Selling property to family members at below-market price

[RobertFisher]

I have looked at the links shared, and have done my own research as well. It seems the rules about this type of transaction is still quite murky, as opposed to, say, the rules regarding IRA are crystal clear. Isn't this quite odd? Considering this type of transaction must have been happening for hundreds of years.....

Maybe I can create a test case to study. Let's say we have this situation:

--I bought a house in 1990 for $200K.
--Now in 2021 the house is worth $800K.
--Prop 13 put the assessed value for property tax purpose at $300K
--My son is getting married and future mother-in-law demands that he has a house (a very real scenario)
--To help him out, I sell the house to him for $100K since he only has $150K savings and I know he will need money for other stuff

Now in this case which I think is very legit. Based on what I gathered here, see if I am correct:

1. For my capital gain/loss, I cannot use the 100K figure. But then what do I use? Who is the authority on "fair market value" even if we kind of know it's about $800K? It could easily be $750K or $850K...

2. For my son's cost basis, the same question applies -- who assigns that figure since the only figure ($100K) is not usable?

3. I can gift to my son $15K every year tax-free. The balance of the gifted value -- exact amount we don't know since we have no figure, but we know it may be around 800k-100k-15K=685K -- will count toward my lifetime estate and gift exemption, which at $11.7m is more than enough to cover. So in this transaction, no one should pay any gift tax or inheritance tax.

4. Assessed value for property tax purpose will be stepped up to fair market value, which is around $800K. One question here: If transaction price is way HIGHER than market value, will the assessor use the full new figure or stick to the fair market value? Seems the latter will be more fair...

[jackmichigan]

Originally Posted by Listener2307

Can I give you $200,000?........ No. You have to declare it and pay taxes. So I can't give you a home worth that, either.
People who win houses in lotteries and give-aways find this out all the time.

That's not correct. Generally, the donor of a gift is the one who is liable for any gift tax--not the recipient. Winning a house in a lottery is not considered to be a gift (even though I feel that some give-aways should be counted as gifts). So, go ahead...feel free to give me $200,000.

The IRS will not impute a fair market value to a bargain sale to a relative where a gift of value is intended. Instead, the donor of such a gift may be liable for gift taxes, or more likely, for filing the proper forms so it's included in the lifetime exclusion. If the property being gifted had been an investment property, special rules apply to the recaptured depreciation.

In a bargain sale of property to a qualified charity, the amount which is less than the fair market value is a tax deductible noncash contribution. Again, special rules apply. In all of these complicated scenarios, professional tax advice is recommended.


EDIT: In some areas, a fair market value may be imputed when it comes to paying transfer taxes.

[chrisCD]

Originally Posted by RobertFisher

Some properties record transaction price way below market. As an example, this property in a $1000/sqft neighborhood was sold last year for $153/sqft:


5. I think I know the answer but still have to ask: Does this below-market transaction price affect the property tax base?

I know many answers were given, but I think the answer to this one may have been wrong (at least the first answer I read). Maybe I'm wrong in my understanding. I'm in CA. I believe your base property tax is 1% of the sales price. So if a home sells for "under" market value, the property tax would price down. But, maybe there is something in the law to "protect" the base.


cd :O)

[Zippyman]

Originally Posted by RobertFisher

I have looked at the links shared, and have done my own research as well. It seems the rules about this type of transaction is still quite murky, as opposed to, say, the rules regarding IRA are crystal clear. Isn't this quite odd? Considering this type of transaction must have been happening for hundreds of years.....

Maybe I can create a test case to study. Let's say we have this situation:

--I bought a house in 1990 for $200K.
--Now in 2021 the house is worth $800K.
--Prop 13 put the assessed value for property tax purpose at $300K
--My son is getting married and future mother-in-law demands that he has a house (a very real scenario)
--To help him out, I sell the house to him for $100K since he only has $150K savings and I know he will need money for other stuff

Now in this case which I think is very legit. Based on what I gathered here, see if I am correct:

1. For my capital gain/loss, I cannot use the 100K figure. But then what do I use? Who is the authority on "fair market value" even if we kind of know it's about $800K? It could easily be $750K or $850K...

Every tax assessor I’ve dealt with is responsible for calculating both a “taxable value”, and an “actual cash value” - even if they call it something else, it’s an approximation of “market value”.. The property owner has a right to dispute both values every year if they don’t agree with them. The government (the local tax authority) has both the right and the obligation to make sure that “actual cash value” is correct - and that value is usually a public record that anyone who cares to see can see - and object to if they don’t agree.

In the absence of an actual, “arms-length” sale transaction, that “actual cash value” figure is the “market value”, even if everyone actually knows they “could get more than that”.

For IRS “tax purposes”, is the IRS actually going to dispute the “market value” calculated by the local tax authority? I’d love to be on that jury if they did!

Put on your “Matlock” voice, and say something like, “So, mr or mrs IRS person, from your office in New Yawk city, you were able to determine the “value” of this property more accurately than the city appraiser, who was duly elected and responsible for keeping accurate records of a property’s value? further, are we to believe that you were able to fabricate this “value” a couple years after the transaction occurred? ”.. Taxes are paid in arrears, so any value argued by the government would have to be “retrospective”.. which would be extremely difficult to calculate..

In your theoretical situation above, you could certainly hire an appraiser to give their opinion about market value at the time of transfer, and assuming it’s higher than the “actual cash value” put on the property by the tax authorities, I doubt anyone will complain.. But if the appraiser came up with a lower number than the tax office, which one would a judge or a jury think was more persuasive?

Real-world, a property that can pull $800k in the market today is probably assessed with an “actual cash value” at $600k (or less) and the government’s assessment is persuasive - even if we’re pretty sure it’s wrong.

[anononcty]

The way some of these towns, states and counties are they might tax the difference between sale value and market value.

I know people who got taxed because they bought a car cheap off of someone and the government comes back like they were obligated to sell it at market value(without knowing the condition) and get taxed & penalized. And yet one could sell below market to a cash buyer/flipper without raising eyebrows.

Neighborhood comps shouldn't be the sellers responsibility. The only obligation is paying the property taxes on assessed value which they can appeal.