Selling your home to a relative allows you to keep a valuable and sentimental asset in the family, and can help them afford to buy a home.
While it may be tempting to give family a good deal on the price, selling your home for less than its fair market value has financial and emotional implications.
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There are lots of reasons to sell a home to a family member. A common one is to make buying a home more affordable for a relative who otherwise would be unable to afford it. Another is to keep a property in the family as a kind of keepsake.
It’s also tempting as a way to save money on a sale.
“You can avoid real estate commissions by handling the transaction on your own,” says Kari Brummond, a tax preparer and accountant at TaxCure, based in Trumbull, Connecticut. “The seller may save money on repairs if the buyer agrees to take the property as-is. The buyer may be able to save money if the seller agrees to sell the home below its fair market value.”
How Is Selling Your Home to a Family Member Different?
Selling a home is a complicated transaction. A lot of financial and legal documentation is required to transfer ownership of any property. And there are ways in which selling a home to a family member differs from selling a home on the open market.
‘Arm’s length’ vs. controlled transactions
Selling a home to a buyer you have no prior relationship with is called an “arm’s length” transaction, while selling to a family member, friend, or professional acquaintance is called a controlled transaction.
These are legal terms, with specific definitions used by the IRS for tax purposes.
In a controlled transaction, the seller often sells the home at a bargain price or even gives the home to a family member.
In such a transaction, the value of the sale includes what’s called a gift of equity, since the buyer gains equity in the home as a gift. Equity is the difference between what a home is worth and how much is owed on it, and has a specific dollar value that the IRS documents in such a sale.
“The gift of equity would be the difference between the current market value and the amount that you sell your home (for),” says Ryan Fitzgerald, a real estate agent and owner of UpHomes, based in Charlotte, North Carolina. “If you do sell it for lower than fair market value, you have to report the gift to the IRS.”
When you’re giving your home to a family member or selling it to them for less than fair market value, you need to file a gift tax return if the gift amount exceeds the federal exemption. The annual gift tax exclusion in 2022 is $16,000 per individual and $32,000 for a married couple filing a joint return.
What’s unusual about gift taxes is they aren’t paid in the year they are filed. Instead, they’re deducted from the seller’s lifetime estate tax exemption — which is $12.06 million in 2022 — affecting how much estate tax they pay when they die.
“No one actually pays gift tax,” Brummond says. “Instead, the gifts they give away during their lifetime reduce their estate tax exemption.”
If your lifetime estate gifts exceed the lifetime estate tax exemption, then your estate will need to pay tax on the amount over the limit when you die.
“If you reported $6 million on gift tax returns during your lifetime, your estate tax exemption would drop to $6.06 million, and after your death, your estate would face estate taxes on any value over that threshold,” Brummond says.
If you sell your home to a family member for a price well below what you originally paid, the fair market value of the property minus what you received for it may count toward the gift tax.
In addition to federal taxes, there are state tax policies to follow that vary depending on where the home you’re selling is located. You can usually learn more about state taxes by going to the website of the government or treasury with jurisdiction over the home.
Tips for Selling Your Home to a Family Member
There are several ways to make selling your home to a family member go smoothly. Most entail treating the transaction like a standard sale.
“When selling to family, you can avoid costly estate agent fees,” says Anastasia Allmon Riley, a lead attorney at Farris, Riley & Pitt LLP, based in Birmingham, Alabama. “However, you will likely still need to find a real estate lawyer to sign off on the sale, and even look over a contract to ensure that it is watertight, but typically you will need their services far less, and at the end of the process, their fees should be far lower.”
Here are a few tips for selling your home to a family member.
Establish the transaction type
You’ll want to avoid misunderstandings or assumptions that can lead to conflict and create rifts within your family. Both parties should agree whether the transaction will be a gift, or more like an arm’s length transaction.
Get a real estate agent
Even though it’s unnecessary to use a real estate agent when selling your home to a family member, an agent can help with the process.
“An agent will be able to navigate through impasses, work with lender and appraisal issues, deal with title challenges, and be a resource throughout the transaction, regardless of whatever issues might arise,” says Michael Shapot, a residential real estate broker with Keller Williams NYC, based in New York.
Work with a lawyer
A lawyer can ensure that everything is in writing and assist you in preventing any future legal disputes or unexpected costs.
“You should certainly always hire a real estate attorney for both people even though it is a family member,” Fitzgerald says. “A professional can serve as the buffer between you and the family member to keep the process objective and offer advice to both sides.”
Don’t skip important steps
“You wouldn’t want to sell the home to a family member only to saddle them with safety or major structural issues,” says Justin Kirk, vice president of investments and acquisitions at Alta Senior Living, based in Southern California.
Insist on following through with the documentation that is required in an arm’s length transaction, especially the transfer of the deed.
The Bottom Line on Selling Your Home to a Family Member
There are definite financial and emotional benefits to selling or giving your home to a family member. While doing so can make buying a home more affordable for them, it’s important to remember that it is still a real estate transaction with legal and tax implications that need to be carefully considered.