Selling land to a family member follows the same legal steps as any real estate sale, with one extra wrinkle: if you charge less than the land is worth, the IRS treats the discount as a gift. To do it correctly, get an independent appraisal, decide on a price, draft a written purchase agreement and deed, handle notarization and recording, and account for gift tax, capital gains, and any seller-financed interest on your return.
Get an Independent Appraisal First
Before you settle on a price, hire a licensed appraiser to determine the land’s fair market value. Fair market value is what the property would sell for between a willing buyer and seller on the open market, and it anchors every tax calculation that follows. The appraiser considers recent comparable sales, size, location, zoning, access, and any improvements. For vacant land, an appraisal typically costs a few hundred dollars.
Even if you plan to charge full price, the appraisal gives you a defensible number if the IRS ever questions the sale. If you plan to sell below market, it’s essential: it establishes exactly how large the gift portion is.
Gift Tax When You Sell Below Fair Market Value
Federal law treats a sale for less than fair market value as a gift for the difference between what the property is worth and what you actually charge.1Office of the Law Revision Counsel. 26 USC 2512 – Valuation of Gifts Sell land appraised at $300,000 to your daughter for $200,000, and you’ve made a $100,000 gift in the eyes of the IRS. The agency itself states that selling something at less than its full value may constitute a gift.2Internal Revenue Service. Gift Tax
For 2026, you can give up to $19,000 per recipient with no filing requirement. A married couple who agrees to split the gift can cover up to $38,000 together. Anything above that threshold triggers a Form 709 gift tax return.
Filing Form 709 doesn’t mean you owe tax. It reports the gift and subtracts the excess from your lifetime exemption, which for 2026 sits at $15 million per person following the One, Big, Beautiful Bill Act enacted in mid-2025.3Internal Revenue Service. What’s New — Estate and Gift Tax Most sellers will never exhaust that exemption, but the filing requirement applies regardless of how much remains.
Capital Gains on the Sale
Gift tax is separate from capital gains tax, and you may owe both. Your taxable gain is the difference between the sale price and your adjusted basis, which is generally what you originally paid for the land plus improvements, minus any casualty losses or depreciation claimed.4Internal Revenue Service. Property (Basis, Sale of Home, etc.) 3 The gain is calculated on the actual sale price, not the fair market value. If you bought land for $50,000, sell it to a family member for $200,000, and its appraised value is $300,000, your capital gain is $150,000.
The $250,000 home-sale exclusion ($500,000 for joint filers) only applies to a main residence you owned and lived in for at least two of the five years before the sale.5Internal Revenue Service. Topic No. 701, Sale of Your Home Vacant land and investment property don’t qualify. Land held more than a year is taxed at long-term capital gains rates, which top out at 20% for high earners. Land held a year or less is taxed as ordinary income.
Why the Buyer’s Basis Matters
When your family member buys land from you, even at a discount, their cost basis for future tax purposes is generally the same as yours. This is called carryover basis.6Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Say you paid $40,000 for the land decades ago and sell it to your son for $150,000 when it’s worth $300,000. His basis stays rooted in that original $40,000, and when he eventually sells, he could face a large capital gains bill.
Inheritance works differently. If your son instead inherited the same land after your death, his basis would reset to the fair market value on the date you died.7Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If the land was worth $300,000 at that point and he sold it shortly after for $300,000, he’d owe nothing in capital gains. That stepped-up basis can save tens or even hundreds of thousands of dollars.
Selling during your lifetime still makes sense in plenty of situations: you need the cash, you want the buyer to take possession now, or the land hasn’t appreciated much. But if you’re an older parent selling highly appreciated land to a child at a steep discount to “keep it in the family,” run the numbers with a tax professional before closing. A transfer at death may save the family far more than a below-market sale today.
The Documents You Need
A handshake and a check won’t hold up, even between siblings. A family land sale needs the same core paperwork as any real estate transaction.
- A written purchase agreement setting out price, closing date, who pays which costs, and any conditions that must be met before closing.
- A deed transferring ownership. A general warranty deed gives the buyer the strongest protection because the seller guarantees clear title and promises to defend against future claims. A quitclaim deed transfers whatever interest the seller has without guarantees, which is riskier for the buyer but common in family deals where trust is high.
- A promissory note if you’re financing the sale yourself, spelling out the amount, interest rate, payment schedule, and consequences for missed payments.
- A deed of trust or mortgage to secure the note by placing a lien on the land, giving you a legal path to reclaim the property if the buyer defaults.
Attorney fees for drafting typically run from a few hundred dollars for a simple deed to over $1,000 for a full package with seller financing. Given the tax exposure and family dynamics involved, this is not the place to use an online form without professional review.
Federal law also requires certain disclosures, most notably the lead-based paint rule for any structure built before 1978.8Environmental Protection Agency. Real Estate Disclosures About Potential Lead Hazards Most states additionally require sellers to disclose known material defects, environmental issues, flood zone status, and boundary disputes. Forms vary, so check your state’s rules before closing.
Notarize and Record the Deed
Two mechanical steps make the transfer legally effective. First, the deed and any financing documents must be signed in front of a notary public, who verifies each signer’s identity and witnesses the signatures. Most states require in-person notarization for real property deeds, though a growing number now permit remote online notarization. Check your state’s rules before assuming a video call will work.
Second, the signed and notarized deed must be recorded with your county recorder’s office, sometimes called the register of deeds. Recording creates the official public record of the ownership change. Skip it and the chain of title stays unclear, which can cause problems if the buyer later tries to sell, refinance, or prove ownership in a dispute. Recording fees typically run between $25 and $150 depending on the document and page count.
Before the deed changes hands, the buyer should pay for a title search of public records for liens, unpaid taxes, easements, or competing ownership claims. Surprises turn up more often than you’d expect: old contractor liens, utility easements no one mentioned, or boundary issues from a prior owner. Title insurance protects the buyer from financial loss if a defect surfaces after closing, and it’s a one-time premium paid at closing.
If the Land Has an Existing Mortgage
Selling mortgaged land doesn’t make the loan disappear. Most mortgage contracts include a due-on-sale clause allowing the lender to demand full repayment when the property changes hands.
Federal law offers a narrow shield. The Garn-St. Germain Act prohibits lenders from enforcing a due-on-sale clause on residential property with fewer than five units when the transfer goes to the borrower’s spouse or child.9Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions The same protection applies to transfers on death or through a divorce or separation decree. A sale to a sibling, parent, or nephew may not qualify, and the protection is limited to residential property. If your situation doesn’t fit squarely within the exemption, contact the lender before closing.
Rules for a Seller-Financed Sale
When you finance the sale yourself, the IRS expects you to act like a bank. The central rule: you must charge at least the Applicable Federal Rate of interest, which the IRS publishes monthly in three tiers based on the loan term (short-term for loans up to three years, mid-term for three to nine years, long-term beyond that).10Internal Revenue Service. Applicable Federal Rates
Charge less than the AFR and federal law imputes the gap. The IRS treats the difference between what you charged and what the AFR would have produced as a gift from you to the borrower. That forgone interest is considered transferred from lender to borrower and then retransferred back as interest, meaning the IRS can tax you on interest income you never received.11Office of the Law Revision Counsel. 26 US Code 7872 – Treatment of Loans With Below-Market Interest Rates For gift loans under $100,000 where tax avoidance isn’t a principal purpose, imputed interest is capped at the borrower’s net investment income for the year. Cleaner to just charge the AFR from the start.
You must also report the interest you receive as income. The IRS requires seller-financed mortgage interest on Schedule B, along with the buyer’s name, address, and Social Security number. You have to provide the buyer with your SSN so they can claim a mortgage interest deduction on their return.12Internal Revenue Service. Instructions for Schedule B (Form 1040) Unlike a commercial lender, you’re generally not required to file Form 1098 if the loan isn’t part of a trade or business.13Internal Revenue Service. Instructions for Form 1098
Create a formal amortization schedule showing how each payment splits between principal and interest. It helps both sides report accurately and proves the transaction is a real loan, not a disguised gift.
Watch the Medicaid Five-Year Look-Back
A below-market sale can cause problems years later. When someone applies for Medicaid coverage of nursing home care, the state reviews all asset transfers made during the previous 60 months. Any transfer for less than fair market value is presumed to have been made to qualify for Medicaid, and the applicant faces a penalty period during which Medicaid won’t cover nursing home costs.14Centers for Medicare and Medicaid Services. Transfer of Assets in the Medicaid Program
The penalty clock doesn’t start when you make the transfer. It starts when the applicant is in a nursing home, has spent down to Medicaid’s asset limit, and has applied for coverage. The timing is harsh: the person hit with the penalty is already in the facility and already out of money. Penalty length is calculated by dividing the total uncompensated transfer by the regional monthly nursing home cost. A $100,000 gift of equity could translate to roughly eight to twelve months of ineligibility, depending on local rates.
If you’re over 60 or expect to need long-term care within the next five years, talk to an elder law attorney before selling below market to a family member. A sale at full appraised value sidesteps the issue because there’s no uncompensated transfer.
Property Tax Reassessment and Transfer Taxes
A change in ownership often triggers a reassessment of the land’s value for property tax purposes. If the land has been in your family for decades and its assessed value sits well below market, the sale could sharply increase the buyer’s annual property tax bill. Some states offer limited exemptions for parent-child transfers, but these protections have narrowed in recent years. Ask the county assessor how the transfer will affect the buyer’s tax burden before closing.
Most states and some local governments also impose a transfer tax or documentary stamp tax when property changes hands. Rates range from a fraction of a percent to several percent of the sale price, and some states use flat fees or don’t impose a transfer tax at all. Certain family transfers are exempt in some jurisdictions, though this is far from universal. Your closing attorney or title company can confirm what applies in your county.
Beyond transfer taxes, budget for the appraisal, title search, title insurance, recording fees, attorney fees, and notary costs. In a seller-financed deal, who pays what is negotiable, and that allocation should appear in the purchase agreement. Adding it all up before you commit to a price keeps closing free of surprises.