You're doing your estate planning, and you've decided to sell your home to one of your children, rather than leaving it in your will. This way, everything is taken care of in advance, the kids don't have to work out owning a piece of the family home, and you get the money for the house in advance.
However, you're not going to charge the child full price. You know your home is worth $400,000, but you have agreed to let it go for $200,000.
You're allowed to sell your home at any price you want, of course, even half of the fair market value, or FMV. If you sell it to a random buyer, there aren't any tax implications. You just ripped yourself off.
If you keep the home in the family, though, the IRS looks at it as a gift. Essentially, you just "gave" your son or daughter $200,000. Had your child bought the same home from someone else, that price would have been much higher.
This is important for estate planning purposes. You do get an annual gift exclusion. You can apply it to the balance to reduce it. If you don't, or if there is money left over, you must count it against the total gift tax exemption, however. The exemption may still be large enough to cover it, but that depends on the size of the estate.
Whenever you're doing estate planning or moving assets around, be sure you know what legal rights and obligations you have. Carefully consider all of your options before making any firm decisions.
Source: Next Avenue, "5 Ways to Give Your Home to Your Children Tax-Free," Bill Bischoff, accessed June 07, 2017