Selling your home below market value isn’t always a mistake, but it’s a highly complex decision to make. Homeowners across the US consider this at some point or another, for a vast array of reasons. Some might be trying to help a family member. Some may not want to deal with a long, drawn-out probate process. Others may simply want to exit quickly from a property that has been, or has become, a burden. No matter why, when market price and sale price don’t line up, tax and legal issues can pop up fast.
Below-market-value sales have a wide-reaching effect. They impact home values and future taxes, but they even change how the transaction appears to government agencies. What feels like a decision between you and your buyer can actually trigger rules tied to real estate, gifting, taxes, and more. This article will help you get the information you need before going forward with a below-market-value sale. With our help, you’ll learn when it actually makes sense, and when you should be looking at other options to lower risk.
The “Arm’s Length” Rule: Why the Sale Price Matters to the IRS
The IRS pays close attention to whether or not home sales are done as an arm’s-length transaction. An “arms-length” sale simply means the buyer and seller are acting in their own independent best interests. When a sale appears to be between relatives, friends, or business partners, the IRS can question the price and whether the sale price reflects actual, true market value. To do this, the IRS examines the property’s fair market value.
The fair market value should be supported by comparable sales in the neighborhood. Sometimes it may even have an appraised value. If the sale price drops lower than the comps by a significant margin, the difference could end up treated as a gift instead of a sale. This means that the unexpected change in cost basis can also create dramatic tax consequences.
On top of all that, market fluctuations will also play a substantial role. In a fast-moving seller’s market, prices are pushed up. In a buyer’s market, though, they are depressed. Knowing what’s going on with your local market can help prevent unintentionally triggering IRS scrutiny with your pricing strategy.
The “Gift of Equity” Trap: IRS Forms 709 and Tax Bombs
Selling a house below market value to a family member often creates what the IRS calls a gift of equity. The difference between the sale price and the home’s market value may be treated as a gift, even if no cash changes hands. That’s where gift tax rules come into play.
While many homeowners won’t owe immediate gift tax thanks to the lifetime gift and estate tax exemption, the transaction may still require filing a gift tax return using Form 709. Failing to file can create problems later, especially during audits or estate planning. These rules apply even when the home is a primary residence, and even if the intent was simply to help a child or relative.
The long-term impact can be just as serious. A reduced cost basis can increase future capital gains when the property is sold again. Family transfers in areas like Elm Grove or New Berlin often look harmless at first, but the tax consequences can follow both parties for years. Understanding these risks helps homeowners decide whether a below-market sale is actually a gift with strings attached.
Wisconsin Medicaid “Divestment”: The 5-Year Look-Back Period
Selling a home below market value can create problems if Medicaid eligibility is part of your near future. Wisconsin has a 5-year “look back” period, during which the state can review financial transactions when applying for long-term care assistance. If a primary residence has been sold for less than market value, the difference can be treated as a divestment, rather than a typical property sale.
That divestment can then trigger Medicaid penalties. These penalties delay Medicaid benefits and could be incredibly dangerous. For homeowners already facing financial turbulence, like bankruptcy, it can add unnecessary complexity and stress to the situation. It can also have consequences that outweigh any potential short-term relief.
The “$1 Sale” Myth: Why You Can’t Just Sell Your House for a Dollar
Lots of people believe that you can sell your house for $1, and while it’s true, it doesn’t work as people expect. This is known as “symbolic pricing”, and the IRS doesn’t recognize it as legitimate compensation for real estate transactions. Instead, the transaction is valued with below-market value rules. The difference between the dollar price and the market value is then usually treated as a gift. That gift is subject to reporting requirements as well as gift tax rules.
Doing it this way can also complicate private sales and for-sale-by-owner transactions. Currently extant obligations, like a second mortgage or other security interest, still have to be resolved. In most cases, the $1 sale creates many more problems than it solves.
WI Real Estate Transfer Returns (RETR): Family vs. Investor Sales
Wisconsin requires a Real Estate Transfer Return for just about every property sale. Just because you’re selling below market value doesn’t relieve you of that obligation. The RETR exists to document the relationship between the parties and the sale price, along with any applicable exemptions. Family sales and investor sales are all reported, but they are reviewed with different criteria.
When you sell a home to a family member, the state compares that price to market data. If the numbers don’t line up close enough, there could be additional questions. This is more common with off-market deals, where a traditional listing history isn’t applicable.
Sales involving a real estate investor or part of broader real estate investments are looked at differently. Transactions that are part of fix-and-flip property strategies are real estate auctions typically rely on documentation that supports those pricing models.
Does Selling Cheap Lower Your Property Taxes in Wisconsin?
Another reason people think about selling below market value is that it would somehow result in lower property taxes. This is not the case. In Wisconsin, our property values are based on an assessor’s appraised value, not the sale price. Even if a homeowner accepts a lower offer due to personal situation or property need, that won’t move the needle on taxes. It might influence future assessments, but that’s not guaranteed nor immediate. Factors that carry more weight include things like specific neighborhood trends and comparable sales. Data from a home value estimator may also have a little more weight. Either way, selling for a lower price is not a reliable way to lower property taxes.
Capital Gains Risks: Why Your Kids Might Hate You for a “Cheap” House
Selling a home below market value can create long-term capital gains tax problems for the buyer, especially when that buyer is a family member. When a property is sold cheaply, the buyer’s cost basis is often tied to the lower sale price rather than the original market value.
That matters years later. If your child or relative sells the home, a lower cost basis can result in a much higher capital gains tax bill. This is where capital gains strategies and tax planning become critical, even if the original goal was simply to help someone out.
In many cases, families assume the step-up in basis rules will protect them, but that benefit typically applies to inherited property, not gifted or discounted sales. Long-term rentals and future investment use can further complicate the picture.
Making improvements can sometimes help increase basis, which is why understanding how improvements affect value is important before making a below-market decision that can’t be undone.
Why Selling to Cream City Home Buyers is The Best Solution
There are countless homeowners who aren’t picky about their home sale; they just want it to be clear and quick. This means selling below market value doesn’t have to mean gambling with tax accountability or long-term finances. To a lot of homeowners, simplicity matters much more than wringing out every last dime from the sale.
Working with the local cash buyers at Cream City Home Buyers takes out all of the uncertainty. Don’t stress about getting an agent, paying for inspections, staging, or dealing with any of the usual hassles of selling. We simplify the whole process by focusing on creating a solution for your problem, not timing the market. A direct sale gives you a clear exit plan, without the risk of IRS scrutiny or tax hassles down the road.
Conclusion
Selling a house below market value can make sense in the right situation, but it’s not always as simple as naming a low price and moving on. Knowing the long-term consequences relating to taxes, valuation, and more can help you prevent making a costly mistake with good intentions. Every situation is different, though, and the right choice for you depends on your situation. Your timeline and finances are going to have a big role in reaching your goals. If you’re looking for an easy way to sell without complicated tax rules or second-guessing, reach out to Cream City Home Buyers. We’ll help you map out a simple, compliant solution that makes your life easier.
