Selling a house for much lower than market value?

[bacon333]

I posted this a while back but can't seem to find the thread.

Person A wants to sell Person B a house that is worth $1 million for $200,000.

Assuming there's no illegal activity with this transaction and Person A really just wants to sell it for $200k (because he/she bought it for $170k initially), would the government deem this a gift? Is this considered tax evasion? Can this transaction happen with no problems?

 

[jmcoreymv]

Person A can sell it to Person B for 1M, then give me the extra $800k.

 

[Mill]

Why would someone want to sell a house valued at that for cheaper? One of two reasons... one because they are evading taxes, or two because they are wanting to gift to someone the excess equity. I would think you could get away with a hundred or even two hundred thousand on a house of that price, but not what you are speaking of.

Perhaps it is legal. It just doesn't seem like it would be to me.

 

[Slew Foot]

Usually this happens when person A and B are family members or what not. I remember hearing something about tax laws and such but I dont remember.

 

[Vic]

It's called a non-arm's length transaction, and it's completely legal. However, there WILL be tax issues (and a tax professional should be consulted) and (if financing is required) many lenders will refuse to touch the deal.

 

[SSSnail]

Legally, you can sell it for a dollar.

 

[D1gger]

Originally posted by: Vic
It's called a non-arm's length transaction, and it's completely legal. However, there WILL be tax issues (and a tax professional should be consulted) and (if financing is required) many lenders will refuse to touch the deal.

QFT. The OP better get some professional advise before starting this transaction.

 

[bacon333]

Who can I speak to about this? Real estate brokers/agents tell me different things. A few say it doesn't matter how much you sell it for since it's your private property and others say it would be considered evading taxes. Could an accountant help?

 

[KevinH]

Originally posted by: bacon333
Who can I speak to about this? Real estate brokers/agents tell me different things. A few say it doesn't matter how much you sell it for since it's your private property and others say it would be considered evading taxes. Could an accountant help?

Yes. Speak with a tax professional.

 

[FoBoT]

you MUST get a lawyer and/or tax accountant involved, ATOT isn't qualified to answer

well, except for the lawyers and tax accountants

 

[chambersc]

Tax law is looking more and more appealing.

 

[BUTCH1]

No matter what amount you sell it for the county or city tax appraiser will tax
the new owner on the actual appraised value, not the sale price. If I sold my 2005
auto to my neighbor for $100 you can bet the DMV will charge him sales tax (FL)
on the blue book value of the car NOT the fact he only paid $100 for it.......

 

[Greenman]

Originally posted by: BUTCH1
No matter what amount you sell it for the county or city tax appraiser will tax
the new owner on the actual appraised value, not the sale price. If I sold my 2005
auto to my neighbor for $100 you can bet the DMV will charge him sales tax (FL)
on the blue book value of the car NOT the fact he only paid $100 for it.......

In CA a house is taxed based on the purchase price. I don't know how they would handle a house selling for 20% of market value.

 

[bennylong]

If you sell below market value, you might get dinged with a gift tax as the IRS might consider it a gift

 

[bennylong]

http://realtytimes.com/rtnews/rtcpages/20020617_famile.htm

 

[CTrain]

Originally posted by: BUTCH1
No matter what amount you sell it for the county or city tax appraiser will tax
the new owner on the actual appraised value, not the sale price. If I sold my 2005
auto to my neighbor for $100 you can bet the DMV will charge him sales tax (FL)
on the blue book value of the car NOT the fact he only paid $100 for it.......

Actually you are INCORRECT.
I bought 2 cars in 2006 and the same exact thing happenned.

I bought a car from a friend of mine.
I got the title and registered it as a $500 purchase. Book value $4500.
A month later, they sent me a letter asking me to verify the price or else I would have to pay the penalty.

Theres 3 ways to verify the price:

1) Have both the seller and purchaser fill out the form they sent me stating the price of the car. Easiest way.
2) A copy of the bill of sale notarized
3) If you can't contact the seller, you need to fill out the form and state the condition of the car.

I registered a second also way under book value and a month later, they sent me the same letter.
Both times I use the option #1 and that was it.
This is in Florida.

 

[RbSX]

Originally posted by: Mill
Why would someone want to sell a house valued at that for cheaper? One of two reasons... one because they are evading taxes, or two because they are wanting to gift to someone the excess equity. I would think you could get away with a hundred or even two hundred thousand on a house of that price, but not what you are speaking of.

Perhaps it is legal. It just doesn't seem like it would be to me.

This isn't necessarily true, if I recall theres a special clause for gifting things to family members.

Just like if your parents buy you a car and keep it in their name, when they transfer the title to you they can give it for 0$ and no taxes will be paid.

I would explore the tax laws for gifting.

 

[CTrain]

OK, I will give you a real life example.

I purchased a house from my brother in late 2005.

-He owed very little on the house.
-When I was going through the lending process, appraised value was $210K at the time.
-The county had the house assested at around $138K.
-The actuall bill of sale on the house was for $140K. (this is not what I paid for the house though).

So as you can see, the sale price was about 66% of the appraised value and it went through just fine.
I had to pay property tax this past year(2006) and it was based on a value of $146K(I could have fill out some paper work and had the value at $140K but I was lazy).

-Selling the house at a lower price had no affect on my brother as he owned the house for more than 2 yrs and any amount of gain would have been tax free.
-As for me, I paid property tax on a much lower value.
And in 9 months, I can sell it for whatever I want and all the gains will be tax free.

Going from $1mil to $200K is extreme.
What me and my brother did was just fine.

 

[BUTCH1]

Originally posted by: CTrain

Originally posted by: BUTCH1
No matter what amount you sell it for the county or city tax appraiser will tax
the new owner on the actual appraised value, not the sale price. If I sold my 2005
auto to my neighbor for $100 you can bet the DMV will charge him sales tax (FL)
on the blue book value of the car NOT the fact he only paid $100 for it.......

Actually you are INCORRECT.
I bought 2 cars in 2006 and the same exact thing happenned.

I bought a car from a friend of mine.
I got the title and registered it as a $500 purchase. Book value $4500.
A month later, they sent me a letter asking me to verify the price or else I would have to pay the penalty.

Theres 3 ways to verify the price:

1) Have both the seller and purchaser fill out the form they sent me stating the price of the car. Easiest way.
2) A copy of the bill of sale notarized
3) If you can't contact the seller, you need to fill out the form and state the condition of the car.

I registered a second also way under book value and a month later, they sent me the same letter.
Both times I use the option #1 and that was it.
This is in Florida.

How it's done may vary county to county, I live in voulsia and they use the " by the book" value, I know a few people who tried to use bill of sale but said it didn't work.
I'll have to look it up to see if it's statel law or varies by county.

 

[Scarpozzi]

I hate that the gubment regulates sales like that. But yeah, consult with an expert...particularly, one from your area. You can probably get free advice by speaking with the selling agent and getting in touch with their title office attorney. They would probably answer a question like that over the phone.

 

[flot]

You want to talk to a good accountant, and/or a real estate attorney.

98% of all RE Agents, unfortunately, just aren't qualified to answer this type of question.

 

[PrinceofWands]

Not everyone views a house as an investment. For many of us it's a home, the value of which is purely emotional. We've sold 3 houses out of the family after deaths and moves, and in all 3 cases we asked for far less than market (though nothing approaching the numbers you're talking about). We don't care about the money, we care about who the home is going to and about not exploiting for monetary gain. We've never experienced any problems with the sales. Of course, in all three cases the homes were owned outright, so I'm not sure if that makes a difference or not. In general I don't know or do what's legal anyway, just what's right.

 

[dullard]

As for the house, I believe you might be subjected to the gift tax laws. But I'm no tax expert. Try the tax thread. as there are experts in there.

Originally posted by: CTrain
Actually you are INCORRECT....This is in Florida.

Actually, arguing over something that is different in every state and calling that person with different tax laws "incorrect" is stupid.

Laws vary from state to state. Thus what he said may very well be correct for his state. In my state, NE, for cars there are two taxes. (1) Sales tax. The sales tax, even for used cars there is sales tax, is charged in the location where the buyer lives. If the buyer buys an expensive car for very little, then the sales tax is very little. I've done this multiple times with my family, selling cars back and forth for little to no money. (2) Property tax. Property tax is charged each year to get the license plates. Property tax is based on the AVERAGE selling price for a vehicle of that make, model, and year. Thus, the property tax does NOT change with the price that you bought/sold the car.

So, in NE, if you buy a mint condition car worth $10,000 for $1, you pay sales tax on $1 and property tax on ~$8000 because the average car is not in mint condition.

Likewise if you buy that same car but it has been damaged severely so it is only worth $5000 and pay only $1, you pay sales tax on $1 and property tax on ~$8000.

 

[bacon333]

Here's more detail on the transaction:

1. State of transaction: California
2. According to Zillow the apartment complex is worth $1 million.
3. Person A and Person B are relatives.
4. Gifting is not an option.

Person A lost her job and just needs to sell off the apartment. She chooses to sell it to person B, who has been living in the apartment for over 7 years.

Is there some kind of "stress sale" that would make this possible?

Also, when you go to zillow.com to get an estimate on a apartment complex, how accurate are those values? I heard that the market value could actually be more than $200k lower than what is represented there.

I will speak to a tax professional soon regarding this issue but it wouldn't hurt to hear from your experiences.

 

[dullard]

Zillow is still in beta form. Its formulas are not final yet, and it often uses outdated information. Plus, a formula is never a perfect substitute for a real valuation or a real sale. There are little things that formulas miss. For example, last I looked, Zillow doesn't account for building condition. A high quality renovation isn't given any more money or a dilapidated dump is still given high prices. Finally, Zillow's price often fluctuate by 100% over the course of a year. My own house supposedly was worth $100k on Zillow, then next month $200k, next month $300k, and now back to the $180k that it should be. There is too much fluctuation in Zillow's algorithm; house prices do vary a bit over the year, but not that much.

Thus, use Zillow as a tool, a good guideline, but not as a real valuation. For example, you can use Zillow to see how much you can expect to get more if you add a bathroom.