The biggest real estate decisions in Texas get made at a kitchen table, not in a lawyer’s office. A parent wants to sell to a grown child at a price the kid can afford. Maybe a landlord is worn out, or a sibling has an estate to settle fast. Good intentions, real urgency, then a tax bill nobody saw coming.
Selling a home below market value is legal in the Lone Star State. What trips people up is everything that comes after, because the IRS pays close attention to the gap between what a house is worth and what it sold for.
Why Selling Below Market Value Changes Your Tax Picture
A retired couple called me about a small brick house in Pflugerville, northeast of Austin. They’d rented it out for years and were finished being landlords. Their nephew loved the old place. Sell it cheap, skip the hassle, and help the family. Nobody had told them that one simple transfer would touch gift tax rules, adjusted cost basis, and the nephew’s future capital gains.
Run the numbers and you’ll see why it matters. Take a $350,000 Texas home. A 10% family discount is $35,000, nearly double the annual gift exclusion for one giver. Stretch that discount to 15%, and it reaches $52,500, which means a Form 709 filing even when no tax is owed.
What Is Fair Market Value, and How Is It Determined in Texas?
An elderly seller sat across from me in a two-bedroom in Mesquite, east of Dallas. She was certain her home was worth what she’d paid decades ago. Her county appraisal notice said otherwise.
Fair market value is the price a willing buyer would pay a willing seller, with neither one under pressure and both knowing the facts. That definition holds for federal tax and Texas property tax alike. Under Texas Tax Code 23.01, all taxable property is appraised at its market value as of January 1 each year.
County appraisal districts assign those values, which set your taxable assessment. The county figure is one benchmark, not the only one the IRS respects. A licensed appraisal ordered for your sale carries the most weight, and every Texas appraiser has to hold a license from the Texas Appraiser Licensing and Certification Board. An agent’s market analysis can back you up, though it’s thin cover once gift tax is in play.
Your sale price cuts both ways with the county. The district could throw it out as non-arm’s-length or use that same number to argue the home is worth less than the assessed value. Calling your appraisal district before closing costs you nothing.
What Does It Legally Mean to Sell a Home Below Market Value?
Can you sell your house for whatever price you and the buyer shake on?
Yes, and Texas law sets no minimum price for a private home sale. The federal tax code doesn’t grade on that curve, though. Selling below fair market value raises questions a normal sale never does. When a home sells at a discount, the IRS can treat part of the gap as a gift, and the reporting lands on the seller.
That holds whether the buyer is a stranger who got lucky, a friend, or your own adult child. Any transfer of value without fair payment is a gift.
The IRS runs an arm’s-length test over all of this. Unrelated parties bargaining freely are treated as a market sale, and the price is presumed fair. A sale between relatives, or between a seller and a business partner, gets a much closer look. Treasury regulations spell out how a bargain sale gets split into part sale and part gift, so this isn’t the IRS improvising.
Courts have upheld the IRS’s power to recast such a sale as part sale, part gift, and the Tax Court has done it where the seller kept no record of the value used at closing.
Selling below market doesn’t mean you lost money in the IRS’s eyes. Your gain still runs from your adjusted cost basis, not from what you received.
What Is a Gift of Equity, and How Does It Work in Texas?
Sellers often figure that calling the discount a “gift of equity” tidies up the paperwork. It doesn’t.
A gift of equity is the difference between fair market value and what the buyer pays. Sell to your daughter for $80,000 below appraised value, and that $80,000 is the gift, with the standard gift rules riding along on top of it.
Fannie Mae and Freddie Mac both accept a gift of equity from family, but they want a signed gift letter and a settlement statement showing the credit. Skip either one and the mortgage can come apart later. FHA allows equity gifts too, and because it asks for only 3.5% down, a modest gift can cover the whole down payment.
Even a family sale needs a real appraisal, a written contract, and a title company. Skipping any of the three because “it’s just family” is where these sales go sideways. With no appraisal, the gift amount stays a guess. With no contract, the terms belong to whoever remembers the talk differently. No title company means a deed error nobody catches until the next sale. That’s usually a quitclaim, so read up on whether you can sell your house with a quitclaim deed in Texas before anyone signs one.
Gift Limits for Texas Family Sales
The IRS doesn’t make you pay gift tax on every below-market family sale. What matters is where the reporting line sits.
These rules live in Internal Revenue Code Sections 2503 and 2505. The current numbers look like this.
| Item | 2026 amount | What it does |
|---|---|---|
| Annual gift exclusion | $19,000 per recipient | Discounts at or under this need no Form 709. |
| Married couple, gift splitting | $38,000 per recipient | The split election itself requires a Form 709. |
| Two givers, two recipients | $76,000 | Four separate exclusions in one year |
| Lifetime gift and estate exemption | $15 million per person | Excess gifts chip away at this, and tax is rarely owed. |
| 0% long-term capital gains ceiling | $49,450 single, $98,900 joint | Taxable income under this means no federal tax on the gain. |
| Net Investment Income Tax trigger | $200,000 single, $250,000 joint | Adds 3.8% on investment income above the line. |
A discount at or under the annual gift exclusion needs no filing at all. Above it, you file, and the excess eats into your lifetime exemption. If the home is community property, each spouse gifts their half, and no split election is needed. Ask your CPA which version fits the way your title reads.
Very few Texans ever write the IRS a gift tax check, because the exemption runs that deep. Paperwork is the real cost. Missing the filing isn’t fraud, though it leaves an open item that complicates estate planning later.
What Happens When a Texas Home Sells Below Fair Market Value?
Two tax clocks start the moment a Texas home closes below market. First comes the seller’s gift clock. Second is the capital gains clock, running for you now and your buyer later. Most sellers watch the first and miss the second.
Your side is simple math. Fair market value at closing, minus the sale price, equals the gift. Subtract whatever gift exclusions apply. Anything left goes on Form 709 and reduces your lifetime exemption. If nothing’s left, no form is due.
The buyer’s surprise shows up much later. A below-market sale doesn’t hand them a clean basis at the price they paid. Under Treasury Reg. 1.1015-4, a part-sale, part-gift gives the buyer the greater of what they paid or your adjusted basis. In a discounted family sale, your basis almost always wins.
Property tax runs on its own clock. A price change later in the year doesn’t register until the next tax year. A November sale won’t drop your buyer’s assessment that year. The district weighs your price as one data point at the next reappraisal and may set it aside if the sale looks non-arm’s-length.
Capital Gains and Losses When You Sell Below Market Value in Texas
For a long time I assumed that selling below market cut a seller’s capital gains. Lower price, lower gain, right? The IRS doesn’t read it that way.
Selling below market doesn’t erase capital gains tax. Basis is the starting point, not price. Your gain measures the sale price against your adjusted cost basis, and the discount never enters that math. Buy in Katy for $180,000 fifteen years back, put $30,000 into the place, then sell to a relative for $300,000. Against a $210,000 basis, your gain is $90,000. The discount itself gets handled on the gift side of the ledger.
Adjusted basis is the piece that sellers most often get wrong. Capital improvements raise it, so a new roof, an addition, a kitchen remodel, and a central HVAC swap all count. Routine repairs don’t. Sellers in The Woodlands or Southlake who’ve upgraded for twenty years usually have a higher basis than they’d guess.
Losses split based on how the home was used. A loss on a personal residence is never deductible. A loss on rental or investment property often is, since you held it for profit. The catch is who’s buying. Sell a rental below basis to a relative, and the related-party rules under IRC Section 267 can disallow the loss in full for good. Talk to a CPA before you get anywhere near closing.
What Capital Gains Rules Apply to the Buyer’s Adjusted Basis?
This is where the long-term money sits for your buyer.
Someone who takes a home as a gift, or well below value, doesn’t get a fresh slate at the price they paid. Their basis for a gain starts with your adjusted basis.
A parent buys a Frisco home for $200,000, puts $50,000 into it over two decades, and sells to a child for $150,000 when it’s worth $450,000. The child’s basis for a future gain is $250,000, matching the parent’s adjusted basis, because that beats the $150,000 actually paid. Sell five years later for $500,000, and the child’s taxable gain is $250,000, not the $350,000 a reset basis would have produced. The rule only helps because the child paid less than the parent’s basis. Pay more than the seller’s basis, and your price becomes your basis.
Another rule kicks in when fair market value at transfer sits below the seller’s adjusted basis. The basis for this purpose is again the seller’s adjusted basis. The basis for a loss is the fair market value at transfer. Sell later at a price between the two, and you get neither a reportable gain nor a deductible loss.
Buyers, keep records: the seller’s original price, every capital improvement, any depreciation taken during rental use, and any gift tax paid. When the receipts are long gone, county permit records can sometimes rebuild the history.
Texas and Federal Taxes on a Home Sale
Some sellers push back here. Texas has no income tax, so why worry about taxes at all?
Fair question. Texas has no capital gains tax and no state income tax, and the state constitution bans one. Your state rate on real estate gains is zero, a real edge over California, New York, and most coastal markets.
No state tax isn’t no tax, though. IRC Section 121 excludes up to $250,000 of gain single or $500,000 joint on your main home. You need to have owned and lived in it for at least 24 of the past 60 months. Gain above that is taxed at 0%, 15%, or 20% for 2026.
The brackets run on taxable income, not gross. The 15% rate runs to $545,500 single and $613,700 joint, and 20% applies above that. A retired seller on Social Security with modest other income can land the entire gain in the 0% bracket. Timing can move which bracket you hit, so make that a CPA call before you set a closing date. Higher earners also pick up the 3.8% Net Investment Income Tax, which isn’t labeled a capital gains tax and catches people by surprise on the same sale. The same layers apply to any Texas sale, and the breakdown of what taxes you pay when you sell a house in Irving, TX walks through each one.
On property tax, the statewide average effective rate sits near 1.40%, and combined rates in higher-tax metro counties often run 1.6% to 2.5%. Those taxes don’t vanish at closing. You owe your prorated share through the closing date, and the buyer picks it up from there, figured to the day.
Do You Have to Report a Below-Market Home Sale to the IRS?
That depends on the size of the discount. The IRS wants Form 709 if you give one person more than $19,000 in 2026, elect gift splitting with your spouse, gift a future interest at any value, or make a generation-skipping transfer. A below-market sale transfers value, so the part above the exclusion is a reportable gift.
Filing usually isn’t paying. The form records that the excess reduced your lifetime exemption, and with $15 million to work through, most Texas sellers owe nothing. The duty is still real. Penalties on a late or missing return climb to 25% of unpaid gift tax.
Form 709 stands on its own and never gets attached to your Form 1040. It’s due April 15 of the year after the gift, and an extension on your 1040 covers it too.
On the gains side, report any taxable amount above the Section 121 exclusion on Schedule D and Form 8949. When the whole gain fits inside the exclusion, you often don’t report the sale at all.
Keep a file with these:
- A licensed appraisal dated close to the sale, establishing the fair market value you used
- The signed contract showing the actual sale price
- The closing disclosure, showing any credits, concessions, or seller contributions
- The gift letter, if the buyer’s lender required one
- Basis records for the buyer: your original closing statement, improvement receipts, and any depreciation claimed on rental use
If you’re working with Ready House Buyer on a quick below-market sale, ask upfront whether it will be structured as an arm’s-length sale or a family gift of equity. That one label drives everything that follows on the IRS side.
Depreciation gets its own treatment. Gain tied to prior depreciation is taxed at up to 25% under Section 1250, and that recapture applies even inside the Section 121 limits. A landlord who rented out a Lubbock property for eight years carries recapture income no matter the price.
How to Sell Below Market Value the Right Way in Texas
A seller in Cedar Park had already shaken hands with his nephew on a price. He got it from a neighbor’s house sale two years earlier. The appraisal came back $60,000 higher. Closing at the handshake figure would have put a $60,000 gift on a Form 709 and reduced his lifetime exemption. Loose pricing off stale comps is exactly the gap the IRS finds in family transfers.
Get a licensed appraisal before you set the price. Not after, and not the week of closing. Before. It fixes the fair market value, which anchors the gift amount, the capital gain, and your filing threshold. Without one, you’re guessing.
Hire a CPA who works in real estate, not a general tax preparer. Gift tax, capital gains, Section 121, and Texas property tax interact in ways a generalist misses. Ask straight out whether they’ve handled non-arm’s-length sales.
Plan the timing for when the discount is large. Nothing requires the whole gift to land in one year. A seller giving a child a $60,000 discount could close in December, then gift the overage in January, spreading it across two exclusions.
Structure the sale formally even when it feels silly. Use a title company, sign a real contract, and close through escrow. Courts and the IRS both look kindly on a transfer that followed the steps of an ordinary sale. If a mortgage is still on the property, get lender approval first, since some loans carry due-on-sale clauses that a discounted family transfer can trigger. If the lender won’t budge, selling at full market value to cash home buyers in Austin takes the gift tax question off the table.
Hang onto every document for at least seven years. The audit window is three years, stretches to six if more than 25% of gross income gets left off a return, and never closes on fraud.
Speed matters when a gift has to land in a specific tax year. We buy houses in Texas for cash, on a firm close date, so you can plan the gift year around a known number. No agent fees, no repair holdups, and no buyer loans falling through. Reach out to the Ready House Buyer team if a December close solves your timing problem.
As cash home buyers in Dallas, cash home buyers in Frisco, and across Texas, we make a clear cash offer and close on a date that fits. After closing, please keep the closing disclosure, the appraisal, the gift letter, and any filed forms boxed separately and labeled.
Frequently Asked Questions
Am I Allowed to Sell My House for Less Than Market Value?
Yes. You can sell for any price you and a buyer agree on, and Texas law sets no minimum. The catch is that the IRS may treat the gap between your price and fair market value as a taxable gift, which triggers reporting. Get an appraisal first so you know what “below market” means in dollars.
How Do I Avoid Capital Gains Tax on Home Sales in Texas?
Texas collects no state capital gains tax, so your focus is entirely federal. If it’s your main home and you lived there at least two of the past five years, Section 121 excludes up to $250,000 of gain for single filers or $500,000 for joint filers. Gain above that is taxed at 0%, 15%, or 20% depending on income. Timing the sale for a lower-income year can drop you into a lower bracket.
Can I Sell My House to My Daughter at Below Market Value?
Yes, and it happens all the time in Texas. The discount counts as a gift from you to her. For 2026, gifts up to $19,000 per recipient fall under the annual exclusion and need no reporting. Above that you file Form 709, though tax usually isn’t owed thanks to the lifetime exemption. Her basis will be the greater of what she paid or your adjusted basis, never a reset to the sale price.
If you want to talk through your options, whether it’s a family transfer, a quick cash sale, or something in between, our team is here.
