Recapture still applies at actual sale price
Depreciation recapture is calculated on your gain — the difference between your adjusted basis and the actual sale price. Selling to a family member at a discount reduces your realized gain but doesn't eliminate the recapture component. If your adjusted basis is $150,000 and you sell to a sibling for $200,000, you have a $50,000 gain; if depreciation claimed was $50,000, that entire $50,000 is recaptured at up to 25%.
The bargain-sale / deemed-gift problem
When you sell below fair market value to a related person, the IRS may treat the discount as a part gift. If the property is worth $350,000 and you sell for $200,000, the $150,000 discount could be a reportable gift on Form 709. The buyer's basis is generally the greater of what they paid or your adjusted basis, which can limit their future loss deductions on a quick resale.
Section 267: losses disallowed between related parties
If the discounted sale produces a loss for you, Section 267 disallows that loss between related parties (siblings, parents, children, spouses, and certain entity relationships). Gains, however, remain fully taxable. This asymmetry means family sales at a discount rarely achieve the tax goal investors hope for, while introducing new complexity.
Frequently asked questions
Can I sell my rental to a family member below market value to avoid recapture?
No — recapture is based on your gain relative to your adjusted basis. Selling below market may also trigger gift reporting and disallows any resulting loss.
What basis does my family member get when I sell below market?
Generally the greater of what they paid or your adjusted basis, limiting their ability to claim a loss on a future sale.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.