Selling Second Homes Below Market Rate

Selling below market value to family will attract IRS scrutiny.

If the IRS decides a sale to a relative is a disguised gift, the proceeds will be taxed.

Consult a tax attorney or accountant when in doubt.

Did you know?

There are many ways to transfer a second home to your child. Consider them all before taking action.

Let’s say you need, or want, to sell your second home somewhere below the fair market value for the real estate. Any stranger or casual acquaintance who takes your offer can shake your hand and take possession of the property knowing they got a really good deal. If your kids or another close relative decides the deal is too good to pass up, your sale to them will probably raise the interest of the Internal Revenue Service.

The reason is a below market sale to a stranger is just a real estate transaction. That same sale to a relative may well look like a disguised gift to the IRS, and an attempt to circumvent the gift tax. If the IRS decides to take a closer look at your transaction and determines the sale was in fact a gift, you will have to pay a gift tax on the difference between the sale price and the fair market value of your second home.

You can, of course, use your $11,000 gift-tax exemption to further reduce the taxable amount. Let’s say the second home has a market value of $100,000 and you sell it to your son and his wife for $55,000. The IRS steps in and decides that $45,000 difference amount to a gift. Both you and your spouse can make tax free $11,000 gifts to your son and daughter-in-law consuming $44,000 of the $45,000 gift. The end result is a $1000 taxable gift and that can be folded into your $1 million annual gift tax exclusion.

The important thing is to be aware of transactions that will arouse the interest of the IRS and structure the sale accordingly, on firm legal ground. You may wish to consult a tax attorney or accountant.