Selling Second Homes Below Market Rate

Let's say you need, or want, to sell your second home below the fair market value for real estate in the area. (Why would you want to do that? Keep reading.)

A stranger or even casual acquaintance who buys your home for below market value can take possession and feel comfortable they got a really good deal.

On the other hand, what if instead of selling below market to a stranger, you sell below market to your children. The IRS could consider this a problem.

The reason is a below market sale to a stranger is just a transaction. That same sale to a relative, however, may look like a gift to the IRS – a disguised gift for the sole purpose of getting around tax law.

If the IRS decides to take a closer look at your transaction and determines the sale was in fact a gift, you will have to pay a gift tax on the difference between the sale price and the fair market value of your second home.

Rather than do that, you can use your $11,000 gift-tax exemption to further reduce the taxable amount.

Let's say the second home has a market value of $100,000 and you sell it to your son and his wife for $55,000. The IRS steps in and decides that $45,000 difference amounts to a gift. Both you and your spouse can make tax free $11,000 gifts to your son and daughter-in-law consuming $44,000 of the $45,000 gift. The end result is a $1000 taxable gift and that can be folded into your $1 million annual gift tax exclusion.