DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need assistance navigating the legalities or tax implications of selling a house to a family member, HomeLight always encourages you to reach out to your own advisor.
If your parents are considering selling you their home for $1, then they’re either extremely generous or you’re an incredible negotiator.
The price may appear small at first glance, but this is a major transaction. Before making any hasty decisions, it’s prudent to understand how you and your family are impacted by such a disproportionate exchange of assets.
To provide you with accurate insights, we asked a top real estate agent and a veteran real estate attorney to answer some of the most common questions regarding this type of transaction.
Can my parents sell me their house for $1?
Yes, your parents can legally sell you their house for $1. The significance of that $1, however, is mostly symbolic. They can simply give you the house outright and it will carry the same tax and ownership implications, says Robert Pecharich, a real estate attorney and senior partner with Boyle, Pecharich, Cline, Whittington & Stallings P.L.L.C. in Prescott, Arizona.
“Either way [the parents] are making a gift,” Pecharich says. “I think that some people think that if you sell for $1, you have some consideration and it’s binding, but you can transfer by a complete gift or a $1 consideration and they’re both a valid transfer.”
The only time that $1 might be necessary is if a fiduciary arrangement, such as a trust, requires it, says Rick Ruiz, a top-selling real estate agent in Las Vegas, Nevada who sells properties 48% quicker than the average Las Vegas agent.
“Rhetoric in the trust may mandate that anything has to be sold and can’t be gifted,” Ruiz says. “But at the end of the day, what [the parents] are really doing is giving you the property.”
In the eyes of the IRS, if you transfer money or property to another person for nothing (or less than full value) in return, then it’s considered a gift and the value of that gift must be reported using a gift tax return (IRS Form 709). This doesn’t necessarily mean you owe any taxes on that gift, however.
Here are some explainers and things to keep in mind when gifting property:
- Gift tax annual exclusion: The annual federal gift tax exclusion is $16,000 for single filers and $32,000 for married couples filing jointly. Meaning, you can individually give up to $16,000 to as many people as you want in a given year without having to report it to the IRS. Spouses who combine their gift exclusion (known as “gift splitting“) must still file a gift tax return, but it won’t impact their lifetime gift tax exemption unless it exceeds the $32,000 threshold.
- Lifetime gift tax exemption: Under the current federal law, the lifetime gift tax exemption is $12.06 million. This means someone can give away up to that amount in their lifetime before having to pay any gift tax. Assuming no changes, this exemption amount is set to expire at the end of 2025. Starting January 1, 2026, the exemption will drop to $6.2 million.
- Gift letter: To properly give a gift of equity, the seller should draft and sign a gift letter listing all pertinent information regarding the gift. The letter should include the seller’s relationship to the buyer, the property’s address, and the amount of equity being gifted.
- Follow IRS Rules: You will need to be extra careful with how you handle the entire transaction. You’ll want to take steps to prevent the appearance of impropriety when the IRS reviews the transaction.
Let’s say the fictional Linda wants to sell her home to her son, Robert, for $1. Linda gets the home appraised and it’s valued at about $400,000. To make sure everything is handled correctly, she hires a real estate agent to manage the paperwork. They then sign a purchase agreement, run a title search to make sure the title is clean, and close the sale.
When tax season rolls around, Linda reports a gift of $399,999 to the IRS. Assuming she has never declared a gift before, that amount is subtracted from the full $12.06 million lifetime gift tax exemption ($12,000,600 – $399,999 = $11,600,601). Due to the exemption, she pays no gift tax on the transaction.
What if my parents gift me the house and they continue to live there?
Giving someone a house as a gift — or selling it to them for $1 — is legally equivalent to selling it to them at fair market value. The home is now the property of the giftee and they may do with it as they wish.
Whether or not your parents continue to live in a house they gift you has no effect on the validity of the transaction, Pecharich says.
Pecharich’s concern with this scenario, however, is that once parents gift property to their children, they lose complete control over it and could be pushed out of the home if the children have a change of heart about letting them stay there.
If the parents want to immediately give the home to their children while securing their right to continue living there, then Pecharich suggests using what is called a life estate deed. The home would technically belong to the children, but the parents would continue to pay the taxes on it and be entitled to live there as long as they choose to.
What is the easiest way to transfer property to a family member?
Pecharich says the easiest way to confidently transfer property to a family member is to go to a title company and pay them to do a warranty deed from you to the family member.
This can be a cheap and surefire way of getting the job done because a warranty deed guarantees that the seller is the rightful owner of the property and the title is clean.
“When you’re transferring property from one person to another, you want to ensure it’s done right because it’s affecting the chain of title,” Pecharich says. “Sometimes you don’t know your own title. Maybe there’s a lien on that title that you didn’t even know about. If you transfer it to your son or daughter with a lien on it, then you’re creating a problem for them.”
If you’re absolutely sure the title is clean, then a quitclaim deed can be an even simpler transfer method.
“Every state and county is different,” Ruiz says. “In Nevada, a quitclaim deed would be the easiest.”
What if I sell the property my parents gave me for $1?
Perhaps the greatest concern with gifting real estate is whoever you gift the property to assumes your tax basis (the original cost of the property plus the value of any major improvements made to it).
For example, if your parents purchased their home for $100,000 many years ago, and they gift you the home this year when it’s valued at $500,000, your basis for determining any gain or loss from selling it is now $100,000 rather than the market value of $500,000. This means you will have a $400,000 gain if you sell the house for $500,000.
In this example, the only way you would get a break on that capital gains tax is if you owned the property for at least two years and lived in it as your primary residence for at least two of the past five years before selling it. If you meet these qualifications, then the IRS would allow you to exclude up to $250,000 worth of gain (or $500,000 if married and filing jointly).
If your final surviving parent instead leaves you the house as an inheritance, you will receive what’s known as a “step-up” in the tax basis of the home to the market value on the date of your parent’s death. So rather than the $100,000 amount they originally paid for their property, you can use that $500,000 value on the date your last parent dies as your tax basis. Now if you sell the property for $500,000, you may have no taxable gain. This “inheritance” classification can save you a lot of money if you are planning on selling the home.
What if the gifted house is now worth less than what my parents paid for it?
You would not be allowed to claim a loss when selling the property. In the eyes of the IRS, any gains or losses would be determined by what you paid for the home. If the home was a gift, you incurred no losses.
Can my parents sell their house and give me the money?
Yes. This is just another form of gifting that would need to be reported to the IRS using a gift tax return.
What happens if I rent out the property my parents gave me as a gift?
This is totally fine as well.
“Whether the kids live in the house or they just take it and rent it out, the value of the house is still a gift; it’s still counted toward that lifetime gift tax exemption,” Pecharich says.
Can I buy my parent’s house to avoid inheritance tax?
You can, but whether you should depends on which state you live in and how much you expect to inherit.
Only six states have an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) and there is no federal inheritance tax.
This is a tax on the money and property you receive from the estate of a deceased person. The tax percentage in each state varies depending on the recipient’s relationship to the deceased and the value amount of assets received.
“Transferring to avoid inheritance tax is usually not necessary,” Pecharich says. “You have to talk to your accountant or attorney to figure it out, but usually that’s not a good reason to transfer title.”
Find the right advice if your parents are gifting you a house
Buying a house from your parents for $1 is completely legitimate.
Whether or not it’s the wisest financial decision for you and your family is another question.
In addition to reading up on the process, you may wish to consult an accountant, attorney, real estate agent, or all of the above.
To find an experienced agent, consider using HomeLight’s Agent Match platform. Our free tool analyzes millions of transactions and thousands of reviews to determine which agent is best for you based on your needs.
Header Image Source: (Tile Merchant Ireland / Unsplash)