Should you sell your house to your kids for a tax loss?
The claim: “Selling your house to your kids is a smart way to get a tax loss.”
False — related-party and gift rules block the loss
No. IRC §267(a)(1) disallows a loss on a sale between family members, including parents and children. If the house is your personal residence, the loss is not deductible even when you sell to a stranger, because IRC §165(c) allows only business, investment, and casualty losses. A below-market price is also partly a gift, and Treas. Reg. §1.1001-1(e) allows no loss on a part-sale, part-gift transfer.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- IRC §267 disallows losses on sales between parents and children, siblings, spouses, and grandparents.
- A loss on selling your own home is never deductible under IRC §165(c).
- A sale below fair market value is a gift of the difference; a Form 709 is generally required if gifts to one person exceed $19,000 in 2026.
- Under IRC §267(d), the child may use your disallowed loss to reduce gain when the child later sells.
- Family real estate transfers also involve deeds, title, lenders, and state law.
Where the claim comes from
Families often want to keep a house in the family, and some online advice adds a tax angle: sell the property to your children at a low price, claim the loss, and keep the asset in the family. The plan fails on several separate rules, and the most common version, selling the family home, never had a deductible loss to begin with.
A related version suggests selling the house to a child for a nominal price so that the parents qualify for benefits or remove the home from their estate. Those goals involve Medicaid look-back rules, estate planning, and property law, and a nominal-price sale is treated as a gift for federal tax purposes.
What the law actually says
IRC §267(a)(1) provides: "No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b)." Under §267(b)(1) and (c)(4), that includes an individual's brothers and sisters, spouse, ancestors, and lineal descendants. The loss is disallowed outright, not deferred for you.
Section 267(d) gives the buyer a partial benefit. When your child later sells the property at a gain, the gain is recognized only to the extent it exceeds your disallowed loss. Any part of your loss not used that way is lost permanently.
For a personal residence, the related-party rule is not even needed. IRC §165(c) limits an individual's losses to those from a trade or business, a transaction entered into for profit, and certain casualties and thefts. A home you lived in is personal-use property, so a loss on its sale is not deductible to anyone.
If the price is below fair market value, the difference is a gift under IRC §2512(b). Treas. Reg. §1.1001-1(e)(1) governs a transfer that is part sale and part gift and states that "no loss is sustained on such a transfer if the amount realized is less than the adjusted basis." For 2026, the gift tax annual exclusion is $19,000 per recipient and the basic exclusion amount is $15,000,000 under Rev. Proc. 2025-32, so most families owe no gift tax but must still file Form 709 when a gift to one person exceeds the annual exclusion.
What is true and what is not
It is true that you can sell property to your children, and that a sale at a gain may qualify for the IRC §121 exclusion of up to $250,000 ($500,000 for joint filers) if it was your main home for two of the last five years. It is also true that the child's later gain can be reduced by your disallowed loss on investment property.
It is not true that a family sale produces a deductible loss, or that a discounted price is just a sale. The IRS treats the discount as a gift, and the child's basis in the gift portion generally carries over from you under IRC §1015.
- Not true: a loss on selling to your children is deductible.
- Not true: a loss on your personal residence is deductible to anyone.
- True: a bargain sale is part gift and may require Form 709.
- True: the child may use your disallowed loss to offset later gain.
What to do instead
Decide what you are trying to achieve before choosing the transaction. If the goal is a deductible loss on investment property, a sale to an unrelated buyer at fair market value is the transaction that can produce one. If the goal is to pass the property to your children, compare a sale, a gift, and holding the property until death. Property held until death generally receives a basis equal to fair market value under IRC §1014, which can matter more than any loss.
Get a qualified appraisal, document the price, and consider how any mortgage, homestead exemption, property tax reappraisal, and title insurance will be affected. In Texas, deed preparation and homestead questions are legal matters.
If you sell to a child with seller financing, charge at least the applicable federal rate under IRC §7872 and §483, document the note, and collect the payments. Forgiving payments later is a gift, and a pattern of forgiveness can lead the IRS to treat the whole transfer as a gift from the start.
How ebotCPA helps
We compare sale, gift, and inheritance outcomes for the property, compute the income and gift tax effects, and prepare any required Form 709. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Assumptions: Rental property (not a residence) with an adjusted basis of $350,000.; Fair market value of $300,000, supported by an appraisal; sold to the owner's child for $300,000.; The child later sells the property for $340,000 with no further improvements or depreciation.; Federal income tax only; depreciation recapture and selling costs ignored.
| Parent's loss on paper ($300,000 − $350,000) | −$50,000 |
|---|---|
| Loss allowed to parent under §267(a)(1) | $0 |
| Child's basis | $300,000 |
| Child's gain on later sale ($340,000 − $300,000) | $40,000 |
| Gain recognized by child after §267(d) offset | $0 |
| Remainder of parent's loss never used | $10,000 |
The family recognizes no loss; the child's $40,000 gain is sheltered by the disallowed loss, and the remaining $10,000 is permanently lost.
Illustration only; not a projection of your results.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Can I sell my house to my son for $1?
You can, but the difference between $1 and fair market value is a gift. You would generally file Form 709, and your son would generally take your basis in the gifted portion.
Does selling to a son-in-law avoid §267?
In-laws are not listed in the family definition of §267(c)(4), but the IRS can look through indirect sales, and a below-market price is still a gift.
Is it better to leave the house to my kids?
Often, from an income tax view, because inherited property generally takes a basis equal to fair market value at death. The answer depends on your estate, your needs, and state law.
What if I sell to my kids at a gain?
The gain is taxable to you unless an exclusion such as §121 applies. §267 disallows losses, not gains.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.