Can I Sell My House Below Market Value In California?

Listing a property below its market value is a common tactic in real estate to expedite its sale. This approach is often favored by sellers prioritizing speed over maximizing profit.

Homeowners opting for this strategy typically seek to unlock equity for various expenses such as relocation or personal needs.

Even if a property has unresolved issues, it can attract significant interest in a competitive market, provided it’s priced below market value. This tactic is effective not only in a buoyant market but also in neutral or downturn markets where price sensitivity is heightened among buyers.

At times, you may decide to sell your property to someone close like a family member or friend. To give them a deal, you sell the place for less than what it could fetch on the market and don’t ask for an upfront payment.

Although this can happen, the tax authorities may take a closer look at the deal, especially if you’re selling a house to a family member without following usual business standards. They usually see this as a sale meant to benefit you personally.

For a long time, selling below market value has been a strategy to avoid taxes like capital gains, inheritance, and gift taxes when it comes to family properties. So, when a property deal involves family, the tax authorities and other government bodies often see it as a sign of trying to protect family wealth.

Thus, if you’re selling your property to a family member under standard business practices, you need to show that you’re not doing it to shield family assets or dodge taxes. The process should be similar to other regular property sales, even if you’re selling below market value.

If everything is done correctly, selling your property to a family member under standard business practices is considered legal by the tax authorities. You just need to file a gift tax return.

However, if not done properly, both the seller and the buyer could face tax consequences. We’ll delve deeper into this later in the article.

Another common reason homeowners list their property below market value is its poor performance in the real estate market. This might happen because of wrong pricing or the current state of the housing market in the area.

Determining the right price for a house can be tricky, especially if the properties used for comparison aren’t in similar condition to the one being listed. If offers come in significantly below your listing price, you may need to lower it since you might have set an unrealistic asking price.

If the real estate market in your area is sluggish, you’ll likely receive consistently low offers and your property will stay on the market for a long time. While waiting for a good offer is an option, it can be time-consuming. If you’re eager to sell quickly, pricing your property lower is advisable.

If you’ve paid off your house but facing money problems because of losing your job or other personal issues, selling it could be an option you’ve considered. 

Even though this might give you enough money to bounce back from financial trouble, there’s no assurance that you’ll sell quickly. That’s when selling for less than the market price might be smarter.

But remember, it’s only helpful to sell below market value if what you need is less than what you’re asking. If not, you’re just making your financial situation worse while losing your home.

People who have inherited a property, especially if it is a hoarder home or fixer upper, would want to dispose of it as soon as possible. They don’t really care if they profit from the sale or not, so long as they become free of the responsibility of property ownership. This is a common situation for selling below market value.

You can repair a roof or floor, but you can’t change a home’s undesirable location. If your property is close to a dump, highway, or business area, it’ll be tough to attract buyers in the real estate scene. You’ll likely need to list your property below its market price in such situations. Depending on how unfavorable the location is, you might not make any profit when you sell.

If the owners of the property are old, they may want to downsize or transfer into a retirement home. The proceeds of the sale don’t matter as much as selling their property fast and moving on.

If the home is an investment property and the tenants are difficult to deal with, it makes sense to put the house up for sale. And since with it comes the bad tenant, the home should be priced below market value, so someone would take an interest in it. 

One big reason some houses don’t sell in real estate is the listing price. If you don’t do a good comparative market analysis (CMA), chances are, you’ve set a price that’s way too high.

So, before setting a low price, make sure you know the real value of the property. If you can, get a professional appraisal. Appraisers do more than CMAs. They also check the property and look at current market trends.

The appraisal report is a good way to know the property’s value. Then, you can lower the price a bit if you want to sell quickly.

If your property’s worth is lower than what you owe on your mortgage, it’s in negative equity. Selling for less than its market value means you’ll be unable to clear your loan fully and will lose your home.

In such cases, a short sale might be considered. However, it’s not advisable to sell below market value in a short sale because you still need to settle your mortgage with the sale proceeds.

Your mortgage lender needs to approve a short sale, as you’re essentially asking them to forgive the remaining loan balance due to negative equity. They might require proof of financial hardship or other documentation to support your situation.

When selling your home to a relative at a discount greater than 25% off market value, it may trigger IRS gift tax. This can pose challenges if your aim is simply to assist the family.

To sidestep gift tax in familial transactions, consider selling at $15,000 below fair market value, aligning with the annual IRS gift tax exclusion.

Alternatively, transferring property ownership via quitclaim deed to a relative can avoid gifting taxes. Post-transfer, the family member can secure a Home Equity Loan to repay you the discounted purchase price.

Tax implications persist, so consulting a tax professional is advisable.

Seller financing presents another option for selling to a family, facilitating a more manageable home purchase.

Word of mouth means nothing in the eyes of the law. If you want everything to be perfectly legal, put everything in writing, even if you are selling your home to a family member.

Note all the significant terms and conditions of the sale so you can avoid misunderstandings as the sale progresses. This will also make things smoother and easier for the title company you choose.

Tax laws when selling to a family member can be complicated in a non-arms length transaction. We suggest seeking the assistance of a real estate attorney, tax attorney, or tax professional to understand capital gains tax, gift tax, and inheritance tax.

Always comply with the gifting laws of the IRS when you sell your house to a family member. To avoid any issues, ensure that the discounted amount is not more than 15% of the home value, so you don’t have to pay gift taxes.

Even if you’re not selling your property to a family using a realtor, it’s crucial to get it inspected and appraised. This benefits both you and your family member purchasing the property.

An inspector can identify all needed repairs so you can address them. Skipping this step could lead to blame if something goes wrong, like roof or wall damage or flooding.

An appraisal determines your property’s value, setting the discounted price for a family sale.

We get that you want to offload your property for a good deal to aid your kin. However, we urge you not to let sentiment dictate your sale.

Treat it like any other property transaction, even if it means offering a discounted yet justifiable price. This ensures you won’t rue your decision later, particularly concerning financial consequences.

Prioritize rationality over sentiment when dealing with family home sales, and maintain the appropriate formality throughout the process.