They say not to mix family and money.
Sometimes, though, the stars line up perfectly and selling your house to a family member just makes the right kind of sense. Maybe it’s an old home that has sentimental value, or maybe you just want to give a leg up to a younger relative.
Regardless, having a buyer for your house already lined up keeps your home off Zillow and puts you in a great position.
1. Agree on a price, but stay flexible
In a standard real estate transaction, the buyer and seller are on opposing teams. They both want to come out on top—or at least with most of their demands met. When your buyer is a friend or family member, though, you don’t have the luxury of thinking like that.
If both parties value the relationship, it’s a smart idea to get everything in writing and have both an inspection and an appraisal done fairly early into the process, preferably as soon as the buyer gets pre-approved by their lender and knows their spending limit.
An inspection protects the buyer from ending up with a lemon. It’s generally one of several contingencies put in place with the initial sale contract, but when the seller and buyer are friendly, it’s an easy thing to skip, potentially at the cost of hurt feelings.
An appraisal, meanwhile, will be required by the buyer’s lender to make sure the home is worth more than the loan amount. Sometimes, the numbers come in higher or lower than expected, especially if a realtor with knowledge of the market wasn’t involved in the pricing, as is common with sales to relatives.
Though the result doesn’t always have an impact on the sale, it would be wise for both parties to be flexible once the results come in. Otherwise, things may get tense.
2. Selling your home to family below market value can get tricky
In some situations, the seller might want this transaction to look less like a sale and more like a gift. This can be more complicated than it seems, though.
Sell the home more than 25% below market value, and it’s likely the buyer will get hit with a gift tax courtesy of Uncle Sam. There are a few alternative options, though:
- Sell the home at only a slight loss, but give the relative the maximum allowable tax-free gift ($13,000) each year until the agreed upon amount is reached.
- File a quitclaim deed to add the buyer’s name to the title. These are the simplest way to transfer property, but they’re generally not used when money is exchanging hands. If the seller still does want to be paid, the buyer will have to take out a home equity loan to pay the seller.
- Go the seller financing route. This option cuts out the lender entirely and puts the seller in their stead. While it can mean excellent rates and terms for the buyer,
3. Stay on the IRS’ good side
The IRS likes to keep a close eye on transactions that take place between relatives, and for good reason. When the buyer and the seller are on the same side, it’s a lot more likely for funny business to go down. That funny business often takes the shape of fake tax deductible losses or fake short sales.
As far as the IRS is concerned, you can sell your property at a loss to a family member all you want, but you can’t take a deduction on the loss, and you can’t sell the property for less than you owe to the bank.
For some helpful examples, this is a good resource.
4. Swap your realtor for a lawyer
While you can probably skip the realtor, a qualified real estate attorney is going to be your best friend if you’re planning on selling a house to a family member. A lawyer will be able to fill in the gaps in the process that a realtor would generally have helped fill for you, like getting the right paperwork and lining up the title search and transfer.
They’ll also have a much clearer idea of your options and be able to make recommendations with your goals in mind.
Filed Under: Buying/Selling
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