Can I Legally Sell My House for a Dollar?

Thinking about selling your house for just one dollar? It sounds like a clever idea, right? You might want to help a family member. Or maybe you think it's a smart way to avoid taxes. Before you put a $1 price tag on your home, you need to understand the rules. The short answer is yes, you can legally sell your house for a dollar. But the process is not as simple as it sounds. This choice has big financial and legal consequences. Let's break down what it really means to sell a house for a dollar.

The $1 Sale: A Gift in Disguise

When you sell a house for a dollar, the Internal Revenue Service (IRS) pays close attention. They see the sale as a gift, not a regular transaction. For example, if your home’s fair market value is $300,000, and you sell it for $1, the IRS considers the remaining $299,999 a gift to the buyer. This is where the gift tax comes into play.

Every year, you can give a certain amount of money to someone without paying taxes. This is called the annual gift tax exclusion. For 2024, this amount is $18,000 per person. If you're married, you and your spouse can gift up to $36,000. If the value of your gift goes over this amount, you must file a gift tax return.

You might not have to pay the gift tax right away. The excess amount can count against your lifetime gift tax exemption. This is the total amount you can give away in your lifetime without paying gift tax. In 2024, the lifetime exemption is a hefty $13.61 million per individual. While most people won't exceed this limit, selling a house for a dollar will reduce your available exemption.

Big Problems for the Buyer

Selling a house for a dollar can create a huge tax problem for the person who buys it. The buyer's cost basis in the property becomes just one dollar. The cost basis is what you paid for an asset. When the buyer decides to sell the house later, they will pay capital gains tax on the difference between the sale price and their original cost basis.

Let's look at an example. Imagine you sell your $300,000 house to your child for $1. Your child's cost basis is $1. If they sell the house a few years later for $350,000, their taxable gain will be $349,999. They will owe a lot of money in capital gains taxes. This could be a much larger tax bill than if they had inherited the house. When you inherit a property, the cost basis is "stepped-up" to the fair market value at the time of the owner's death. This can save a lot of money in capital gains taxes.

Mortgage and Other Hurdles

Do you still have a mortgage on your house? If so, selling it for a dollar is probably not an option. Your lender has a "due-on-sale" clause in your mortgage agreement. This means you must pay off the entire mortgage balance when you sell the property. Since a one-dollar sale won't cover the mortgage, your lender will not approve the sale.

You also need to think about other legal issues. A formal sales contract is a must, even for a dollar. This legal document proves the transfer of ownership. You should also get a professional appraisal to know the home's true fair market value for tax purposes. This helps you correctly report the gift to the IRS.

Are There Better Options?

Selling your house for a dollar is usually not the best way to transfer property. Here are some better alternatives:

• Gifting the Property: You can directly gift the property to your loved one. This has the same gift tax implications as a $1 sale, but it is a more straightforward process.

• Selling at Fair Market Value: You can sell the house at its fair market value and then gift the money to your family member. This gives them the cash to use as they wish.

• Using a Trust: You can place your home in a trust. This gives you more control over the property and can help your family avoid probate court.

For more information on selling your property, check out this helpful article on How to Sell Home Fast and For Top Dollar.

When Does a $1 Sale Make Sense?

In some rare cases, selling a house for a dollar can be a useful strategy. Some cities with many vacant homes have sold properties for a dollar to encourage people to move in and fix them up. Also, real estate investors might use a $1 sale to transfer properties between business entities. These situations are not common for the average homeowner.

The Takeaway

So, can you legally sell your house for a dollar? Yes, but it's a complicated process with serious tax consequences for both you and the buyer. It's rarely the best choice. At Sell My House Fast Local, we can help you understand all your options. As a subsidiary of Brickfront Properties and Construction, we have the experience to guide you. We can help you find the best way to sell your house, whether it's to a family member or on the open market. Contact Sell My House Fast Local today for a free, no-obligation consultation.