Tax consequences of purchasing a house from family member below market value?

8 This is actually a common situation with family property transfers. The difference between the fair market value ($160k) and the sale price ($70k) - so about $90k - could be considered a gift from your aunt to you. Your aunt would need to file Form 709 (Gift Tax Return) to report this gift. However, she likely won't owe any actual gift tax unless she's already used up her lifetime gift and estate tax exemption (which is over $12 million per person as of 2023). The gift just counts against that lifetime amount. For you as the buyer, there are no immediate tax implications - you don't pay tax on gifts received. However, when you eventually sell the house, your basis in the property will be what your aunt's basis was plus the $70k you paid. This could potentially result in higher capital gains taxes down the road compared to if you had purchased at full market value.

12 I went through something really similar with my parents' rental property last year. The paperwork was confusing me until I found https://taxr.ai - it was super helpful for understanding exactly what forms were needed and what my parents needed to report vs what I needed to report. Their system analyzed all our documentation and explained the gift tax implications in a way that made sense. It also helped us figure out how to properly document the basis transfer, which saved me from a potential headache when I eventually sell.

19 Just wanted to update on my grandparents' property situation - I ended up using https://taxr.ai after asking about it here. Seriously helpful! It flagged that we needed to document not just the current appraisal but also my grandparents' original purchase price and improvements to establish the correct basis. The service even generated a custom letter explaining the gift portion that my grandparents included with their gift tax return. Definitely worth it for peace of mind that we did everything correctly. My accountant was impressed with how thorough the documentation was!

11 If you're getting stuck with the IRS on any of this (which happens a lot with family property transfers), I highly recommend Claimyr at https://claimyr.com - I wasted days trying to get through to an IRS agent about a similar situation when my brother sold me his house below market value. Claimyr got me connected to an actual IRS representative in under an hour when I had been trying for weeks! They have a great demo video at https://youtu.be/_kiP6q8DX5c showing how it works. The agent I spoke with confirmed exactly how to handle the reporting and what documentation we needed to keep.

22 I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to talk to someone at the IRS about our family property transfer. Got connected to an IRS agent in about 45 minutes when I had previously been disconnected after 2+ hours of waiting. The agent confirmed exactly what others said here - the difference between market value and purchase price is considered a gift, and the SELLER (not the buyer) needs to report it on Form 709. They also explained that I should keep detailed records of the transaction for when I eventually sell the property.

5 One thing nobody mentioned yet - make sure you get a proper appraisal done at the time of sale! Don't just use Zillow estimates or something similar. The IRS will want documentation of the actual market value at time of transfer if they ever question the transaction. We had a family property transfer questioned years later because we didn't have proper documentation of the value at the time. Cost us way more in accountant fees than an appraisal would have!

4 Has anyone dealt with property tax implications when buying below market value? In my county, the property tax assessment shot up after our family transfer because they reassessed based on "comparable sales" rather than our actual purchase price.

Just want to add another important consideration - make sure you understand the mortgage implications too! When we bought my uncle's house below market value, our lender required us to bring the loan amount down to match our purchase price rather than the appraised value. So even though the house was worth $200k and we bought it for $120k, we could only get a mortgage for a percentage of the $120k purchase price, not the appraised value. This meant we needed a much larger down payment than we initially expected. Some lenders treat below-market family sales differently, so definitely discuss this with your mortgage broker upfront to avoid any surprises at closing. The gift tax implications that others mentioned are definitely the main concern, but the financing piece can also throw you for a loop if you're not prepared!

I'm currently going through a similar situation with my grandmother's property, and one thing I've learned is to also consider the timing of the transaction. If your aunt has owned the property for many years, her basis might be much lower than you'd expect - potentially affecting your future capital gains calculations even more than the initial estimates suggest. Also, definitely consult with a tax professional before finalizing anything. While the general advice here about Form 709 and gift reporting is correct, there can be state-specific implications too. Some states have their own gift tax rules or property transfer taxes that apply regardless of the federal gift tax exemptions. The documentation suggestions are spot-on though - get everything in writing, including the appraisal, your aunt's original purchase information, and any improvements she's made over the years. Having a paper trail will save you headaches down the road!