A client came to me last month with what seemed like a simple plan. His daughter and her husband were ready to buy their first home, and he was ready to downsize from the family house in Brooklyn he’d owned for thirty years. “I’ll just sell it to them for what I paid for it back in 1994,” he said. “Keep it simple.”
It’s a wonderful sentiment, born from a desire to give the next generation a strong start. I see it often in my practice. But in the eyes of New York law and the IRS, a transaction like this is anything but simple. An intra-family home sale is a powerful tool for building a legacy, but it must be handled with deliberate care. The biggest mistakes we see are not born of malice, but of the assumption that good intentions are a substitute for good legal structure.
The Sale Price and the Unintentional Gift
When you sell a property to a non-family member, the goal is straightforward: get the best possible price. When you sell to your child, the goal is often the opposite. This generosity introduces the legal concept of a “bargain sale.”
The IRS evaluates every transaction based on Fair Market Value (FMV). If your home has an appraised FMV of $900,000, but you sell it to your son for $400,000, you have not simply given him a good deal. You have given him a gift of $500,000. That gift has tax implications.
For 2024, the annual gift tax exclusion is $18,000 per person. A married couple could gift their child and their child’s spouse a combined $72,000 without needing to file a gift tax return. In our example, the $500,000 gift far exceeds this. The difference must be reported on a gift tax return and will be deducted from your lifetime gift and estate tax exemption. While you may not owe tax today, you are using a portion of the exemption your estate might need later.
Setting the right price is a strategic decision, not just an emotional one. An official appraisal is the non-negotiable first step. It establishes the FMV and provides the baseline from which all other decisions—the sale price, the gift amount, and the tax strategy—are made.
Why a Handshake Deal Is a Future Lawsuit
“We’re family. We don’t need lawyers and contracts.” I have heard this countless times. It is the most dangerous assumption in estate planning. A real estate transaction, even between a parent and child, requires formal, legally sound documentation to protect everyone involved.
A verbal agreement to sell a house holds no water in court. New York’s General Obligations Law § 5-703 is unequivocal: any contract for the sale of real property must be in writing and signed. Without a written purchase agreement outlining the price, closing date, and other terms, the deal is unenforceable. This protects the seller from a buyer who backs out and the buyer from a seller who changes their mind.
Beyond the contract, the transfer itself must be properly executed with a new deed and filed with the county clerk. A professional title search is also crucial. You may be certain the title is clean, but what if an old, forgotten lien from a contractor exists? A title search uncovers these issues, and title insurance protects the new owner—your child—from financial loss related to title defects. These are not mere formalities. They are essential safeguards that prevent future disputes and secure the property for the next generation.
The Hidden Cost: Understanding Capital Gains Basis
An intra-family sale has a major, and often overlooked, effect on the property’s cost basis. This is a critical piece of generational planning. The “basis” is what you paid for an asset. When you sell it, you pay capital gains tax on the difference between the sale price and your basis.
If you sell your home to your child for the same low price you paid decades ago, their cost basis becomes that low price. Let’s return to my Brooklyn client. He bought the house for $150,000 in 1994. If he sells it to his daughter for that same amount, her basis is now $150,000. If she sells it 20 years from now for $1.5 million, her taxable gain will be a staggering $1.35 million.
This forces a conversation about the alternative: inheritance. When a child inherits a property, the cost basis is “stepped-up” to the fair market value at the time of the owner’s death. If the daughter inherited that same house when it was worth $900,000, her basis would become $900,000. If she then sold it for $950,000, her taxable gain would only be $50,000. The decision to sell rather than bequeath a property has significant, long-term tax consequences. It requires a prudent look at the entire family’s financial picture.
An intra-family property sale is more than a real estate transaction—it is a foundational act for the next generation. A well-intentioned gift, however, can create unintended tax burdens and legal risks. It requires intentional planning.
Before you name a price or shake hands, the first prudent step is to get a professional appraisal of the property. We can then sit down with that document and map out a transfer strategy that honors your intentions while protecting your family’s financial future.
