When it’s time to sell your home, you may consider keeping it in the family. Selling to a family member has its advantages. You can save big on Realtor fees and fast-track the selling process. But it can also be risky.
Mixing family and money can be tricky, but that doesn’t mean it can’t work — as long as you establish some ground rules. Read on for four helpful tips to consider when you're selling a house to a family member.
You can sell a house to anyone in the U.S. who can legally buy a home, family included.
However, the IRS will classify the home sale differently from a traditional sale. That’s because when you sell to a stranger, the buyer and seller act in their own self-interest to get the best deal. This is considered an arm’s-length transaction.
When you sell to a family member, it’s considered a controlled transaction because you know the buying party. Because of this connection, the IRS may scrutinize your home sale to ensure the price reflects the fair market value of the property.
In an expensive and competitive real estate market, you can help a family member financially by giving them a discount on your home. But there may be tax implications. Every dollar you sell under market value counts as a gift, and gifts can be taxed. In 2022, gifts up to $16,000, or $32,000 for married couples, are excluded from the gift tax. Any amount above the limit may be subject to a tax rate of 18% to 40%.
For example, if your home’s market value is $450,000 and you decide to sell it to a family member for $400,000, the IRS would view the $50,000 difference as a gift. Assuming you’re single, you’d deduct $16,000 from $50,000, bringing your taxable gift total to $34,000.
The seller is responsible for the gift tax, but depending on how much you lower the price, the buyer may be subject to capital gains or inheritance taxes when they sell.
For instance, if you sell your house at a discounted price of $100,000, and your family member later sells it for $450,000. The IRS will calculate the profit as $350,000. A single person may deduct up to $250,000, meaning your family member would be on the hook for taxes on $100,000.
To avoid surprise tax bills and financial burdens down the line, it’s wise to talk with a qualified real estate agent and set a price near fair market value when you plan to sell your home to a family member.
Before jumping headfirst into the home-selling process, you should talk with the family member who wants to buy your home. Determine how much he or she can afford to pay upfront and how much will be financed. Disclose your expected sale price, and don’t be afraid to be firm. Losing money on your home sale may be a financial burden you’re not able to accept.
Make sure you write down the terms to avoid any disagreements as you move forward in the process. This can help avoid or solve arguments if someone remembers something differently or thinks different conditions were set.
No matter how great your relationship with the buyer, negotiating a transaction this large can be complicated. Although you may be tempted to skip the Realtor, having an objective third party may be worthwhile. Your agent can act as the middleman and advocate for your best interests.
You may even be able to find a real estate agent who will work for a discounted rate because you already have a buyer in mind.
If you decide not to work with an agent, consider hiring a professional to help you create the purchase agreement and file the necessary paperwork so you know your transaction is completed correctly.
Even if you’re working with an agent, a real estate attorney can help during the closing process. In fact, if the buyer is financing, the lender may require a real estate lawyer when working with the title company. In addition, legal representation can help review other documents along the way.
When selling to a family member, it’s important to opt for a third-party inspection to protect your relationship with the family member who’s buying your home. This way, you’ll know everything uncovered in the inspection is fair and accurate. If something in the home breaks down the line, your family member won’t think you hid a major problem before moving out.
Traditionally, when you sell a home, the buyer finds a mortgage lender who pays you the lump sum of money for your home. The buyer then repays the lender in installments. If the family member buying your home has poor credit or doesn’t want to obtain financing from a mortgage lender, he or she may propose paying you monthly for the home.
It’s best to avoid this scenario. If your family member is unable to make payments in the future, you could lose a lot of money. Plus, asking your family member for money, taking them to court, or foreclosing on them could strain the relationship even further.
At the end of the day, who you sell your home to is your choice.
The main drawback of selling to a family member is that it may feel uncomfortable to advocate for yourself during the process and ask for more money or better terms. That’s why it’s important to partner with a real estate agent who can help navigate this tricky process with you.
If you communicate well from the beginning, selling to a family member can go smoothly. It can help you sell your home fast while ensuring it remains with a buyer you know and trust.