If I bought a house back in the day, rented it, depreciated it, etc. do I *have* to sell it for market value and pay the horrendous capital gains taxes? Why can't I sell it for what whatever make sense to pay the depreciation pay-back, be done and walk away?

Depending on your overall situation, the answer can vary.

Best to talk to your tax expert and financial adviser first.

Let me give you an example that outlines exactly what you are discussing. Bought a place for $42,000 back in 2009. Since then, I have collected over $220,000 in rents. The place is in my Self-Directed Solo 401K.

Residents of 12 years, wants to buy it. The have been paying above average rents for the small place for so long, that I plan on selling the place which might be worth $120,000 for $82,000. The guy is a contractor, and I am sure having that hook up will come in handy in the future for the SDIRA accounts.

Now if this place not in a retirement account, I would be on the hook for the recapture and the gain. I believe you are asking what happens if the sale is a loss. So, if I would have sold it for say $40,000 and the place wasn't in a retirement account, there would be a $2,000 loss (assuming the adjusted basis stayed the same) that would offset the first $2,000 in depreciation recapture. So instead of getting hit with over a $4,000 tax bill, the bill is about $2,000.

You are supposed to be selling places at or near market value. But you are wise to ask, what does that mean exactly? Who out there can really understand the market? It has been a fun ride up, but how far is the ride going to go down and more importantly, when?

Ray, exactly. We lost money on a rental back in the day - it was actually our personal home, we bought another, we rented the other for a year or two, HATED being a landlord SO BAD we made every mistake (this was before Mr. LL) so we sold and it was at a big loss - we just wanted OUT. Had to bring a check to closing to sell, that's how bad it was...

So that was not "on purpose" to avoid taxes, that was the actual market at the time.

Like most, people aren't able to understand basic tax law! Also the IRS has problems of their own.

When you purchase a rental, you can not write off any cost until AFTER the property was first put into service. (Rent it out for a short period, then fix things up for a write off).

If you sell a rental for profit, the first taxes repaid is the Depreciation Recapture at 25%. That's before Long Term Capital Gains Tax (15%-20%).

If you wish to avoid paying taxes, then you need to do your research into a 1031 exchange, converting the rental to a personal residence then sell afterwards, charitable Trust donation or other vehicles.

There is also this to consider:

For 2025, you qualify for the 0% long-term capital gains rate if your taxable income is $48,350 or less for single filers, or $96,700 or less for married couples filing jointly.

FWIW, we are NOT selling. Our plan has always been to leave everything to the kids - they get the reset basis so good for them. They can sell after we die if they want.

This is just a generic rentals question. I understand about 1031 and capital gains and depreciation, etc. None of those apply to us. Our personal estate plans are made.

I also firmly believe in "Don't Mess with the IRS!" which is why we pay the experts.

But my question is just a general question based on discussions of exit plans and such. I don't need to ask an expert, because we are not selling. I just wondered if anyone had a general idea.

Market value would have to be stated in a context in the IRS. They are probably going around appraising every property sold to see if market value was achieved.

If you were claiming $20,000 a year on your schedule E, what would selling it for $250,000 look like? It would raise an eyebrow at all. What about selling it for $100,000 if the rents are Netting you $20,000. I wish I knew the thresh hold level on one hand. But that answer would depend on the market place too. On the other, I ask myself why. I do try and hook up my long-term residents if they elect to buy. But just knowing what your real estate basis requires a pen and paper.

If you are routinely selling below that basis, I think you asking for dinner with the IRS. I have bought a place at a tax sale, saw the signs of meth and torn the place down, selling at a loss - I didn't get questioned. So, I believe the IRS is also eyeing the portfolio along with individual assets.

Just for the heck of it, I asked Chatgpt. It gave 2 responses and asked me to choose which I preferred.

Response 1

No. In most situations, a property owner is free to sell for whatever price they choose, even if it is below what real estate agents, assessors, or online sites say the "market value" is.

A few distinctions matter:

Market value is generally an estimate of what a willing buyer and willing seller might agree to in an open market.

It is not a legal requirement that the seller obtain the highest possible price.

If a seller wants to help a particular buyer—such as a family member, friend, young family, nonprofit, or someone who otherwise could not afford the property—they can often choose to sell below market value.

However, there can be consequences depending on the circumstances:

Tax considerations

Selling significantly below fair market value can sometimes be treated as partly a gift for tax purposes.

The seller may still have capital gains tax issues based on the actual sale price and their basis in the property.

Trusts, estates, and fiduciary duties

If the property is owned by a trust, estate, guardianship, or business where someone is acting for others, there may be a duty to obtain a fair price.

For example, a trustee generally cannot give trust assets away at a discount simply because they like the buyer.

Multiple owners

If there are co-owners, one owner usually cannot intentionally sell at a discount that harms the other owners' interests.

Government programs

Certain subsidized housing or program-related sales may have special rules.

From a purely personal standpoint, many people intentionally sell below the maximum possible price. For example:

"The house might bring $250,000 if I listed it publicly and waited six months, but I'm happy to sell it to a young family for $225,000 because it closes quickly, requires no repairs, and helps them get started."

That is a perfectly rational choice if the seller is comfortable with it.

The bigger philosophical question is whether a person is obligated to maximize every dollar of value they own. In a free market economy, the answer is generally no. Owners are usually free to balance financial return against other goals such as helping others, reducing hassle, speeding up a sale, preserving a family property, or supporting a cause they care about.

If your friend's situation involves an inherited property, trust, estate, Medicaid planning, or a sale to a relative, the answer can change because additional legal rules may apply.

ChatGPT

Response 2

No. In most situations, a property owner is not legally required to sell at the highest possible price simply because the market might support it.

If your friend owns a property outright (or is otherwise free to sell it), they can generally sell it for whatever price they choose, including:

To a family member at a discount.

To a friend at a discount.

To a first-time homebuyer who otherwise couldn't afford it.

To a tenant who has been a good renter.

To anyone they want to help.

However, there are some important exceptions and consequences:

If the seller has fiduciary duties

The seller may have a duty to seek fair market value if they are:

An executor of an estate.

A trustee of a trust.

A guardian selling property belonging to someone else.

An officer of a company selling company assets.

In those cases, selling below market value could create legal problems because they are managing property for beneficiaries or other owners.

Tax considerations

A discounted sale can sometimes be treated as partly a gift.

For example, if a house worth $200,000 is sold to a child for $120,000, the IRS may view part of the transaction as a gift. That does not necessarily mean immediate tax is owed, but gift-tax reporting rules may apply.

Medicaid and asset-protection issues

If the seller is elderly and may need Medicaid nursing-home benefits within the lookback period, selling significantly below market value can create complications.

Capital gains

Selling for less than market value generally reduces the seller's gain. The IRS usually respects the actual sale price in an arm's-length transaction, but very large discounts to relatives can trigger additional scrutiny.

From an ethical perspective

Many people choose to sell below "maximum market value" because:

They want the property to go to a specific person.

They want to help a younger family buy a home.

They prefer a quick, certain sale.

They value helping someone more than squeezing out every last dollar.

A property's "market value" is simply an estimate of what the broader market might pay. It is not a legal obligation.

If your friend is asking because the property is in a trust, estate, divorce, LLC with multiple owners, or involves Medicaid planning, the answer can be different, and those details would matter.

Yes, Lucy, my kids are waiting with baited breath to get their hands on our stuff LOL. They all know the benefits of owning real estate for fun and profit.

If a long-term option agreement was shown in an audit, I wouldn't think the IRS would have a leg to stand on. Even if it wasn't an arm's length transaction, if the strawman had the option and the family member had the right of first refusal to that option, I think the IRS would have a difficult time.

The real question, does anyone want to open up that letter from the IRS saying we need to look further? Just a couple of ideas perhaps for others that WMH may have stimulated

You can sell the property for any price you want.

Well we definitely wouldn't SELL to a family member when they are going to inherit anyway.

But if we had a property we wanted to get rid of, and we had a deserving tenant, for instance, that wanted to buy...why NOT sell at a reasonable price? I'd rather a real live human get the deal rather than the IRS get the profit. Like buying stuff at the end of the year...