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You sister can certainly sell you her house at a below market price. However she might need to pay capital gains taxes on profits as if she had sold at market value (depending on her gain and the use of capital gains exemptions). Additionally she will have to file gift tax forms if the amount below market price excludes the gift tax filing limit ($18k). Note that if you and your sister are both married, you could get 4x this limit before having to file gift tax forms. The issues are predominantly related to tax filings. Think about it more like you bought the house at market value and then she gave you back a gift at closing. That’s how this will be treated. Meaning all taxes will be based on a sale at market value. Make sure you have an appraisal to support that valuation.
Not really without running into rules that are designed to penalize you for doing so. https://www.realtor.com/advice/buy/what-is-an-arms-length-transaction/
Thank you!
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