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A price discount is a gift of equity and may be subtracted from your lifetime gift exemption limit
Before we jump into whether you’ll pay gift taxes on the sale of a house to a family member, it’s helpful to have a baseline understanding of how the IRS taxes gifts.
How gift taxes work
When you give someone money or an item of value without being paid in full for it in return, you may be making a gift in the eyes of the IRS. However, that doesn’t mean that you automatically have to pay gift taxes anytime you send your grandkid money.
Unless you’re gifting millions of dollars over the course of your lifetime, you likely won’t pay gift taxes under current tax rules. In addition, gifts to your spouse generally aren’t taxable.
The $19,000 annual exclusion for tax year 2025
You can generally give up to $19,000 in value to as many people as you want in a given year, or $38,000 if married and filing jointly, without having to report those gifts to the IRS.
Example:
Let’s say the fictional Diane gave her son Tyler and daughter-in-law Maryanne each $19,000 in 2025 to help them with their new baby’s expenses. She would have been able to do so without involving the IRS.
It’s generally only when you provide a gift exceeding $19,000 in value that you need to report it on your tax return. Let’s say Diane decided to give Tyler $20,000 rather than $19,000; the $1,000 overage on the gift to one individual would typically mean that Diane has to report that gift.
The lifetime gift exemption limit
That $1,000 must be reported so that the IRS can keep track of the total value of what you’ve given away in your life. Still, that $1,000 overage will not necessarily be taxed.
For tax year 2025, a single individual’s lifetime exemption is $13.99 million. “This means you can gift up to this amount during your life without having to pay a gift tax,” explains Xintian Wang, CPA with Dimov Tax Specialists, a San Francisco-based tax preparation service.
The limit applies to gifts given while the person is alive and after they have died, so taxpayers have to account for their inheritance plans in their gift tax liability. Gift amounts exceeding the exclusion threshold of $13.99 million are taxed at a rate of 18% to 40%.
Gift taxes when selling below market value
When you sell a house below market value, the same gift tax rules are likely to apply. Only rather than giving someone money outright, the “gift” you’re providing is a discount on the value of the home.
“If you’re selling a home to a family member for less than its fair market value, it is a ‘gift of equity,’” explains Wang. “You, as the seller, have to report the gift to the IRS if the value of the gift exceeds $1[9],000. The value of the gift is the difference between your selling price and the fair market value of the home. The seller is responsible for paying a gift tax if applicable.”
Example:
Diane sells her home to Tyler and Maryanne for $250,000 despite its fair market value of more like $400,000. The sale, including the $150,000 gift of equity (minus any amount Diane can subtract as part of the annual exclusion), must be reported and subtracted from Diane’s lifetime exemption limit.
Keep in mind that these examples are purely for educational purposes. When it comes to gift taxes, it’s always wise to consult with a tax advisor about your situation.
“Stepped up” tax basis will not transfer if the home is fully gifted
Should a seller choose to gift the entire value of their home to a family member, they should be aware of the potential capital gains tax implications.
