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 your sale price and the home’s fair market value as a gift, which triggers federal reporting once that gap crosses the annual exclusion. A discounted sale can also jeopardize your Medicaid eligibility if you need long-term care within five years, shape your son’s tax bill when he eventually sells, and change what he pays in property taxes going forward.
The Discount Is a Gift in the Eyes of the IRS
When you sell your home for less than its appraised value, the IRS treats the difference as a gift, whether or not you meant it that way.1Internal Revenue Service. Gift Tax If the house appraises at $400,000 and you sell it to your son for $250,000, you’ve made a $150,000 gift of equity.
Two layers of federal protection sit between that gift and an actual tax bill. The first is the annual exclusion. In 2026, you can give any one person up to $19,000 without reporting anything.2Internal Revenue Service. What’s New — Estate and Gift Tax If you’re married and your spouse agrees to split the gift, the combined exclusion is $38,000.3Internal Revenue Service. Gifts and Inheritances On a $150,000 gift of equity, a married couple would report $112,000 on IRS Form 709.
Filing Form 709 is not the same as owing tax. The reported amount chips away at your lifetime gift and estate tax exemption, which for 2026 is $15,000,000 per person.2Internal Revenue Service. What’s New — Estate and Gift Tax Actual gift tax comes due only after you’ve exhausted that $15 million across your lifetime. For most families the form is paperwork, not payment. It’s due by April 15 of the year after the sale.4Internal Revenue Service. Instructions for Form 709
Capital Gains on Your Side of the Deal
The sale portion of the transaction still generates a capital gain for you. Your gain equals the sale price minus your adjusted basis. If your basis is $200,000 and you sell for $300,000, you have a $100,000 gain from the sale itself, separate from the gift.
The primary residence exclusion applies normally. 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 filing jointly.5Internal Revenue Service. Topic No. 701, Sale of Your Home Most parents selling their primary home to a child owe nothing in capital gains tax because the gain fits comfortably inside that exclusion.
What Your Son’s Basis Will Be
The consequence that lands hardest, and latest, is on your son. His cost basis will determine how much taxable gain he faces whenever he sells, and in a part-gift, part-sale transaction the calculation is not what most people expect.
For calculating a future gain, your son’s basis is the greater of the price he paid or your adjusted basis at the time of transfer.6eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale Two examples:
- Your basis is $200,000 and you sell for $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 you sell for $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 your son eventually sells at a loss, his basis for computing that loss cannot exceed the home’s fair market value on the day you transferred it to him.6eCFR. 26 CFR 1.1015-4 – Transfers in Part a Gift and in Part a Sale The rule blocks families from engineering a deductible loss through a below-market sale. If the home was worth $400,000 when he bought it and he later sells for $380,000, he cannot claim a loss based on your higher original basis.
If You Finance the Sale Yourself
If your son pays you over time instead of getting a bank mortgage, you cannot simply set a zero or token interest rate. Federal law requires intra-family loans to carry at least the Applicable Federal Rate, which the IRS publishes monthly.7Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
For January 2026, the long-term AFR, which covers loans over nine years and therefore most home financing, is 4.63% compounded annually.8Internal 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 counts as an additional gift from you to your son and as interest income to you, meaning you owe income tax on interest you never collected and you report the imputed gift on Form 709. Check the current AFR table before setting your rate; the numbers change every month.
The Medicaid Five-Year Look-Back
If long-term care is a realistic possibility in the coming years, the Medicaid consequences of a discounted sale deserve close attention. This is where families are blindsided most often.
Every state Medicaid program is required to review an applicant’s financial transactions for the 60 months before the application date.9Office 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 pay for nursing home or other long-term care.
The length of the penalty is the uncompensated value of the transfer divided by the average monthly cost of private nursing home care in your state.9Office 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 face a 15-month penalty. States cannot round down partial months, so even modest gifts add weeks of ineligibility.
The timing makes it worse. The penalty period does not begin on the date of the transfer. It starts when you apply for Medicaid and would otherwise qualify. By then the asset is already gone and the benefit you need is out of reach. Planning around this rule means acting well ahead of any expected need for care.
Property Tax Reassessment
Property tax is the cost families consistently overlook. In many jurisdictions, transferring a home to a child triggers a reassessment of its taxable value. If you’ve owned the house for decades and your assessed value sits far below current market value, your son could see a dramatically higher annual bill. Some states offer exemptions or reduced reassessment for parent-to-child transfers, but the rules vary widely. Have your son check with the local assessor before closing so he knows what his ongoing tax bill will look like.
Closing the Sale Cleanly
The mechanics of a below-market family sale look much like any real estate closing, with a few extra requirements tied to the gift portion.
Get a Professional Appraisal
A licensed appraiser sets the fair market value that every other number depends on. You need it to calculate the gift for Form 709, and if your son is financing part of the purchase, his lender will require it. A Zillow estimate is not a substitute; the IRS and lenders both expect a formal appraisal.
Write the Purchase Agreement and a Gift Letter
The contract should state the sale price, the appraised value, and the amount of equity being gifted. If your son is getting a mortgage, his lender will ask for a gift letter confirming the equity gift is a genuine gift and not a disguised loan.
Deal With Your Existing Mortgage
If you still have a mortgage, most loan agreements include a due-on-sale clause that allows the lender to demand full repayment when ownership changes. Federal law prohibits lenders from enforcing that clause when the borrower’s children become owners, for residential properties with fewer than five units.10Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions Even so, call your lender before closing to confirm the transfer will go through without the loan being called.
Run a Title Search and Check Transfer Taxes
A title search protects your son from inheriting liens, unpaid taxes, or other claims. Family trust does not clear a tax lien, so title insurance is worth carrying even when buying from a parent. Many states and localities also charge a real estate transfer tax, generally 0.1% to 5% of the sale price or assessed value, though some jurisdictions reduce or waive it for parent-to-child transfers and 16 states impose no state-level transfer tax at all. Confirm the local rules before closing.
Record the Deed
The transfer is not complete until a new deed is signed, notarized, and recorded with the county recorder or equivalent office. Recording fees vary, and the office will reject documents with missing notarization, incomplete legal descriptions, or formatting errors.
File Form 709 After Closing
Because there’s real money changing hands, the closing agent will likely file a Form 1099-S reporting the sale price.11Internal Revenue Service. Instructions for Form 1099-S (Rev. April 2025) Separately, if the gifted equity exceeds the annual exclusion of $19,000 (or $38,000 for a married couple splitting gifts), you file Form 709 by April 15 of the following year.4Internal Revenue Service. Instructions for Form 709 Keep the appraisal with your tax records; it’s the document that supports every number on the return.