Should you sell your home to your children below market value?

You can agree to whatever price makes sense for your family, but there is an important point to understand before you do that: the price you agree on and the property’s fair market value are not necessarily the same thing. That difference can have tax and estate-planning consequences that are worth considering before the property changes hands.

What is the home actually worth?

In my work as a real estate appraiser, one thing I regularly have to explain is the difference between a sale price and market value.

Imagine your home would reasonably sell for $1 million dollars if it was listed on the open market. Instead, you sell it privately to your son or daughter for $750,000. That doesn’t suddenly make the home worth $750,000.

The transaction is between related parties and your motivation is different from that of a typical seller. You may be perfectly willing to give up $250,000 because helping your son or daughter is more important to you than obtaining the highest possible price.

From a valuation perspective, however, we still have to ask: What would this property likely sell for in an open and competitive market? If the answer is $1 million, that remains an important number even though you have chosen to accept $750,000.

A lower sale price doesn’t necessarily mean a lower tax bill

This is where things can get complicated. Selling a property to a family member is different from a typical arm’s-length transaction, and there can be tax consequences when real estate is transferred for less than its fair market value.

Let’s say you bought an investment property years ago for $400,000. Today, it’s worth $1 million, but you sell it to your children for $700,000. It would be a mistake to simply assume that any tax calculation will therefore be based on the $700,000 selling price. 

Transfers between related parties can be subject to special tax rules, which is why the fair market value of the property at the time of the transaction can become particularly important.

Article Continues Below Advertisement

Skip Ad

X

The type of property matters, too

If the home was solely your principal residence for every year you owned it and otherwise qualifies for the principal residence exemption, you generally won’t have to pay tax on the capital gain. But the situation can be different for a rental property, investment property, cottage, or a home that wasn’t your principal residence throughout the entire ownership period.

There can also be additional complications for the child acquiring a property below market value, particularly when it comes to the property’s tax cost for a future sale.

This is one area where I would strongly recommend getting tax advice before transferring the property rather than trying to sort everything out afterward. As an appraiser, I can establish the property’s fair market value. An accountant or tax professional can determine how the transaction should be structured and what the tax consequences will be. Those are two different jobs, but in a transaction like this they can be closely connected.

Why getting an appraisal beforehand can help

You might wonder why you need an appraisal at all if you and your child have already agreed on a price. The answer becomes clearer when you think about what could happen several years from now.

Suppose you transfer a property to your son today. Five years later, an accountant, lawyer, the Canada Revenue Agency, or another family member needs to know what the property was actually worth when the transfer took place. Now, someone has to go back five years and figure it out.

This is something I encounter in retrospective appraisal assignments. Determining a historical value is certainly possible in many cases, but it can become more challenging as time passes. The appraiser has to research comparable properties that sold around the original date and reconstruct the market conditions that existed at the time. 

We also need to understand what the property itself was like on that date. Was the basement finished? Had the kitchen already been renovated? Was the property in the same condition as it is today? Sometimes, an old MLS listing or historical photographs can answer those questions. Other times, the documentation simply isn’t there anymore.

If you already know that you’re transferring a property to a family member for substantially less than market value, establishing the fair market value at the time of the transaction can provide a useful record for the future.

Think about your other children

Tax isn’t the only reason to establish the property’s value.

Suppose you have three children and own a home worth $1 million. You sell it to one of them for $750,000. What does the $250,000 difference mean to your family?

Perhaps you’re simply comfortable giving that child the benefit. Or perhaps you intend to take it into account when dividing your estate among your children later. Either way, it is worth thinking about it now.

I’ve seen how important historical property values can become in estate-related appraisal work. Years after a transaction has taken place, family members may have very different recollections of what a property was worth or what their parents intended to do with it. 

An appraisal won’t tell a family how an inheritance should be divided, but it can establish one important fact: what the property was reasonably worth when it was transferred. If everyone agrees that the property was worth $1 million when one child purchased it for $750,000, at least there is a clear starting point for whatever estate planning the parents choose to do.

What if your child sells the home for much more later?

This can create another misconception.

Suppose the home is appraised at $1 million when you transfer it to your child. Four years later, your child sells it for $1.25 million. Was the original appraisal too low? Not necessarily.

An appraisal estimates market value as of a specific date. It isn’t a prediction of what the property will eventually sell for. Real estate markets change. Interest rates move. The number of homes available for sale changes and buyer demand rises and falls. The property itself may also have been renovated or improved.

We’ve seen just how quickly market conditions can change in the Greater Toronto Area over the past several years. The relevant question is what the property was worth on the date it was transferred, based on the market information available at that time.

So, should you sell your home to your child below market value?

There is nothing inherently wrong with wanting to give your child a financial advantage when buying a property. For parents who are financially comfortable, selling a home or another property below market value may be one way of helping the next generation while they are still alive—just don’t assume that choosing a lower selling price changes the property’s actual market value, or that the lower price will necessarily be the number that matters for tax purposes.

Before going ahead, find out what the property is worth. Talk to an accountant or tax professional about the tax implications, and if the transaction is part of a larger wealth-transfer plan, discuss it with your estate lawyer, as well.

You can decide how much you want your child to pay for your property. Knowing what the property is actually worth can help you understand exactly what you’re giving them—and avoid some potentially expensive surprises later.

About Tejveer S. Walia, P.App, CRA

Tejveer S. Walia is a designated appraiser with Appraisal Institute of Canada (AIC) and the founder of Walson Consulting Inc., serving homeowners, lawyers, and estate professionals across the Greater Toronto Area (GTA).

Linkedin Facebook Website