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Can my parents sell me their house for less than it's worth?

Selling at lower than fair market value means that you will have to report the gift to the IRS. Under IRS rules, you can provide a gift of up to $15,000 as a gift of equity before you have to pay gift taxes. As the seller and gift-giver, you must pay the gift tax.

quickenloans.com - Steps To Selling A House To A Family Member - Quicken Loans

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Why Does The Government Care About Sales To Family Members?

The IRS is not a fan of non-arm’s length transactions because they provide an opportunity for fraud or tax avoidance, but the government as a whole has interests in having the power to review these sales that go beyond taxes. When done correctly, however, a non-arm’s length transaction is perfectly legal.

Limits On Gifts Of Equity

You can choose from two primary options for setting a price when selling to family members: you can make a gift of equity or you can charge your family member fair market value for your home. A “gift of equity” means that you sell property to your family member for a lower amount than the current market value. The gift of equity applies to the difference between the current market value and the amount for which you sell your home. Selling at lower than fair market value means that you will have to report the gift to the IRS. Under IRS rules, you can provide a gift of up to $15,000 as a gift of equity before you have to pay gift taxes. As the seller and gift-giver, you must pay the gift tax. You can easily identify a few drawbacks to gifting a home to a family member, including legal fees (a gift of equity requires a contract) and having to pay possible capital gains taxes.

Negative Implications For Local Real Estate Values

Local governments depend on taxes from real estate, and if the value of the property within its borders is artificially depressed, it can reduce their property tax revenue. Governments frown on reduced revenues. For example, let's say your home is worth $500,000 but you sell it to your child for $300,000. Let's say that after they move in, your former next-door neighbors want to sell their home. They might not get their full asking price of $500,000 because the real estate comps show that your home sold for substantially less. If homes sell for less, the local government receives less in taxes.

Medicaid Fraud

Homeowners engaging in elder planning may be trying to avoid paying for nursing home costs by “selling” their property to a child – without planning to move or change their relationship to the home. The thinking is that by transferring ownership, the home will be safe. However, most states have 5-year look-back periods. If the homeowner gifts or sells the home below market value and they apply for Medicaid within 5 years after the sale, the state may penalize them and make them ineligible for long-term care Medicaid for a period of time.

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What is illegal money transfer?

fbi.gov - Money Mules - FBI

What Is a Money Mule?

A money mule is someone who transfers or moves illegally acquired money on behalf of someone else. Criminals recruit money mules to help launder proceeds derived from online scams and frauds or crimes like human trafficking and drug trafficking. Money mules add layers of distance between crime victims and criminals, which makes it harder for law enforcement to accurately trace money trails. Money mules can move funds in various ways, including through bank accounts, cashier’s checks, virtual currency, prepaid debit cards, or money service businesses. Some money mules know they are supporting criminal enterprises; others are unaware that they are helping criminals profit. Money mules often receive a commission for their service, or they might provide assistance because they believe they have a trusting or romantic relationship with the individual who is asking for help. If you are moving money at the direction of another person, you may be serving as a money mule.

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