If you’re selling your home, you’re likely eager to move on and begin the next chapter of your life. However, before you proceed, it’s important to consider the potential tax implications of selling a house below market value. While selling below market value might seem like a simple solution, it can raise concerns with the IRS. If the sale price is significantly lower than the home’s fair market value, the IRS could see this as a gift, and you may face gift taxes. Additionally, depending on the situation, there could be capital gains tax considerations as well. Understanding the tax rules in your area, like Pittsburgh, can help you navigate this process and avoid unexpected tax consequences. Let’s dive into the tax implications of selling a home below market value and what you need to know.

The Likelihood of Paying Taxes on the Sale of Your Home 

If your home has appreciated significantly in value, especially in recent years, selling your home in Pittsburgh could result in a sizable profit. However, with that profit comes the potential for tax implications of selling a house. In particular, you may be subject to capital gains taxes on the sale of your home.

Capital gains taxes apply to the profit you make when selling an asset, such as real estate, investments, or valuable personal property. The IRS considers your home an asset, so if you’ve sold it for more than you paid for it, you’re likely facing capital gains taxes on the profit.

For those selling in 2025, it’s important to keep in mind that home prices surged dramatically between 2020 and 2022, leading to higher-than-usual appreciation in many areas. This means your home may have significant capital gains that will be taxed when you sell. Understanding how much you might owe the IRS can help you plan your finances accordingly. Additionally, if you sell your home the tax implications of selling a house may differ, and you could face scrutiny from the IRS if the sale is seen as a “gift” or if the transaction doesn’t reflect fair market value.

Be sure to consult with a tax professional to understand the specific implications for your situation and ensure you’re in compliance with current tax laws for 2025.

How Capital Gains Taxes Work

When selling a house, especially if it’s below market value, it’s important to consider the tax implications of selling a house. In Pennsylvania, like in other states, capital gains taxes may apply when you sell your home for more than what you paid for it.

A capital gains tax is levied on the profit you make when selling an asset, such as a home. The IRS considers almost anything you own and use for personal or investment purposes to be a capital asset, and the tax applies to the profit earned from selling these assets, including real estate.

The IRS classifies capital gains into two categories: short-term and long-term. When you sell your home, the length of time you’ve owned the property will determine the type of capital gain you’ll incur. If you’ve lived in the property for less than a year, it will be considered a short-term gain. If you’ve owned and lived in the home for a year or longer, the gain is considered long-term.

Here’s where things get specific for Pennsylvania residents: short-term capital gains are taxed at the same rate as your ordinary income, which means you’ll be taxed at your regular tax bracket. On the other hand, long-term capital gains benefit from preferential tax rates. These rates are typically 0%, 15%, or 20%, depending on your income and tax filing status.

For Pennsylvania residents, it’s also important to note that if you’re selling a home that has appreciated in value, and you meet specific criteria, you may be able to exclude up to $250,000 (or $500,000 for married couples) of the profit from the sale of your home, potentially avoiding paying taxes on that amount altogether. However, if you sell your home below market value, the IRS may still assess the sale based on fair market value, and the transaction could be scrutinized to ensure it’s not considered a gift or a way to avoid taxes.

Additionally, when selling your home below market value in Pennsylvania, it’s important to be aware that there could be potential tax consequences. If the sale is considered a “gift” or an attempt to avoid taxes, the IRS could impose gift tax rules, and you might be required to pay gift tax on the difference between the sale price and market value.

Given these factors, it’s crucial to consult with a tax professional or an accountant who understands Pennsylvania tax laws to ensure you’re fully informed and compliant with both state and federal tax rules when selling your home below market value. These are just based on our research and it’s still best to speak with a professional.

How to Avoid Capital Gains Tax

When selling your home in Pennsylvania, you may be subject to capital gains taxes, but there are some exclusions you may qualify for that could reduce or eliminate your tax liability.

According to tax experts, “if you meet certain requirements, you can exclude up to $250,000 of your capital gain from the sale of your home. This amount increases to $500,000 if you’re married and filing jointly.

To qualify for this exclusion, you must meet the following criteria:

1. Ownership Requirement: You’ve owned the home for at least two years during the five years preceding the sale. The two years don’t have to be consecutive, and if you’re married and filing jointly, only one spouse needs to meet this requirement.
2. Principal Residence Requirement: The home was your primary residence for at least two of the five years prior to the sale. For married couples filing jointly, both spouses must meet this requirement.
3. Exclusion History: You haven’t sold another home within the two years before this sale, or if you did, you did not use this exclusion on the gain from that sale.

It’s important to note that if you’re selling your house below market value in Pennsylvania, the IRS may still treat the transaction as though it was sold at fair market value, which could affect your eligibility for the exclusion. If the sale price is significantly below market value, there could be tax implications of selling a house below market value that need to be carefully considered.

To ensure you’re fully aware of the potential tax implications of selling a house below market value and whether you qualify for these exclusions, it’s highly recommended to consult with a local tax professional or a real estate agent in Pittsburgh. They can help you navigate the complex rules around capital gains and ensure that you’re making the most of your sale while minimizing your tax liabilities.

Special Circumstances

Even if you don’t meet the criteria delineated above, you still may be able to claim a full or partial exception on selling your home in Pittsburgh. The special qualifying circumstances here include . . . 

• Gaining ownership of the home during a separation/divorce
• If your spouse died during your ownership of the home
• Owning a “remainder interest” in the home when selling
• Having your previous home condemned
• Being a service member during your ownership of the home
• Releasing the home in a “like-kind” exchange

Get Professional Assistance

Again, we are not accountants, but these are what we know based on our research. With that said, If the capital gains tax process feels overwhelming, you’re not alone – it can definitely be complicated. That’s why it’s important to consult both a tax professional and an experienced Pittsburgh real estate investor when selling your home. We can help simplify the process and provide guidance to ensure you achieve the best possible outcome. If you have any concerns about the tax implications of selling a house below market value, don’t hesitate to reach out to us at 4125334127.