You can legally sell a house to a family member for $1, but the IRS won’t treat it as a sale. It treats it as a gift of almost the full value of the home. On a house worth $400,000, that’s a $399,999 gift, with a return to file, a tax basis that follows the buyer for years, and side effects that can reach your mortgage, your Medicaid eligibility, and your creditors. The dollar bill is real. The tax system just doesn’t care about it.
Why the IRS Calls It a Gift
Federal law is direct: when you transfer property for less than fair market value, the difference is a gift.1Office of the Law Revision Counsel. 26 USC 2512 – Valuation of Gifts A $400,000 home sold for $1 is a $399,999 gift. The seller becomes a donor, the buyer becomes a donee, and the transaction is governed by gift tax rules rather than ordinary sale rules.
The buyer doesn’t owe income tax on the gift, because federal law excludes gifts from the recipient’s gross income. The seller carries the reporting burden. The buyer carries a hidden cost that shows up later, when the home is sold again.
What the Seller Has to File
In 2026, you can give any one person up to $19,000 in a year without reporting anything.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A gift the size of a house blows past that, so the seller must file IRS Form 709 by April 15 of the following year.3Internal Revenue Service. Instructions for Form 709
Filing the return usually doesn’t mean paying tax. The amount above the annual exclusion is subtracted from the seller’s lifetime gift and estate tax exemption, which is $15 million per person in 2026.4Internal Revenue Service. What’s New – Estate and Gift Tax Actual gift tax, at a top rate of 40%, only applies once your combined lifetime gifts and estate exceed that ceiling. For most families, Form 709 is a tracking document.
Married sellers can each apply their own $19,000 exclusion to the same recipient by electing to split the gift, but both spouses have to file their own Form 709 even when only one of them owns the property.3Internal Revenue Service. Instructions for Form 709
The Buyer Inherits Your Cost Basis
This is where the $1 sale quietly gets expensive. When you receive property as a gift, your tax basis is the same as the donor’s original basis, not what the home is worth on the day of the transfer.5Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Tax professionals call this carryover basis.
A common example shows the size of the problem. A parent bought a house for $100,000. It’s now worth $500,000. They sell it to their child for $1. The child’s basis is $100,000, not $500,000. If the child later sells for $550,000, the taxable capital gain is $450,000. At the 15% long-term capital gains rate that applies to most taxpayers in 2026, that’s a $67,500 federal bill. Higher earners pay 20% on some or all of it.
The child can shrink that gain by moving in. Federal law lets a homeowner exclude up to $250,000 in capital gains on a primary residence, or $500,000 for a married couple filing jointly, if they’ve owned and used the home for at least two of the five years before selling.6Internal Revenue Service. Selling Your Home For gifted property, the child’s holding period includes the donor’s, which helps with the ownership test, but the child still has to actually live there for two years.7Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
Inheriting the Home Usually Beats a $1 Sale
Now compare what happens if the child simply inherits. Heirs get a stepped-up basis equal to the home’s fair market value on the date of death.8Internal Revenue Service. Gifts and Inheritances In the example above, the child’s basis would jump to $500,000. Selling for $550,000 produces a $50,000 gain instead of $450,000. Tens of thousands of dollars in tax disappears.
The parent also skips the gift return. If the goal is passing the house to the next generation without probate, a revocable living trust or a transfer-on-death deed (available in most states) generally accomplishes the same thing while preserving the stepped-up basis.
What Happens to the Mortgage
If the home still has a loan on it, transferring the title runs into the due-on-sale clause built into nearly every mortgage. That clause lets the lender demand full repayment when ownership changes. A $1 sale is a change of ownership.
The Garn-St. Germain Act blocks lenders from enforcing due-on-sale on residential property (fewer than five units) for certain family transfers:9Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions
- Transfers to a spouse or child of the borrower
- Transfers to a relative after the borrower’s death
- Transfers to a spouse under a divorce decree or separation agreement
- Transfers into a living trust where the borrower stays a beneficiary
A sibling, parent, niece, or nephew isn’t on that list. If your buyer falls outside the protected categories, the lender can call the loan due. And even when the protection applies, the original borrower stays legally responsible for the payments unless the lender formally approves an assumption or the buyer refinances.
The Medicaid Five-Year Look-Back
Giving a house away for a dollar can also block long-term care coverage. When someone applies for Medicaid, the state reviews every asset transfer made in the previous 60 months.10Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Any transfer for less than fair market value inside that window triggers a penalty period of ineligibility.
The penalty is calculated by dividing the uncompensated value of the transferred asset by the average monthly cost of private nursing home care in the applicant’s state. A $300,000 home given away in a state where nursing care averages $10,000 a month produces roughly 30 months of ineligibility. During that time, the applicant has to pay for care themselves.
Narrow exceptions exist for transfers to a child under 21, a disabled child, a caregiver child who lived in the home for two years before the parent’s admission to a facility, and certain sibling co-owners. These are read strictly. Anyone considering a $1 transfer with Medicaid in the picture should talk to an elder law attorney well before the look-back period matters.
Creditors Can Undo the Transfer
Every state has some version of the Uniform Voidable Transactions Act, which lets creditors challenge transfers made without receiving fair value in return. A court doesn’t need to find that you meant to cheat anyone. If the transfer was for far less than the property was worth and you were insolvent at the time or became insolvent because of it, the court can void the transaction. The family member who thought they owned the home can lose it.
Transfers made shortly before or after a lawsuit, during a divorce, or while behind on debts are the ones most likely to be challenged. Even without active debt problems, a below-market transfer to family invites scrutiny if trouble arrives later.
Practical Items Before You Sign
Property Tax Reassessment
Many jurisdictions reassess property to current market value when ownership changes, which can push the annual tax bill up sharply on a home that has appreciated. Some states exempt parent-to-child transfers, but the rules vary and often require paperwork filed with the local assessor within a set deadline. Check with the county assessor before recording anything.
Title and Homeowner’s Insurance
An existing owner’s title insurance policy covers the specific insured party and does not transfer with the property. The new owner needs their own policy, and this matters more than usual for $1 family sales because they often use quitclaim deeds with no fresh title search behind them. Homeowner’s insurance is the same: the seller’s policy covers the seller, so the new owner needs their own coverage in place by the time they take title.
Deed Choice and Recording
Most family transfers use a quitclaim deed, which is fast and cheap but guarantees nothing. The signer transfers whatever interest they have, without promising clean title. A warranty deed guarantees clear title and obligates the seller to defend against future ownership claims. Where any doubt exists about the title history, paying for a title search and using a warranty deed protects the buyer.
Whichever deed you use, it has to be signed, notarized, and recorded with the county recorder. Recording fees typically run from $10 to $90 depending on the county, and notary fees usually run $5 to $25 per signature. Some states also charge a documentary transfer tax on real property conveyances, though transfers for nominal consideration are often exempt or taxed at minimal rates.