Can you sell your house for whatever you want?

My sister insists that it’s illegal to sell your house for below market value. I don’t believe this for 2 reasons:

First, I know of folks who were close to foreclosure and were advised to sell for less than market value to insure a quick sale.

Second, how can the government determin what you sell anything for. That sounds fascism to me.

Anyone know what she’s talking about?

WAG–But, I would think that you could give your house away for free if you were so inclined! You’d still have to pay some closing costs probably…

She insists there is a penalty for doing this…a penalty so high that it deters people from doing it. The only thing I can think of is MAYBE some capital gains tax for the receiver.

For example, my house has a fair market value of, say, $178,000. She claims that if I were to sell it for $90,000 the government would penalize me. I would love to come up with something that says she’s full of shit.

Well there are two answers to your question:

You couldn’t give away your house, but you could sell it for $.01. Just draft a contract and presto!

However, there are some tax implications. Namely, the gift tax. The government doesn’t like rich Daddy Warbucks selling his entire estate to Skippy Warbucks for $.01 and escaping estate taxes. The gift tax would apply immediately, and the capital gains tax (well, anything above profits of $500k for sale of a primary house) would smack the receipient.

But if you sell your house for less than market value, does the gift tax apply? My house appraises for $250,000, but nobody wants to buy it at that price at this time. I’m in a hurry and take the best price offered, say $100,000. Am I hit with a gift tax?

I guarantee that you can sell your house for whatever you want. My mom sold a house to her father for well below market value on the contractual obligation that she had first right of refusal if he wanted to sell it, and that she could buy it back (even from his estate upon his death) for what she had sold it to him plus inflation. The house’s fair market value was appraised at $160k, she bought it back for $120k.

A house on the block next to us sold for well under market value a couple of years ago. It turned out that the owners sold it to a relative.

(I believe that some areas do have special tax rules for such situations, but I don’t think ours does. When a house sells for well under fair market value, our area just rates the house at fair market value for annual real estate tax purposes. No problem, and no penalty (but no tax benefit, either) for selling your house for less than it’s worth.)

Selling prices to not follow fair-market-value. Selling prices DETERMINE fair market value. Appraisers use recent sales to ESTIMATE the value of a house. Using at least three recent sales, they make adjustments to sales prices to account for differences (for example: Say your house has a finished basement, but the house next door that sold for $240k did not).

Where is your sister located pkbites?

In the US, you can sell for whatever you want to.

Like bizerta said. What better way to determine the market value of something than by selling it?

FWIW, we got a fairly good deal on our house and were able to get the appraised value dropped to the purchase price.

Well, I think this can depend too on your community or Homes Association bindings. I have heard here in Johnson County (aka, “Homes Association USA”), that in fact you may violate your Homes Association agreement by selling under a certain level that the Association determines. And thus be subject to financial penalties.

I am a commercial real estate agent and although I do not sell residential except very occasionally for friends, as a buyer’s agent. The other posters are correct, you can offer and sell your house for whatever you wish assuming there is a buyer for the price point you are willing to agree to.

Aside from any requirements of a homeowner’s or condo association’s bylaws (if you are subject to them), there is no state or federal penalty or other punishment for doing so unless it is part of a scheme to defraud someone (including the government) in some manner.

Property tax assessments are obviously impacted by price, but assessors are not complete idiots and have as good (if not better) an idea of fair market value (FMV) as most appraisers and real estate professionals. If you sell a 250,000 house for 100,000. it is unlikely that your assessment will be immediately reduced to (or even close to) a 100,000 basis as it is obvious that the average price of comparable "like kind" sales is more than 200,000. If more below market sales occur and the average prices start to change then assessments will change.

Your sister is wrong unless the intent of the below market sale is to defraud the government or others. If property in an estate, for example, is willed to, or otherwise disposed of to a relative (ie non-arm’s length transaction) for well below market value to decrease the tax impact the estate (or the recipient) would be subject, to the government can audit the transaction and potentially assess penalties.

If you are going to do this (lower the sale basis with below market transaction) the key to making this work is not being stupid. The government is not going to care (as much) , in most cases, if the sales differential, even if below market, does not net them any meaningful amount of taxes. For example, you could sell a 30,000 to 40,000. FMV rental unit for 20,000 to 25,000 and no one will likely blink an eye. In selling properties for hundreds of thousands or millions you can get away with being aggressive towards the lower end of valuation if you have a complaint (notice I didn’t say competent) appraiser and a reasonable argument to make, but again, the IRS is not a pack of idiots and if motivated they can easily find fair market value for properties.

One thing your sister may have been thinking of, and that I don’t see mentioned above is if you sell for less than your mortgage, and the bank forgives the rest, because they know you’ve got no money and it’s not worth it to pursue, then the IRS will tax you on the forgiven amount of the mortgage.

Say you own a house that you owe $300,000 on. The market has collapsed, and you can only get $200,000 for it when you sell. The bank reviews the case and decides it will get less than it costs to pursue you for the rest, so it writes off $100,000 as a bad debt. The IRS says, “Ah-ha! The bank just gave you $100,000! Pay me 28%!” (or something similar.)

For more info:
IRS publication 544, Sales and Other Dispositions of Assets

So, your sister is right in some cases - if you owe money on the property, you can’t just screw the bank without penalty. If you own it free and clear, then only the receiver has to worry about paying taxes on it. You could work out some deal where by paying you some amount the buyer pays less/no taxes, and everyone wins (except the IRS, but nobody loves them.)