Houston will decline the small forward's contract option for next season and allow him to enter restricted free agency.
Chandler Parsons, perhaps the most underpaid player in the NBA, will become an restricted free agent this season.
According to a Yahoo Sports report, the Rockets will decline the 25-year-old's option for next year, which would pay him $964,750.
It is somewhat surprising that Houston would allow one of the biggest bargains in the league to walk, particularly as Parsons is a valuable young asset and one of their best two-way players.
Parsons has become one of the better small forwards in the NBA, averaging 16.6 points, 5.5 rebounds and four assists, and his athleticism means he is likely to improve.
However, Houston are keen to pursue a big-name acquisition over the summer, and clearing cap space is now a priority for this offseason.
Carmelo Anthony has been linked with the Rockets, and in order to fit his max-level deal under the cap the team will need to make a number of moves to free up space. LeBron James and Chris Bosh of the Miami Heat, and Dallas's Dirk Nowitzki are also long-shot possibilities.
Making Parsons a free agent will take his salary off the books, but will also open up sign-and-trade possibilities for Anthony, as well as Minnesota big man Kevin Love.
Parsons has previously said that it “would be nice” to remain in Houston on a long term basis, and there is still a possibility that he stays with the Rockets.
Houston can match any offers that the small forward receives from other teams if they miss out on one of the bigger names available this summer.
Also, if the team is prepared to go over the cap and pay the expensive luxury tax, they could bring in a free agent from outside and then sign Parsons to a long-term deal.
Parsons is expected to command a salary between $10million and $13 million per year, which may be too expensive for Houston. However, by declining his option the Rockets eliminate the possibility of him leaving for nothing as an unrestricted free agent in 2015, and maintain some control over his short-term future.