a house, subtract the original purchase price, plus any capital improvements and selling expenses, from the selling price. The result is your capital gain.

Capital Gains Tax in Real Estate:

The IRS taxes short-term capital gains as standard income, meaning it determines your tax rate based on your income tax bracket. The income tax brackets are as follows:

Tax-filing status

0% tax rate

15% tax rate

20% tax rate


$0 to $44,625.

$44,626 to $492,300.

$492,301 or more.

Married, filing jointly

$0 to $89,250.

$89,251 to $553,850.

$553,851 or more.

Married, filing separately

$0 to $44,625.

$44,626 to $276,900.

$276,901 or more.

Head of household

$0 to $59,750.

$59,751 to $523,050.

$523,051 or more.

How Does Selling Below Market Value Affect Capital Gains Tax?

When you sell your house below market value, the capital gain is still calculated based on the market value, not the sale price. This means you could have a capital gain even if you sold the house at a loss compared to what you initially paid. It's crucial to report this capital gain to the tax authorities, which might lead to a higher tax liability.

2. Gift Tax:

A gift tax is a tax on the transfer of property or money from one person to another without receiving something of equal value in return. It is generally applied when you sell or give away assets, including property, for less than their fair market value.

How Does It Apply to Selling a House Below Market Value?

Selling a house below market value is considered a gift for tax purposes, and you may be subject to gift tax if the value of the property exceeds the annual gift tax exclusion limit. The annual exclusion limit is the maximum amount you can give to someone without incurring gift tax.

When Do You Need to Pay Gift Tax?

You need to pay gift tax when the value of the gift exceeds the annual exclusion limit. However, most individuals won't owe gift tax immediately because of the lifetime gift tax exemption, which allows you to gift a certain amount during your lifetime without incurring gift tax. Still, exceeding this lifetime limit can have significant tax consequences.

How to Reduce Your Tax Liability

To reduce your tax liability when selling a house below market value, consider the following strategies:

1. Sell to a Family Member or Friend for Fair Market Value

Selling your house to a family member or friend at a price that reflects its fair market value can help you avoid or minimize capital gains tax and gift tax implications. This ensures that the transaction is treated as a standard sale rather than a gift.

2. Use Gift Tax Exemption

Leverage your annual and lifetime gift tax exemptions to offset the amount of gift tax you may owe. Consult with a tax advisor to ensure compliance with gift tax regulations.

3. Make a Charitable Donation

Consider donating a portion or the entire proceeds from the sale of your house to a qualified charitable organization. This can potentially provide a charitable deduction, reducing your overall tax liability.

How to Avoid Paying Too Much in Taxes

To avoid paying excessive taxes when selling below market value, explore these options:

1. Sell to a Qualified Buyer

Certain types of buyers, such as first-time homebuyers or those using the home for specific purposes (e.g., as a primary residence), may be exempt from capital gains tax or gift tax. Be sure to research and confirm eligibility.

2. Use a Gift of Equity

A gift of equity involves selling your property to someone at a price lower than its market value. The difference between the market value and the sale price is considered a gift. This can help reduce the amount of capital gains tax and gift tax liability. For example, if your house's market value is $300,000 and you sell it to a family member for $250,000, you're effectively gifting them $50,000.

3. Claim a Deduction for Capital Losses

If you sell your house for less than you initially paid for it, you may be able to claim a deduction for capital losses. This can offset other gains and reduce your overall tax liability.


Selling your house below market value can have various tax implications, including capital gains tax and gift tax. To minimize your tax liability, consider selling at fair market value, using gift tax exemptions, making charitable donations, selling to qualified buyers, using a gift of equity, or claiming deductions for capital losses. Always consult with a tax advisor to navigate these complex tax matters effectively.

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