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What Does it Mean when a House Sells for $1?
For most people, having their own home is one of the biggest things a person could aspire to and is typically a hallmark of success. However, housing demand in the wake of the pandemic sent home prices soaring-- up to 7 times the current average annual income as of June 2022 in the United States.
Housing is becoming out of reach for many people, especially millennials, or those born between 1980 and 2000.
In light of the above data, perhaps you're one of those parents who'd like to help out their child into owning their first piece of real estate. This could be achieved by selling them a home for an outrageously low price.
But how low of a price can you go?...
Can You Sell a House for $1?
The short answer is yes, you can sell a house for $1. But, you'll find that doing so can have a lot of tax implications. So, we put together this guide to give you an understanding of the process and what you can do to mitigate the tax hit.
What is Nominal Consideration & Valuable Consideration?
When selling a house, you transfer property ownership to another person in exchange for something else of value--usually money, and this is called "consideration". This equivalent exchange makes it a valid sale in the eyes of the law.
Valuable Consideration
In a usual home sales process, the buyer pays you, the seller, what is considered valuable consideration. The sales price you close on typically hews close to the current market value of the house. No one is disadvantaged in this this type of transaction since each party receives whatever is due to them. An example of this is selling as-is to a family member.
Nominal Consideration
However, when selling a house to your child or other family members for a dollar, this is considered nominal consideration. This is because a dollar is hardly reflective of a home's fair market value. In this case where one party is clearly receiving far less than what a house is really worth, you should know that you're not doing something illegal; however, the Internal Revenue Service (IRS) will want to look more closely at the transaction.
Specifically, how much taxes they could collect on the sale.
Do You Have to Pay Taxes when Selling a House to a Family Member for $1?
You may think that you'll be able to avoid giving the IRS a piece of the action when you sell property to your child for a dollar or other nominal amounts. But unfortunately, that is not the case. If your house was sold to your child for far below its fair market value, the IRS would consider the deal as a gift, and you'd be slapped with a gift tax.
Gift Tax
The gift tax is a tax on unbalanced property transfers where one receives far less consideration than the other.
The good news is, there is an annual gift tax exemption of $16,000 (when filing singly) and $32,000 (when filing jointly with your spouse). The exemption is applied per person, meaning, if your child is married, you can give each half of the couple up to $32,000 in cash or other valuable consideration worth the same amount without tax consequences. The gift tax rate, which ranges from 18%-40%, will be applied on the remaining amount above the exemption.
A gift tax is paid on top of the federal tax rate. Currently, Florida, California, Wisconsin, and Virginia don't have a gift tax.
You can either choose to pay taxes on the year you make the gift, or roll it over into your lifetime estate tax exemption.
Estate Tax
Each person can give away up to a certain amount in their lifetime without having to pay taxes on it. This tax shield extends even after death, which is why it is called a Federal estate tax exemption. This means that when a person dies, the value of all their assets will be computed and any amount in excess will be subject to estate taxes.
For 2022, the exemption is up to $12.06 million, which will revert back to $5.49 million in 2025 unless Congress makes it permanent.
Capital Gains Tax
You may be wondering if you sold (or rather, gifted) your house to your child for a dollar, what happens to capital gains? Surely, your property has appreciated (or depreciated) in the years since you bought it? Or maybe you've added improvements, further raising its value?
Well, what happens is that your child assumes your tax basis, or the original cost of the property including the value of all the improvements you have made to it. Therefore, if you acquired the property for $50,000 twenty years ago, and made $50,000 worth of improvements, your child's tax basis will be $100,000 even though the current fair market value is assessed to be $400,000.
What this means is, if your child decides to sell the property at fair market value, the computation for capital gains tax purposes will be up to 20% of the profit ($300,000).
Tax Implications of Selling a House for One Dollar
Example: Selling to Family Members for $1
Let's say you have a home you acquired for $30,000 thirty years ago. Due to incredible real estate property appreciation, it is now worth a whopping $400,000. So, you and your spouse decide to sell or transfer it to a married family member for a sale price of $1. The Internal Revenue Service will then look at the transfer as a $399,999 gift.
How much in taxes do you need to pay assuming the highest gift tax rate of 40% is applicable to you?
Taxable amount = Fair market value - payment - exemptions
Taxable amount = $400,000 - $1 - $64,000
Taxable amount = $335,999
Gift tax = Taxable amount * 40%
Gift tax = $134,399.60
While the tax bill may seem staggering, you have a choice to deduct it from your lifetime exemption, so you don't have to pay the price now.
Remaining lifetime estate tax exemption = $12,060,000 - 134,999.60
Remaining exemption = $11,925,000.40
Frequently Asked Questions: A House for an Actual Sale Price of $1
Do You Have to Consult a Tax Attorney?
It is important to meet with a tax attorney before you close the sale of your one dollar house to a family member. This will help you find out how much exactly you'd need to pay in taxes. If the tax bill is too high for you, they can help you minimize the impact.
Can You Transfer Property without Consideration?
Yes, many real estate transfers are made without consideration to the grantor. Simply speaking, ownership of the property passes to another individual (grantee) with the grantor receiving nothing in return. This is performed through a property deed.
Examples of no consideration property deeds are as follows:
- Transfer between spouses
- Transfers from the estate of a deceased person
- Transfers between family members
- Transfers made after divorce has been finalized
If a property is given away for free to a family member, the grantor will usually use a quit claim deed to transfer the title.
What are Other Reasons in Selling a House for $1?
Property is a Giant Money Sink
It's also possible that a property is extremely dilapidated and will require huge amounts of money in order to bring it up to code and make it livable again. Not to mention the thousands of dollars it probably owes in property taxes and other liens levied against it.
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.
HUD dollar homes initiative
The Department of Housing and Urban Development (HUD) acquires foreclosed houses or those that owe a lot in back taxes and sells these to local governments for $1 in order to provide housing for low to moderate income families.
The local governments will then fix up the properties and decide the sale price which is easily accessible to those who may need it the most.
Blighted areas
There are areas in the United States where the real estate and job markets have tanked so much that people have abandoned their houses and moved elsewhere. In these neighborhoods you'll see lots of rundown, vacant homes and the pervading atmosphere of desolation.
To encourage people to move back, governments provide housing opportunities such as the Dollar House Initiative in Gary, Indiana. This is where buyers could get a house for a dollar! There are a few requirements that must be met, like a minimum family income of $35,000 and the commitment to stay and rehabilitate the property for five years at least.
Closing Thoughts: Selling a House for $1
While you can definitely sell your house for the price of a dollar, to family members or otherwise, there are a lot of expenses which may not be readily apparent. Gift, estate, and capital gains taxes can be a bit tricky to navigate, so it would be worth it to meet with a lawyer who can guide you in the nuances of the process.
On the other hand, if you're stuck with a property that is a gaping money pit and you're thinking you have no other choice but to sell it for a dollar, why not consider selling to us instead? Here at Sell My House Fast, we buy homes in absolutely any condition!
We can provide you the best deal with a cash offer from our network of cash buyers from across the United States. You don't have to deal with the hassle of working with a real estate agent and their fees!
Interested? Fill out our form so we can get started. If you have any questions, you can reach us at (844) 207-0788 and we'd love to hear from you!
