Selling a house to your son below market value is legal, and families do it routinely. The catch is that the IRS treats the gap between the appraised value and the price he actually pays as a gift from you to him. That gift has to be reported once it exceeds $19,000, and the transaction can also ripple into your Medicaid eligibility, your son’s future capital gains bill, and his property tax assessment.
The Discount Counts as a Gift
If your home appraises at $400,000 and you sell it to your son for $250,000, the IRS says you’ve made a $150,000 gift of equity, whether or not that was your intent.1Internal Revenue Service. Gift Tax
Two layers of federal law stand between that gift and an actual tax bill. In 2026, the annual exclusion lets you give up to $19,000 per recipient with no reporting required at all.2Internal Revenue Service. What’s New — Estate and Gift Tax If you’re married and your spouse agrees to split the gift, that doubles to $38,000.3Internal Revenue Service. Gifts and Inheritances Anything above the exclusion gets reported on IRS Form 709, due April 15 of the year after the sale.4Internal Revenue Service. Instructions for Form 709
Filing Form 709 does not mean you owe anything. The excess simply chips away at your lifetime gift and estate tax exemption, which sits at $15,000,000 per individual for 2026.2Internal Revenue Service. What’s New — Estate and Gift Tax You would only write a check to the IRS after burning through that entire $15 million across all lifetime gifts. For nearly every family selling to a child, Form 709 is paperwork, not a bill.
Your Capital Gains on the Sale Portion
You still have a sale to account for, even at a discount. Your gain is the sale price minus your adjusted basis in the home. Sell for $300,000 on a $200,000 basis and you have a $100,000 gain on the sale portion, separate from the gift portion.
The primary residence exclusion still applies. If you’ve owned and lived in the home for at least two of the five years before the sale, you can exclude up to $250,000 of gain as a single filer or $500,000 as a married couple filing jointly.5Internal Revenue Service. Topic No. 701, Sale of Your Home The related-party restriction in Publication 523 only applies to the sale of a remainder interest, not to a standard sale to a family member.6Internal Revenue Service. Publication 523, Selling Your Home Most parents in this situation owe no capital gains tax at all.
What Your Son’s Cost Basis Becomes
The consequence that surprises families most lands on your son when he eventually sells. His basis controls his taxable gain, and in a part-gift, part-sale transaction the rule is not intuitive.
For calculating a future gain, your son’s basis is the greater of the price he actually paid or your adjusted basis at the time of transfer.7eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale Two illustrations:
- Your basis is $200,000 and he pays $300,000. His basis is $300,000. If he later sells for $500,000, his taxable gain is $200,000.
- Your basis is $350,000 and he pays $300,000. His basis is $350,000. If he later sells for $500,000, his taxable gain is $150,000.
A separate rule applies to losses. If he sells at a loss, his basis for computing that loss cannot exceed the home’s fair market value on the day you transferred it.7eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale That prevents families from manufacturing a deductible loss through a below-market transfer.
If You Finance the Sale Yourself
Holding the mortgage for your son instead of sending him to a bank comes with its own rule: the loan has to carry at least the Applicable Federal Rate (AFR), which the IRS publishes monthly.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates For January 2026, the long-term AFR — the one that applies to loans over nine years, which covers most mortgages — is 4.63% compounded annually.9Internal Revenue Service. Revenue Ruling 2026-2 – Section 1274 Determination of Issue Price
Charge less and the IRS treats the shortfall as “forgone interest.” That amount is taxable interest income to you even though you never collected it, and it counts as an additional gift to your son that has to be reported on Form 709. The imputed interest rules do not apply to loans of $10,000 or less, and for loans between $10,000 and $100,000 the imputed interest is capped at your son’s net investment income for the year.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Neither exception helps with a house. Check the current AFR table before you set the rate, since it changes every month.
The Medicaid Five-Year Look-Back
If long-term care is a realistic possibility for you in the next several years, this is the risk that most often blindsides families.
Federal law requires every state Medicaid program to review an applicant’s financial transactions for the 60 months before the application date.10Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets A below-market sale to your son is a transfer for less than fair market value. If it falls inside that window, it triggers a penalty period during which Medicaid will not cover nursing home or other long-term care.
The penalty length equals the uncompensated portion of the transfer divided by the average monthly cost of private nursing home care in your state.10Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Gift $150,000 in equity in a state where private care averages $10,000 a month and you’re looking at 15 months of ineligibility. States cannot round partial months down, so even a modest gift can add weeks.
The penalty does not start on the day of the transfer. It starts when you apply for Medicaid and would otherwise qualify. By then the asset is gone, which is what makes this rule so painful. Any planning around it has to happen well before care is actually needed.
Property Tax Reassessment
Property taxes are the cost families most often forget. In many jurisdictions, transferring a home to a child triggers a reassessment at current market value. If you’ve owned the home for decades and your assessed value is far below what it would sell for today, your son’s annual tax bill could jump sharply. Some states offer exemptions or reduced reassessment for parent-to-child transfers; rules vary widely. He should call the local assessor before closing so he knows what his ongoing tax bill will look like.
Paperwork the Sale Requires
The mechanics look like a normal real estate closing with a few extra pieces bolted on for the gift component.
A Formal Appraisal
A licensed appraiser sets the fair market value, which is the number everything else depends on. You need it for Form 709, and any lender your son uses will require it. An online estimate will not substitute.
Purchase Agreement and Gift Letter
The contract should state the sale price, the appraised value, and the amount of equity being gifted. If your son is taking out a mortgage to cover the cash portion, his lender will want a gift letter confirming the equity gift is a genuine gift and not a hidden loan.
Your Existing Mortgage
Most mortgage agreements include a due-on-sale clause letting the lender demand full repayment when title changes. Federal law bars lenders from enforcing that clause when the transfer is to the borrower’s children, for residential properties with fewer than five units.11Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions Contact your servicer before closing anyway so nothing surprises you.
Title Work, Transfer Tax, and the Deed
Run a title search and buy title insurance. Trust between family members does not clear a lien from a prior owner or an unpaid tax. Many states and localities charge a real estate transfer tax at rates roughly in the 0.1% to 5% range; some exempt or reduce it for parent-to-child transfers, and 16 states impose no state-level transfer tax. The sale is not complete until a new deed is signed, notarized, and recorded with the county.
Reporting After Closing
A pure gift of a home does not require Form 1099-S.12Internal Revenue Service. Instructions for Form 1099-S (Rev. April 2025) A below-market sale has a real sale component, so the closing agent will typically file a 1099-S for the sale price. If the gifted equity exceeds $19,000 (or $38,000 for a married couple splitting the gift), file Form 709 by April 15 of the following year.4Internal Revenue Service. Instructions for Form 709