Selling a house for one dollar might sound like a bizarre idea, but it’s a question that often comes up for various reasons, including tax implications, gift scenarios, or legal strategies. While it’s technically possible, the process is far from straightforward and comes with significant considerations.
If you’re thinking about gifting a home, a more practical approach might be to sell your current house for cash and use the proceeds to help finance the home your loved one truly desires. At iBuyer.com, we simplify the home selling process, offering you a quick, fair cash offer without the hassle of traditional real estate transactions. This way, you can easily convert your property into cash, making it easier to support your family member or friend in finding their dream home.
If you’re curious about the feasibility and implications of selling a house for one dollar, this article will break down everything you need to know. From legalities to financial consequences, we’ll explore the ins and outs of this unique selling proposition and present a practical alternative.
Selling a House for $1
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Can you sell a house for $1?
Yes, you can! It’s your property, and you are legally free to do with it as you wish. It’s well within your rights to sell it for just one dollar.
However, the state will recognize that you’ve sold your house well below market value. Therefore, it taxes the sale in a different way than usual.
The difference between the price you sold your house for and its estimated value is seen as a gift. You passed on the disparity as a gift to your children. Therefore, it is subject to gift tax.
Gift tax vs. lifetime exemption
Depending on local laws and the transaction details, gift tax can be up to 40%. Say you sold your $400,000 home for $1; your children will have to pay gift tax on the $399,999 you “gifted” them.
But it’s not all bad news. There are some gift tax exemptions.
First of all, there is an annual gifting limit that is left untaxed. As of 2024, you can pass on $18,000 each year to each child tax-free.
That would lower the taxable amount in our example to $381,999. Considering the size of the sale, that doesn’t really make a dent.
Thankfully, there is another option: your lifetime exemption.
For 2024, each individual has a gift tax exemption of just over $13 million spread over their lifetime. Therefore, unless you plan to resell dozens of homes for cheap, you can probably use that allowance for the sale.
Does that mean selling a home before market value doesn’t incur any gift tax?
Possibly. But as always, laws differ from state to state.
Allowance levels are also inconsistent across the country. In some places, you may even have to pay gift tax both to the state and country! On top of that, tax regulations such as the gift tax amount and lifetime exemption amount can change year to year.
Stay up to date with current gift tax regulations. And speak to a financial advisor before making your decision. They will be able to spell out for you the exact tax implications of selling a home below market value in your situation.
This method is accessible, doable, and potentially tax-free. But that doesn’t mean selling a home for one dollar is the best option. There are benefits to more traditional routes that could help your children in the long run.
How Do I Transfer Property to a Family Member Tax-Free?
To transfer property to a family member without incurring estate tax penalties, consider placing the property into an irrevocable trust. When property is placed in an irrevocable trust, it is removed from your estate and is not subject to estate taxes upon your death. This ensures that the named beneficiaries of the trust can receive the property without facing estate tax liabilities.
Below market sales vs. inheritance valuations
The traditional method of passing on a property is to leave it to your children when you pass away. They then inherit ownership of the property. In that case, there may be estate taxes due.
So why might this method, which involves taxes, be better than selling your house for one dollar?
Tax implications of selling a house below market value
It’s all because of something called tax basis. Tax basis is the recognized cost of an asset from which taxes are calculated.
Here’s the catch. If you sell your home for $1, the sale is perceived as a gift. This means that the house has not been resold, only gifted.
For tax purposes, that means the tax basis stays the same. A house you bought for $100,000 may now be worth $400,000 at fair market value. But if you pass it on as a gift, its tax basis is still $100,000.
In the future, if your children ever want to sell the house themselves, its tax basis will be far lower than it should be.
When you sell a house, you pay tax on capital gains or how much the value has increased. For example, if you leave your $400,000 home to your children and they sell the inherited house soon after, they will be selling it at fair market value. They will most likely not need to pay any capital gains tax.
But if you had “gifted” it to them, its tax basis would still be $100,000. When they sell, their capital gains tax will not be calculated based on the difference between $400,000 and the sale price, but between $100,000 and the sale price! That works out to a $300,000 difference in the amount subject to capital gains tax.
New owners might qualify for home sale tax breaks if they have lived in the house. But, again, speak to a financial advisor to determine your exact tax situation.
The long and short of it is you can sell your house for $1, but it is viewed as a gift. When the home is resold, your children will be subject to far more capital gains tax than usual. Whether this is worthwhile for your family is a personal decision.
Can you still live in a house after sale?
What is the situation if you want to sell your house for $1—or at least below market value—but still occupy it? Some favor this route to avoid the complications of dealing with inheritance paperwork after their passing.
It is, of course, doable, but it changes the nature of the sale. Because you continued to live in the property, even if that is not agreed in writing, the sale becomes part of your estate. In other words, it’s not subject to gift tax but estate tax.
Overall, this works out reasonably similar to gifting the property. That’s because the $13.61 million lifetime exemption includes gifting while you’re alive and passing on your estate afterward.
Even though the sale’s tax changes from gift to estate tax, it still falls under the lifetime exemption. And just like the gift tax situation, the house’s tax basis remains the same.
A word of caution, though, is that the gift and estate tax lifetime exemption is not the same in every state. While in most places, it is over $13.61 million as of this year, in some states, it is as little as $1 million. Check local laws and speak to a financial advisor when deciding how to pass on your property.
Can I add my children to the deed instead?
Surely if you add your children to the title deed, you can avoid these issues. Unfortunately, that’s not the case.
As the house has not been sold, you’ll face the same tax basis problems discussed above. The tax basis will stay at its original value, snookering your children if and when they sell the home.
Besides this issue, adding your child to the deed means any financial difficulty they run into will impact your home.
For example, if they divorce, their former spouse may be entitled to part of your property. If they file for bankruptcy, they may sell their share of your home to pay the debts. In fact, at any time, they could sell their share.
Depending on your circumstances, adding people to your title deed could affect your mortgage terms. Make sure to speak to a financial advisor before making a decision.
All in all, adding your child to your title deed is a feasible strategy. But it leads to capital gains tax issues and could put you at risk.
Work out your home’s value today
Figuring out your home’s value dramatically affects the decision-making process. Knowing the value of your house can help you decide if the tax implications of selling a house below market value are worth it or not.
Use our home value calculator to discover how much your house is worth today. We make cash offers to provide you with a reliable selling option just as quickly as a $1 sale.
