What Does it Mean When a House Sells for $1 In California?

What is Nominal Consideration & Valuable Consideration?

When you sell a house, you give someone else ownership of the property in return for something valuable, typically money, which is known as “consideration.” This fair trade makes it a legal sale.

Gift Tax

The gift tax applies to imbalanced property transfers where one party receives significantly less than the other.

The good news is, there’s an annual exemption of $16,000 for individuals and $32,000 for couples. This exemption applies per person, so if your child is married, you can give each spouse up to $32,000 without tax consequences. The gift tax rate, ranging from 18% to 40%, is then applied to any amount exceeding the exemption.

The gift tax is separate from federal taxes. Currently, Florida, California, Wisconsin, and Virginia do not impose a gift tax.

Capital Gains Tax

You may be wondering about the tax implications if you decide to transfer ownership of your home to your child for a nominal fee, like a dollar. What about the increase (or decrease) in value since you purchased it? And what if you’ve upgraded the property, boosting its worth?

Here’s how it works: When you transfer ownership to your child, they inherit the same tax basis as you, which includes the original purchase price plus any enhancements you’ve made. So, if you bought the property for $50,000 two decades ago and invested another $50,000 in improvements, your child’s tax basis would be $100,000, even if the current market value is assessed at $400,000.

Example: Selling to Family Members for $1

Let’s say you have a home you bought for $30,000 three decades ago. Thanks to incredible growth in real estate values, it’s now valued at a massive $400,000. So, you and your spouse decide to sell or transfer it to a married family member for a token price of $1. The tax authorities will then see this as a gift worth $399,999.

How much tax do you owe if the highest gift tax rate of 40% applies to you?

Taxable amount = Market value – payment – exemptions

Taxable amount = $400,000 – $1 – $64,000

Seller wants a bidding war

Unless the real estate deal is with a family member, it is extremely rare that a house sells for an actual sale price of $1. Sometimes a house sits on the market for too long. So, upon the advice of a real estate agent, the seller would re-list the property for $1 to possibly spark a bidding war amongst potential buyers.

Blighted areas

In some parts of the US, real estate and job situations have gotten really bad, causing folks to leave their homes and go elsewhere. These areas have lots of beat-up, empty houses and an overall feeling of emptiness.

To entice folks to come back, governments offer housing deals like the Dollar House Initiative in Gary, Indiana. Here, buyers can snag a house for just a buck! But there are a couple of conditions to meet, like having a family income of at least $35,000 and agreeing to fix up the place and live there for at least five years.