Can I Sell My House To My Child (Or Anyone) Below Fair Market Value? Can I Do A Gift of Equity?

By Devin R. Lucas

Can you sell your home for less than it’s worth? Can you sell your house to your son or daughter below market value? What are the tax implications of selling a house below market value, and how do capital gains factor in? These are common—and important—questions for families planning real estate transfers in Newport Beach, Costa Mesa, and throughout Orange County.

The short answer: Yes, you can absolutely sell a home below market value—and legally gift the difference. It’s a legitimate and frequently used estate planning strategy that can support younger generations, avoid probate, and reduce estate tax exposure.

Let’s break down how it works.

What Is a Gift of Equity?

A “gift of equity” occurs when you sell a home for less than its fair market value (FMV). The difference between the appraised FMV and the sales price is treated as a gift to the buyer. This commonly occurs in intra-family sales—for example, a parent selling to a child.

• FMV of home: $2,800,000
• Sale price to child: $1,800,000
• Gift of equity: $1,000,000

That $1,000,000 is treated as a gift under IRS rules. No cash needs to change hands for that portion—it’s equity transferred through the structure of the sale.

For lending purposes, the gifted equity can serve as a down payment, allowing the child to potentially purchase the home with no money down (i.e. the “gift of equity” is the down payment!).

Do I Have to Report This to the IRS?

Yes—but that doesn’t mean you owe any tax.

As of 2025, the IRS annual gift exclusion is $19,000 per recipient (or $38,000 for married couples), and the lifetime gift and estate tax exemption is a record-high $13.99 million per person (or $27.98 million per couple).

• Gifts under the $19,000 annual limit per person do not need to be reported.
• Gifts over that amount must be reported using IRS Form 709—but no tax is due unless your total lifetime gifts exceed $13.99 million.

Because these thresholds are scheduled to drop significantly in 2026, many families are choosing to make substantial gifts or property transfers in 2025 while these higher exemptions remain.

What About Capital Gains for the Giftor?

This strategy can also help the seller (giftor) minimize or eliminate capital gains tax exposure. For example, if the parents purchased the home for $100,000 and it is now worth $3,000,000, selling the home on the open market would normally result in significant capital gains taxes.

However, as noted in the section below, the purchase price can impact the child’s ‘basis’ for capital gains purposes, i.e. the potential capital gains does not magically disappear in these gift or hybrid gift situations, it is merely passed to the child, they will “step into your shoes” (or higher depending on the purchase price, see below). Whereas if they inherent (at death), Under IRC §1014, assets transferred at death typically receive a step-up in basis to fair market value, thereby eliminating prior capital gains.

You can review our more in-depth article on the step up in basis here.

However, if they instead sell the home to their child for $600,000, they can apply the IRS Section 121 exclusion to potentially eliminate all capital gains tax on the sale. If the parents lived in the home for at least two of the last five years, they may exclude up to $250,000 (single) or $500,000 (married) of gain.

In this case, the sale price ($600,000) minus the original basis ($100,000) results in a $500,000 gain — all of which may be excluded under Section 121 if qualifications are met. The remaining $2.4M in value is treated as a gift, which is subject to IRS gift reporting but no immediate tax, provided it falls under lifetime exemptions.

What About Capital Gains? / Adjusted Basis for the Giftee

Capital gains become especially important when selling property below market value.

This is one of the most misunderstood areas of tax law. Many people assume that a buyer’s basis in a part gift/part sale is either the full fair market value or a proportional blend of the purchase price and donor’s basis—but that’s not how the IRS sees it.

Simplified rule:

• The recipient’s basis is the greater of the amount paid or the donor’s adjusted basis.
• If gift tax is paid, that may increase basis in some situations (see IRS rules).

Example 1 – Buyer pays more than seller’s basis

• FMV: $2,800,000
• Parent’s basis: $600,000
• Child pays: $1,800,000
• Result: Child’s basis = $1,800,000

Example 2 – Buyer pays less than seller’s basis

• FMV: $2,800,000
• Parent’s basis: $1,800,000
• Child pays: $1,200,000
• Result: Child’s basis = $1,800,000 (carryover)

Example (in practice):

• Purchase price: $600,000
• FMV: $2,800,000
• Sale to child: $1,800,000
• Result: Since $1.8M > $600K, basis = $1.8M

See: IRS Publication 551, Treas. Reg. §1.1015-4

Can I Finance the Sale With a Family Loan?

Yes. In fact, combining a gift of equity with a private family loan is a powerful strategy.

You can sell a home below market value and finance the remainder using a properly documented intra-family loan. The IRS requires you to charge at least the Applicable Federal Rate (AFR).

See our article on family loans and the IRS AFR here: Intra-Family Loans and the IRS AFR

• Use a Promissory Note for terms
• Record a Deed of Trust to secure the loan

What About Property Taxes in California?

Thanks to Proposition 19, most parent-to-child property transfers now trigger a reassessment of property taxes.

There are limited exceptions, mainly when the child occupies the home as a primary residence and files timely.

See our main Prop 19 article: https://lucas-real-estate.com/proposition19/
Explore Prop 19 resources: https://lucas-real-estate.com/category/property-taxes/

Final Thoughts: Do It Right

• Use a valid purchase agreement
• Include a gift letter for lenders
• File IRS Form 709 as needed
• Consult with experienced legal and tax professionals

Done right, these strategies can transfer wealth, avoid probate, and minimize tax exposure. Done wrong, they can lead to costly errors.

Sources:

• IRS Publication 551 – Basis of Assets
• Treasury Regulation §1.1015-4
• Treasury Regulation §1.1001-1(e)
• IRS Gift Tax Overview
• Form 709 Instructions
• IRS Topic 703: Basis of Assets
• IRS Topic 701: Sale of Your Home
• Applicable Federal Rates (AFR)
• Lucas Real Estate – Intra-Family Loans
• Lucas Real Estate – Prop 19 Main Article
• Lucas Real Estate – Prop 19 Blog Category

We’re Here to Help Educate and Strategize

At Lucas Real Estate Group, we’ve extensively educated families, trustees, and professionals on Proposition 19’s implications—before and after its implementation. We understand the complexity of planning with LLCs, trusts, and long-term property ownership across generations.If you’re navigating intergenerational transfers of California real estate and want to explore your options—including LLC structures, capital gains strategies, and Prop 19 mitigation—we’re here to help.

Devin R. Lucas is a Real Estate Broker, REALTOR® and Real Estate Attorney. Alongside Courtney Lucas, a licensed CPA and REALTOR®, they lead Lucas Real Estate Group in partnership with Coldwell Banker Global Luxury.

Lucas Real Estate Group offers unmatched expertise in California real estate, Prop 19 strategy, legal structuring, and discreet transactions.

Questions or Need Help?

Lucas Real Estate – REALTOR® and Attorney Devin Lucas and REALTOR® and CPA Courtney Lucas – are your local experts in property management and real estate sales and acquisitions in Newport Beach, Costa Mesa, Newport Coast, Corona del Mar, and all of Orange County.

Want to discuss real estate laws, tax planning, tax considerations, private sales, intra family sales, or real estate legal matters? We conduct paid one-hour confidential consultations via Zoom, walking families through Prop 19 impacts, potential tax exposure, capital gains considerations, and the pros and cons of gifting, sales, LLCs, or hybrid solutions. For discussions requiring real estate legal advice, private family sales, family transfers, or tax-related matters, please schedule a paid one-hour consultation via Zoom, phone, or in person using this calendar (Book a consultation here.)  Upon booking, you’ll receive instant confirmation and a Zoom link if applicable.

Thinking of selling California real estate or seeking a new property management company? We would love the opportunity to assist – we provide full service sales and property management in Newport Beach, Costa Mesa and surrounding areas. If you are seeking to sell or professionally manage your home in Newport Beach, Costa Mesa or the surrounding areas, call or email anytime for a free brief consultation – info@lucas-real-estate.com or 949-478-1623.

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