If done correctly, selling a home to a family member can be a great way to help a loved one save money and build wealth. However, OTC transactions between family members require careful planning and transparent communication to avoid misunderstandings and ensure a smooth process.
Why would selling to family be any different?
Selling your home to a family member is called a controlled transaction, while selling your home on the open market is called an arm’s length transaction.
Fair dealings take place between strangers, each acting in his or her own financial self-interest. Most real estate sales fall into this category, and buyer’s and seller’s agents are typically hired to negotiate on behalf of their respective parties.
In a controlled transaction, there is an established relationship between the buyer and the seller. Controlled transactions may be subject to greater scrutiny by the IRS, especially if the property sells for less than fair market value. However, it may save both parties real estate agent fees.
There are some key considerations when deciding whether selling your home to a family member is a good decision for you. If you’re looking to maximize profits, you probably won’t make as much as you would on the open market. Although you can sell your home for any price you like, a controlled sale may result in certain tax obligations for both parties.
Finally, ask yourself whether the relationship is likely to become strained if disagreements arise during the sales process.
How to sell a house to a family member
Because of the “it’s just family” mentality, some steps may be skipped when selling to family members, but take precautions and complete the process thoroughly to avoid complications, unexpected tax penalties, and unnecessary IRS scrutiny . Regulations vary from state to state, so make sure all parties understand the process in your area.
1. Agree on how to proceed
Start the conversation early so everyone agrees on the logistics of the sale from the beginning of the process.
- Write everything down. To prevent misunderstandings and resolve disputes, document all terms of sale and agreements as if they were an arm’s length transaction.
- Make a schedule. Whether you’re a year away from selling or hoping to close within a few months, timelines are important to all parties, especially if you have family members who need to sell their existing home, secure financing and arrange moving details.
- Discuss financing. Does your buyer need a mortgage? Do they buy with cash? Discussion up front ensures everyone is on the same page.
- Agree on contingencies. Contingencies in the agreement protect both parties if problems arise during the appraisal, inspection or financing stages of the deal. Thanks to your pre-agreed action plan, you’ll know who is responsible for what.
2. Form a professional team
You might think that if you and your family already agree on the key selling points, you don’t need a real estate agent to close the deal. However, an attorney can help come up with a fair market value, draft a contract, review documents, and ensure compliance with state-required agreements.
You can also consult a real estate attorney to learn about the contractual and tax issues involved in selling your home. A home inspector The buyer will be notified of any major problems with the home, and the appraiser If your buyer is financing the purchase with a mortgage, the lender will require this information.
These professionals can act as a buffer between you and your family, providing objective advice based on their professional experience and resolving differences when emotions run high.
3. Determine the value of your home
Because controlled transactions tend to be subject to greater tax scrutiny, you’ll want to document the process you used in determining the fair market value of your home.
You can start with an online estimate, but you should also ask your real estate agent to perform a comparative market analysis to compare your property to similar properties that have recently sold in your area.
Finally, get a professional appraisal, which your lender will require if you have a family member who needs a mortgage. Even if your loved one purchases the home in a different way, a professional appraisal can give both parties an accurate assessment of the home’s current value.
4. Determine the price
Your home’s fair market value can serve as a baseline when determining your final asking price, but you’ll need to decide whether to sell at market value, above market value, or below market value. The options you select should be mutually agreeable and clearly outlined in the final purchase agreement.
A below-market sale can be a financial advantage to your family members, but you may be subject to gift taxes. Buyers may also have to pay capital gains tax when they sell their home, depending on how they use the property and how long they hold it.
If you plan to sell your home as a gift or at a discount to a family member, it is best to consult with a real estate or tax attorney so that all parties understand the potential tax burden and liability.
5. Close the sale
Sellers report that in 2024 they will pay $8,000 in closing costs, which includes title insurance, credit checks, document preparation and other fees needed to complete the sale. Closing costs typically range from 3% to 6% of the purchase price.
A real estate attorney can be an asset in drafting the right closing documents to protect both parties from future legal issues, potential taxes, or unexpected expenses.
If you buy from a family member
On the other hand, buying a home from a family member can also be a great opportunity, as long as it’s the right home for you and the right environment. As a buyer, it’s important to take steps to protect your interests, especially if you feel pressured to help a family member sell due to financial or health issues.
Get a professional price estimate from an experienced appraiser, hire legal representation, and use a third-party home inspector just like you would a fair deal. Most importantly, try to remain emotionally neutral. While buying a loved one’s home can be an act of generosity, you run the risk of buyer’s remorse and potential strained relationships if the timing, home, or neighborhood isn’t right for you.
Luke Babich is CEO of Clever Real Estate.
This column does not necessarily reflect the opinions of the HousingWire editorial staff and its owners.
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