Tax Rules for Selling Your House to a Family Member

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

This article was inspired by a conversation with a client who is considering selling their primary residence to their child. One of the biggest challenges in today’s housing market is affordability for first-time homebuyers. With housing prices and interest rates rising dramatically over the past five years, many parents who were already planning to downsize, relocate, or move into a more retirement-friendly home are now considering selling their home directly to their children to help them afford their first house.

While this can be a great strategy, there are a number of tax rules, gift rules, and financing considerations that need to be understood before entering into an intrafamily real estate transaction. In this article, we’re going to walk through the key areas families should consider before moving forward.

Discounting the Price of the House

One of the most common questions we get from clients is whether they should sell the house to their child at full market value or discount the price.

For example, if a house is worth $600,000, can you sell it to your child for $400,000?

The answer is yes, you can sell your house for whatever price you want. However, if you sell the home significantly below fair market value, the difference between the market value and the sale price may be considered a gift.

So if:

• Market value = $600,000

• Sale price = $400,000

• Difference = $200,000

That $200,000 could be treated as a gift to the child.

For most families, this does not mean you will owe gift tax. However, you may need to file a gift tax return because the gift exceeds the annual gift exclusion. The amount above the annual exclusion simply reduces your lifetime gift exemption, which is currently $15 million per person at the federal level.

Why Selling at Fair Market Value May Be Better

From a tax standpoint, it may actually make more sense to sell the home at full market value rather than at a discount, because of the primary residence capital gain exclusion.

• Single filer: Can exclude $250,000 of gain

• Married filing jointly: Can exclude $500,000 of gain

Example

• Purchase price: $200,000

• Current value: $600,000

• Gain: $400,000

If the parents are married, the $400,000 gain is below the $500,000 exclusion, meaning they would owe no capital gains tax even if they sell the home for full market value.

But the bigger planning opportunity is actually for the child’s future taxes.

If the child buys the home for $600,000, that becomes their cost basis. If they later sell the home for $1,000,000, their gain is $400,000, which may be fully covered by the primary residence exclusion.

However, if the parents sold the home for $400,000, the child’s cost basis is $400,000. If they later sell for $1,000,000, the gain is $600,000, and $100,000 could become taxable.

So in many situations, a better strategy may be:

Sell the home at fair market value and gift money for the down payment, instead of discounting the purchase price.

This can create a better long-term tax outcome.

Do the Parents Hold the Mortgage?

The next big question is how the child will finance the purchase. There are two main options:

Option 1: Traditional Mortgage

The child gets a mortgage through a bank, and the parents receive cash from the sale.

Option 2: Parents Hold the Mortgage (Seller Financing)

If the parents do not need the cash from the sale, they can hold the mortgage and essentially act as the bank. The child makes mortgage payments directly to the parents.

This is commonly called seller financing or an intrafamily mortgage.

Minimum Interest Rate (AFR)

If parents hold the mortgage, they must charge a minimum interest rate called the Applicable Federal Rate (AFR) to satisfy IRS rules. For a long-term loan such as a mortgage, the long-term AFR applies.

As of March 2026, the long-term AFR is approximately 4.6%.

So the process typically looks like this:

• Determine purchase price

• Determine down payment

• Remaining balance becomes the mortgage

• Mortgage must charge at least the AFR rate

• Child makes monthly payments to the parents

Tax Treatment of Payments

As the child makes mortgage payments:

• The Principal portion is not taxable to the parents

• The Interest portion of each payment is taxable income to the parents

Forgiving the Mortgage

Another question that comes up with intrafamily mortgages is:

“Can we forgive payments or forgive the loan later?”

The answer is yes, but this brings us back to the gift rules.

Forgiving Monthly Payments

Let’s say the child’s mortgage payment is $3,000 per month and the parents decide to waive the payments for a year.

That would equal:

• $3,000 × 12 = $36,000 per year

If the parents are married, they can gift up to the annual gift exclusion amount each year without filing a gift tax return (for example, $38,000 combined in 2026). If the forgiven amount is below the annual exclusion, no gift tax return is required.

If the forgiven amount exceeds the annual exclusion, then a gift tax return must be filed, but again, no gift tax is owed unless the parents exceed their lifetime exemption.

Forgiving the Entire Mortgage

If the parents decide at some point to forgive the remaining balance of the mortgage, that is considered a gift of the remaining loan balance, and a gift tax return would need to be filed for that year.

This shows that there is actually a lot of flexibility when families use intrafamily mortgages. Payments can be structured, forgiven, or adjusted over time, but the gift rules must be tracked.

Summary

If parents are in the fortunate position where they can sell their home to their child, we are seeing this strategy more and more due to the challenges first-time homebuyers face in today’s housing market.

However, it’s important to understand the key planning areas:

• Should you sell at fair market value or discount the price?

• Should the child get a traditional mortgage or should the parents hold the mortgage?

• What are the Applicable Federal Rate (AFR) rules?

• How do the gift tax rules apply if you discount the house or forgive payments?

• How does this affect the child’s future cost basis?

• How does this fit into the parents’ estate plan?

These transactions involve tax planning, estate planning, and financial planning, so we strongly recommend working with a tax professional and financial advisor when considering an intrafamily real estate transaction.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions

1. Can I sell my house to my child for less than market value?
   Yes, but the difference may be considered a gift.
2. Do I have to pay gift tax if I sell the house at a discount?
   Usually no, but you may need to file a gift tax return.
3. Do I pay capital gains tax if I sell to my child?
   You may qualify for the primary residence capital gain exclusion.
4. Is it better to sell at market value and gift the down payment?
   In many cases, yes, for long-term tax planning reasons.
5. Can I be the bank for my child’s mortgage?
   Yes, this is called seller financing.
6. What interest rate do I have to charge?
   At least the IRS Applicable Federal Rate (AFR).
7. Is the interest my child pays me taxable?
   Yes, interest is taxable income to the parents.
8. Can I forgive mortgage payments?
   Yes, but the forgiven amount may be considered a gift.
9. What happens if I forgive the entire loan?
   It is treated as a gift of the remaining balance.
10. Should we work with a professional for this type of transaction?
    Yes, you should coordinate with a CPA, financial advisor, and real estate attorney.