Selling land to a family member works like any other real estate sale on paper, but the IRS treats it differently because the price is often below what the land is actually worth. That gap can create a reportable gift, shift the buyer’s future tax bill, and in some cases disqualify an older seller from Medicaid years later. Done right, the deal needs an independent appraisal, a written contract and deed, attention to capital gains and basis, and a clear-eyed look at whether a lifetime sale is really better than letting the land pass at death.
Get an Independent Appraisal First
Before you settle on a number with your relative, hire a licensed appraiser to establish 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 is the figure every tax calculation that follows depends on. The appraiser will look at comparable sales, size, location, zoning, access, and improvements. For vacant land the cost is usually a few hundred dollars.
You need the number even if you intend to sell at full price, because without it you are guessing and the IRS does not have to accept your guess. If you plan to sell below market, the appraisal is essential: it fixes exactly how large the gift portion of the deal is.
Gift Tax When You Sell Below Market Value
Federal law treats a sale for less than fair market value as a gift equal to the difference between what the land 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 in the IRS’s view you have made a $100,000 gift. The agency says plainly that selling something for less than its full value may constitute a gift.2Internal Revenue Service. Gift Tax
For 2026, you can give any one person up to $19,000 without triggering a filing requirement. A married couple who agree to split the gift can cover up to $38,000 together. Anything above that threshold means filing IRS Form 709. Filing does not mean paying. The excess is subtracted from your lifetime exemption, which for 2026 sits at $15 million per person following the One, Big, Beautiful Bill Act passed in mid-2025.3Internal Revenue Service. What’s New — Estate and Gift Tax Most sellers will never exhaust that exemption, but the return still has to be filed once the discount crosses the annual limit.
Capital Gains on the Sale
Gift tax is a separate question from the capital gains you may owe on the sale itself. The taxable gain is the difference between the sale price and your adjusted basis, which is generally what you paid for the land plus the cost of improvements, minus any casualty losses or depreciation claimed.4Internal Revenue Service. Property (Basis, Sale of Home, etc.) 3 The gain is figured on what you actually charged, not on fair market value. If you paid $50,000 for the land, sell it for $200,000, and its appraised value is $300,000, your capital gain is $150,000.
The $250,000 exclusion ($500,000 for joint filers) that shelters gain on a home sale applies only 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 do not qualify. Land held more than a year is taxed at long-term capital gains rates, topping out at 20% for high earners. Land held a year or less is taxed as ordinary income.
The Basis Trap Your Buyer Inherits
This is where family land sales quietly go wrong. When your relative buys the land from you, even at a discount, their cost basis for future tax purposes is generally carried over from yours.6Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If you paid $40,000 decades ago and sell to your son for $150,000 when the land is worth $300,000, his basis stays rooted in that original $40,000. When he eventually sells, the capital gains bill can be enormous.
Inheritance works differently. If your son instead received 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 Land worth $300,000 at that point, sold shortly after for $300,000, produces no taxable gain. That stepped-up basis can save the family tens or hundreds of thousands of dollars.
None of this means a lifetime sale is wrong. You may need the cash, the buyer may need the land now, or the appreciation may be modest enough that the basis difference does not matter. But an older parent selling highly appreciated land to a child at a steep discount to keep it in the family should run the numbers with a tax professional first. The transfer at death may be far cheaper for everyone.
The Documents the Sale Needs
A handshake and a check will not do, even between siblings. The core paperwork for a family land sale is the same as for any real estate transaction.
- A written purchase agreement that sets the price, closing date, cost allocation, and any conditions that must be met before closing.
- A deed to transfer ownership. A general warranty deed gives the buyer the strongest protection, with the seller guaranteeing clear title and promising to defend against future claims. A quitclaim deed transfers only whatever interest the seller has, with no guarantees, which is riskier for the buyer but common in family deals.
- A promissory note, if you are financing the sale, setting out the amount owed, interest rate, payment schedule, and consequences of default.
- A deed of trust or mortgage that secures the promissory note by placing a lien on the land, giving you a legal path to reclaim it if the buyer stops paying.
Attorney fees for drafting range from a few hundred dollars for a simple deed up past $1,000 for a full package with seller financing. Given the tax exposure and the family dynamics, this is not the place for an unreviewed template off the internet.
Required Disclosures
Even in a private sale between relatives, federal law requires certain disclosures. If any structure on the land was built before 1978, the seller must give the buyer information about potential lead-based paint hazards, a copy of the EPA pamphlet on lead safety, and any existing test results. The buyer also gets a 10-day window to arrange their own lead inspection before closing.8Environmental Protection Agency. Real Estate Disclosures About Potential Lead Hazards Most states layer on their own rules requiring sellers to disclose known material defects, environmental issues, flood zone status, and boundary disputes. Check your state’s disclosure form before closing.
Closing the Transfer
Two mechanical steps make the transfer legally effective. First, the deed and any financing documents are signed in front of a notary public, who verifies identities and witnesses the signatures. Most states require in-person notarization for real property deeds, though a growing number permit remote online notarization. Confirm your state’s rule before assuming a video call will work.
Second, the signed and notarized deed must be recorded with the county recorder’s office, sometimes called the register of deeds. Recording creates the public record of the ownership change. Skip it, and the chain of title stays unclear, which creates problems if the buyer later tries to sell, refinance, or prove ownership in a dispute. Recording fees usually run between $25 and $150 depending on the document and page count.
Title Search and Title Insurance
The buyer should pay for a title search before closing. The search examines public records for liens, unpaid taxes, easements, or competing ownership claims. Old contractor liens, unrecorded utility easements, and boundary problems from prior owners turn up more often than families expect. Title insurance protects the buyer against financial loss from any defect that surfaces after closing. It is a one-time premium paid at closing and lasts as long as the buyer owns the land.
If the Land Still Has a Mortgage
Selling land that still carries a loan does not make the loan disappear. Most mortgage contracts contain a due-on-sale clause allowing the lender to demand full repayment when ownership changes. Getting hit with that demand mid-transfer can collapse the whole deal.
The Garn-St. Germain Act blocks lenders from enforcing a due-on-sale clause on residential property with fewer than five units when the transfer goes to a spouse or child of the borrower.9Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions The same protection applies to transfers caused by the borrower’s death or by a divorce or separation decree. The exemption has limits, though: it is residential, and the list of protected recipients is narrow. A sale to a sibling, parent, or nephew may not qualify. If your situation sits outside the exemption, talk to the lender before closing.
Seller Financing and the Applicable Federal Rate
When you finance the sale yourself, the IRS expects you to act like a lender. That starts with the interest rate. You must charge at least the Applicable Federal Rate, which the IRS publishes monthly in three tiers based on the term of the loan: short-term for loans up to three years, mid-term for three to nine, and long-term for anything beyond nine.10Internal Revenue Service. Applicable Federal Rates
Charge less, and federal law treats the shortfall as if you had made it anyway. The gap between what you charged and what the AFR would have produced is treated as transferred from you to the borrower as a gift and then handed back as interest, which means the IRS can tax you on interest income you never actually received.11Office of the Law Revision Counsel. 26 US Code 7872 – Treatment of Loans With Below-Market Interest Rates The cleanest path is to charge the AFR from day one and build a formal amortization schedule showing how each payment splits between principal and interest. That schedule also helps both sides report accurately and proves the transaction is a real loan rather than a dressed-up gift. As a private lender, you report interest received on Schedule B along with the buyer’s name, address, and Social Security number, and you give the buyer your SSN so they can deduct the interest on their end.12Internal Revenue Service. Instructions for Schedule B (Form 1040)
The Medicaid Five-Year Look-Back
A below-market sale to a family member can quietly disqualify an older seller from Medicaid years later. When someone applies for Medicaid coverage of nursing home care, the state reviews every asset transfer made during the previous 60 months. Any transfer where the applicant did not receive fair market value in return is presumed to have been made to qualify for Medicaid, and the result is a penalty period during which Medicaid will not pay nursing home costs.13Centers for Medicare and Medicaid Services. Transfer of Assets in the Medicaid Program
The timing is harsh. The penalty does not start running when you make the transfer. It starts only once the applicant is already in a nursing home, has spent down to Medicaid’s asset limit, and has applied for coverage. The length of the penalty is the uncompensated transfer amount divided by the regional monthly cost of nursing home care. A $100,000 gift of equity can translate to roughly eight to twelve months of ineligibility, depending on local rates.
If you are over 60 or expect to need long-term care within the next five years, see an elder law attorney before selling land below market value to a relative. A sale at full appraised value avoids the problem because there is no uncompensated transfer.
Property Tax Reassessment and Transfer Taxes
In many jurisdictions, a change in ownership triggers a reassessment of the property for property tax purposes. If the land has been in your family for decades and its assessed value trails current market value by a wide margin, the sale can produce a sharp jump in the buyer’s annual tax bill. Some states offer limited exemptions for parent-to-child transfers, but those protections have been narrowing. Ask the county assessor before closing how the transfer will change the buyer’s tax burden.
Most states and some local governments also impose a transfer tax or documentary stamp tax when real property changes hands. Rates range from a fraction of a percent to several percent of the sale price, with some jurisdictions using flat fees and a few imposing no transfer tax at all. Some areas exempt certain family transfers, but this is far from universal. Beyond the transfer tax, budget for the appraisal, title search, title insurance, recording fees, attorney fees, and notary costs, and spell out in the purchase agreement who pays what. Adding these up before you commit to a price prevents an uncomfortable surprise at the closing table.