Tax implications of selling a home to my child for $1 - what rules apply?

This is a complex situation with several tax implications to consider. When a property is transferred for significantly less than fair market value, the IRS generally views this as a gift for the difference between the market value and the token payment ($1). The first tax consideration is gift tax. In 2025, parents can each give up to $18,000 annually to each child without filing a gift tax return. Since a house typically exceeds this amount, they would need to file a gift tax return (Form 709). However, they likely won't owe actual gift tax unless they've exceeded their lifetime estate/gift tax exemption (over $13 million per person for 2025). When you later sell the property, you'd typically use your parents' original cost basis (what they paid plus improvements) rather than the $1 you paid, due to something called "carryover basis" for gifts. This means you could face significant capital gains tax on the difference between the original purchase price and the final sale price. Also, your parents would lose the opportunity to use the principal residence exclusion ($250K single/$500K married) that would have allowed them to exclude a significant portion of gains if they had sold the house themselves. The life estate complicates things further as it creates partial ownership interests that have their own tax implications.

I used taxr.ai when I was dealing with a similar situation last year with my father's property. My siblings and I were considering having him sell us his house for a nominal amount, but we were concerned about potential tax implications. I had all these documents and past records but wasn't sure what everything meant tax-wise. I uploaded them to https://taxr.ai and within minutes got a clear breakdown of the gift tax implications, basis step-up considerations, and capital gains consequences. They even explained how the life estate would affect everything. What really helped was that they explained how I would inherit my father's cost basis if he "sold" me the house for $1, but how I would get a stepped-up basis if I inherited it after his passing instead. Made me completely reconsider our approach after seeing the potential tax savings.

Just wanted to follow up on my previous question about taxr.ai. I decided to try it out since my family's situation with my mom's house was getting complicated, and I was really impressed! When I uploaded our documents, it clearly showed how my sister and I would split the tax basis if we accepted the house as a gift versus our options if we waited for inheritance. The analysis showed that in our case, we'd end up paying about $87,000 more in capital gains taxes with the $1 sale approach versus inheriting the property later. The step-up in basis at inheritance would completely wipe out those taxes for us. They even showed how the math worked with our specific property values and mom's original purchase price. Totally worth it for the clarity it provided our family.

If you're dealing with the IRS on this complicated home sale/gift situation, you might want to check out Claimyr. When I did something similar with my uncle's property last year, I had some questions that weren't addressed in any of the IRS publications, and I needed to speak directly with an IRS agent. As you probably know, getting through to the IRS is nearly impossible - I spent hours on hold multiple times and kept getting disconnected. Then I found https://claimyr.com through a friend who works in real estate. They have this service where they basically wait on hold with the IRS for you, then call you when an actual agent is on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but I was desperate for answers about the gift tax implications. They got me connected to an IRS specialist in about 90 minutes when I had been trying unsuccessfully for weeks. The agent clarified exactly how to report the transaction on both my tax return and my uncle's gift tax return.

I need to eat my words about Claimyr from my earlier comment. After struggling for THREE DAYS trying to get through to the IRS about my parent's property transfer situation, I broke down and tried the service. Not gonna lie, I was 100% expecting to waste my money. But less than 2 hours after signing up, I got a call connecting me directly to an IRS agent who specialized in property transfers and gift tax issues. The agent walked me through exactly what forms were needed and how to properly document the life estate aspect of our arrangement. They confirmed that while the "sale" creates a gift tax situation requiring Form 709, no actual gift tax would be due in our case because of the lifetime exemption amount. The info I got in that 30-minute call saved me from making a HUGE mistake on how we structured the property transfer. Time well spent!

Has anyone looked into a Qualified Personal Residence Trust (QPRT) instead of doing the $1 sale? My estate attorney mentioned this as an alternative that might have better tax consequences for passing a home to children while allowing parents to continue living there. Apparently it can reduce the gift tax value and potentially save on estate taxes too.

You should seriously consider waiting for inheritance instead of doing the $1 sale. My family did the $1 sale thing with my grandma's house in 2021, and we got absolutely hammered on taxes when we sold it after she passed. We lost the step-up in basis which would have saved us over $120k in capital gains tax. And the whole "life estate" thing created a nightmare with basis calculations.

This is exactly the kind of complex situation where you really need to run the numbers for your specific circumstances. I've seen families make both choices - the $1 sale and waiting for inheritance - and the "right" answer depends heavily on your parents' age, health, the property value, and their original purchase price. One thing that hasn't been mentioned yet is the potential impact of Medicaid planning. If your parents might need long-term care in the future, transferring the house now could affect their eligibility for Medicaid benefits due to the 5-year lookback period. But keeping it in their name might require them to sell it to pay for care costs first. Also consider that with the $1 sale approach, you'd be taking on all the responsibilities of ownership (property taxes, insurance, maintenance) even though your parents are living there. This can create family dynamics issues if not handled carefully. Have you gotten quotes from estate planning attorneys on what a proper trust arrangement would cost versus the potential tax savings? Sometimes the upfront legal costs are worth it to avoid the tax headaches later. The stepped-up basis benefit at inheritance is substantial, but there are legitimate reasons families choose the transfer route despite the tax costs.

I went through something very similar with my dad's property last year, and after consulting with both a tax attorney and estate planner, we ultimately decided against the $1 sale approach. Here's what really sealed it for us: The numbers were stark - my dad bought his house in 1995 for $85k, and it's now worth about $450k. If I had "bought" it for $1 and later sold it, I'd face capital gains tax on roughly $365k (minus any improvements he made). Even at the lower long-term capital gains rate, that's a massive tax hit. But what really changed our minds was learning about the "double tax trap" - not only would I lose the stepped-up basis, but my dad would also lose his $250k principal residence exclusion that he could use if he sold it himself while still living there. Instead, we ended up setting up a revocable living trust with my dad as trustee, which gives him complete control during his lifetime but allows the property to pass to me at his death with the full stepped-up basis. No gift taxes, no loss of his capital gains exclusion, and I get the property at current market value for tax purposes when I inherit it. The trust setup cost about $2,500 in legal fees, but it's potentially saving us over $50k in taxes compared to the $1 sale route. Sometimes the "simple" solution ends up being the most expensive one tax-wise.

Just want to add another consideration that came up when my family was dealing with this exact situation - the state you're in can make a huge difference in the tax implications. Some states don't have capital gains taxes, while others can add a significant burden on top of federal taxes. We're in California, and the state capital gains tax would have added another 13.3% to our tax bill if we had done the $1 sale route. That alone was enough to make the revocable trust approach even more attractive for us. Also, something I learned from our estate attorney is that the $1 sale can actually complicate things if your parents ever need to qualify for veterans benefits or other income-based programs later. Since they technically "sold" an asset for below market value, it can be viewed as an improper transfer for benefits purposes. The more I researched it, the more the $1 sale seemed like a solution that creates more problems than it solves, at least in our family's situation. The stepped-up basis at inheritance really is a powerful tax benefit that's hard to replicate with lifetime transfers.

After reading through all these responses, I'm really grateful for everyone sharing their experiences. This is clearly a much more complex situation than I initially realized, and the tax implications are significant. The consensus seems pretty clear that the $1 sale approach could end up costing us a lot more in taxes than we'd save, especially with the loss of stepped-up basis at inheritance. The examples people shared - like potentially owing capital gains on $365k or losing $120k in tax benefits - are eye-opening. I'm particularly interested in the revocable living trust option that a few people mentioned. It sounds like it gives us the control and flexibility we want while preserving the tax advantages. The idea that my parents could maintain full control during their lifetime but I'd still get the stepped-up basis benefit seems like the best of both worlds. I think our next step is going to be consulting with an estate planning attorney who can run the numbers for our specific situation and explain the trust option in more detail. Based on what everyone has shared, the upfront legal costs seem minimal compared to the potential tax savings. Thanks again for all the detailed responses - this community has been incredibly helpful in understanding what we're really looking at here.