Selling a House to a Family Member: Gift of Equity, Taxes, Notes
Selling a house to a family member is taxed like any other sale on the price you actually receive, with two twists: any discount below market value is a gift of equity reported on Form 709, and the buyer takes a carryover-style basis instead of the step-up they would get by inheriting. You can still use the home sale exclusion if it was your main home, you cannot deduct a loss, and if you finance the sale yourself the note should carry at least the applicable federal rate.
This guide walks through the gift, the seller's gain, the buyer's basis, seller financing to a relative, and a worked example for a home and for a rental.
Gift of equity: what it is
A gift of equity is the difference between a home's fair market value and the lower price you sell it to a relative for. The IRS treats a bargain sale to a family member as "partly a sale or exchange and partly a gift" (IRS Publication 544).
- Price paid is the sale part. You figure gain on it.
- Fair market value minus price is the gift part. You report it if it exceeds the annual exclusion.
Mortgage lenders often let a gift of equity count toward the buyer's down payment, usually with a signed gift letter and an appraisal. That is a lending question; the tax rules below apply either way.
Gift tax: Form 709, the annual exclusion and the lifetime exemption
For 2026 the annual gift tax exclusion is $19,000 per recipient and the basic exclusion amount is $15,000,000 (IRS gift tax FAQ, reflecting Public Law 119-21).
- If the gift of equity exceeds $19,000 to any one person, file Form 709 for that year.
- The excess reduces your lifetime basic exclusion; no gift tax is due until your lifetime taxable gifts pass it.
- A married couple who own the home together are each giving their share. Selling to a child and the child's spouse jointly can use more annual exclusions, since each recipient gets one.
For most families the gift of equity is a paperwork issue, not a tax bill. The larger cost is usually the buyer's basis.
The seller's side: gain, the home sale exclusion, and no losses
Gain is measured on the price you receive. Treas. Reg. §1.1001-1(e): "the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property. However, no loss is sustained on such a transfer if the amount realized is less than the adjusted basis." Its first example: a parent transfers property worth $90,000 with a $30,000 basis to his son for $60,000; the gain is $30,000 and the gift is $30,000.
The §121 exclusion still applies. If the house was your main home and you meet the ownership and use tests, up to $250,000 of gain ($500,000 for most joint filers) is excluded no matter who buys it.
No loss deduction. Selling below your basis produces no deductible loss: the part-gift rule above says so, and §267(a)(1) separately disallows losses on sales between family members (siblings, spouse, ancestors and lineal descendants under §267(c)(4)). A personal residence loss is not deductible anyway, but this matters for rentals and land.
The buyer's side: basis and the lost step-up
Under Treas. Reg. §1.1015-4, the buyer's basis in a part-gift, part-sale is the greater of what the buyer paid or your adjusted basis (plus any gift tax adjustment). The regulation's Example 2: property worth $90,000, parent's basis $30,000, sold to the son for $60,000, son's basis $60,000.
Compare inheriting: property received from a decedent generally takes a basis equal to fair market value at death (§1014). If your child would otherwise inherit the house, selling it at a discount can cost them the step-up on the discounted portion, which shows up as extra capital gain when they sell. For some families, holding the house and leaving it by will, or selling at full value, is better after tax. Our death and inherited installment notes guide covers what happens to an unpaid note at death.
Worked example 1: the family home
Simple example. Parents (married, joint owners) sell their main home, worth $600,000, to their daughter for $400,000. Their adjusted basis is $200,000 and they meet the §121 tests.
| Item | Amount |
|---|---|
| Fair market value | $600,000 |
| Price paid | $400,000 |
| Gift of equity | $200,000 ($100,000 from each parent) |
| Each parent's gift above the $19,000 annual exclusion | $81,000, reported on Form 709 |
| Gift tax owed | $0 (well under the $15,000,000 basic exclusion) |
| Parents' gain | $200,000 ($400,000 minus $200,000 basis) |
| §121 exclusion available | Up to $500,000 |
| Taxable gain | $0 |
| Daughter's basis | $400,000 (greater of price paid or parents' basis) |
If the daughter had inherited the house worth $600,000 at the parents' death, her basis would generally have been $600,000. The discount sale saves no income tax for the parents here (the exclusion covers the gain) and gives up up to $200,000 of basis for the daughter.
Worked example 2: a rental sold to a son, with seller financing
Simple example. Assumptions: married filing jointly, 2026 federal brackets, federal tax only, $80,000 of other taxable income. A rental worth $400,000 sold to a son for its full $400,000 value. Adjusted basis $200,000 after $100,000 of depreciation. Gain $200,000: $100,000 unrecaptured §1250 gain and $100,000 capital gain. No §121.
- All cash in one year: about $34,920 federal income tax plus $1,140 net investment income tax.
- Seller-financed: $40,000 down, $360,000 note over 20 years at an assumed 4.5%, which must be at or above the applicable federal rate for the month of sale (check the current rate). Gross profit percentage 50%. Year-one gain $25,681, all unrecaptured §1250 gain (recognized first under Reg. §1.453-12), with federal tax of about $5,167. Over the 20 years, total federal tax on the gain comes to about $14,178, because each year's slice stays in lower brackets.
The interest your son pays is ordinary income to you each year. Figures computed with a statute-ordered §1(h)(1) model; run your own with the calculator.
Owner financing to a family member: the rules that matter
Charge at least the AFR. A seller note that carries less than the applicable federal rate has part of each payment recharacterized as interest under §483 or §1274, and a below-market bargain can also be a gift. See applicable federal rate (AFR) and seller financing interest rate. For sales of land between family members, §483(e) caps the imputed rate at 6% on up to $500,000 of sales per year.
Document and collect like a lender. A signed note, a recorded mortgage or deed of trust, an amortization schedule, and real payments. A family "loan" that is never enforced invites the IRS to treat the whole transfer as a gift. Forgiving each year's payment under a prearranged plan can have the same result, so talk to your advisor before promising to forgive.
The two-year resale rule. If your relative resells the house within two years of your installment sale, §453(e) can treat you as receiving the resale proceeds and accelerate your remaining gain. Full rules: related-party installment sale.
Your own mortgage. If you still owe a lender, federal due-on-sale rules protect transfers "where the spouse or child(ren) becomes an owner" of a home they occupy (12 CFR §191.5(b)(1)(v)(B)). Sales to other relatives, or to a child who will not live there, are not protected. See due-on-sale clause.
Report the interest. If your relative uses the home as a residence, list the interest on Schedule B with their name, address and SSN, and give them your SSN so they can deduct it.
Bottom line
Selling a house to a family member is a real sale on the price paid plus, if you discount it, a gift of equity that is usually a Form 709 filing rather than a tax bill. The seller keeps the home sale exclusion but can never deduct a loss. The buyer's basis is the greater of the price or your basis, which can cost them the step-up they would get by inheriting. If you finance it, charge at least the AFR, document it, and watch the two-year resale rule.
Questions to ask your CPA
- Is a discount sale, a full-price sale with seller financing, or holding until death best for our family after tax?
- How much gift of equity should we report, and should we split gifts or sell to more than one recipient?
- Do I qualify for the §121 exclusion, and how much gain remains taxable?
- What will my child's basis be, and how much step-up are we giving up?
- What rate must the note carry, and how should the interest be reported?
- If my child sells within two years, what happens to my remaining installment gain?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.