Selling a House Below Market Value: Legal or Not?
The practice of selling a house for less than its market value is not as uncommon as you might think. However, it is crucial to understand the legal and financial implications of such sales, especially when dealing with buyers who cannot afford the fair market price.
Is It Legal?
Yes, it is legal to sell a home for less than its market value, and several scenarios can justify such a move. For instance, some owners might not need the money and are willing to accept a lower offer to avoid the hassles of ownership. Other times, the homeowner may need quick cash and is willing to sell for a reduced price to meet their financial needs.
One homeowner, who prefers to remain anonymous, shared their experience:
Why would I sell my house that anyone will pay me 500k to purchase to a person that will only pay me 400k? I’m not a billionaire.
Despite the rationale behind such sales, it is important to note that selling a property for significantly less than its market value can attract scrutiny from regulatory bodies, particularly the Internal Revenue Service (IRS) and other government agencies. These agencies may investigate potential tax evasion through underpriced property sales.
Another homeowner, whose choice to sell for a discounted rate involved a significant reduction in the asking price, expressed:
If you sell for a huge discount - like half. The IRS may investigate and other government agencies may investigate. Trying to find out if some sort of fraud is taking place to avoid taxes.
In contrast, selling for a small discount, such as 5%, might escape notice and investigation, making it less risky for both the seller and the buyer.
The Ready Reckoner Rate: A Regulatory Consideration
While it may be legal to sell below market value, there is one aspect that homeowners must consider: the Ready Reckoner Rate. This is a standardized rate set by the state government for property transactions. The ready reckoner rate serves as a minimum value for properties, whether commercial or residential, in a specific area. It is used for calculations of capital gains under income tax and to determine the stamp duty and registration charges.
Failure to adhere to the ready reckoner rate can result in legal and financial penalties. Therefore, it is crucial for homeowners to understand and comply with this rate when selling their properties.
Conclusion
In summary, while it is legal to sell a house below market value, it is essential to consider the implications for both the seller and the buyer. Tax scrutiny and the adherence to the ready reckoner rate are significant factors to keep in mind. Homeowners should weigh their financial needs and the potential repercussions before making such a decision.