What You Will Read In This Article
- Step 1: Determine a Selling Price
- Step 2: Sign a Purchase and Sale Agreement
- Step 3: Consider Hiring a Real Estate Agent
- Step 4: Work Through the Mortgage Process
- Step 5: Consider Owner Financing
- Step 6: Hire Separate Attorneys
- Step 7: Transfer Title, Pay Taxes, and Close on the Home
- Common Questions About Selling a House to a Family Member
Selling your house to a family member can be a win-win for both of you. For a start, it eliminates the hassle of marketing the house for sale and have wishy-washy potential buyers coming to take a look.
On the other hand, it can throw some additional elements into the mix. To help make the process as seamless as possible, we will discuss seven essential steps you can follow. Continue reading to discover how to sell a house to a family member drama-free.
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Step 1: Determine a Selling Price
This is the first thing to do when you want to sell a house to a family member. You need to have a serious chat with them about the price that will be fair to all parties without incurring the IRS’s wrath and the accompanying penalties.
While you can sell a house at a price that is way below the market value, it cannot be done without penalty when the transaction is between family members or close friends. The IRS will consider the deal an arm’s length transaction. Selling a house to a family member, on the other hand, is considered a non-arm’s-length transaction.
How do you arrive at a fair price for all parties without ending up in the crosshairs of the IRS? You have two options: you can hire an appraiser, or you can get a CMA from a real estate agent.
Option 1: Hire an Appraiser
Hiring an appraiser will give you a better understanding of the home’s value and the best price to set. A professional appraiser is always recommended over an online house valuation tool. It is also necessary if your family member is seeking a mortgage to finance the home purchase. Even if you have already agreed on a price, hiring an appraiser is important as lenders insist on that. They always want to make sure that the value of a home is high enough to match the mortgage’s value.
An appraisal is a good idea before you sign any paperwork, primarily because selling your home below market value can result in tax penalties courtesy of the IRS.
Option 2: Get a CMA from a Real Estate Agent
If you want to get an accurate value for the home you intend to sell, getting a comparative market analysis (CMA) from a real estate agent is another good way to go. A CMA will consider every factor that determines the price of a house, including the neighborhood, the market situation, how trendy the kitchen is, and many other points. It is one of the best ways to ensure that you know what the home is worth at the moment.
It is best to agree on a price after ascertaining your home’s real value and what can be considered a reasonable price for it. Even if you intend to give your family member a great deal, make sure the house is not sold for less than 75% of its current value. This is basically to avoid falling into trouble with the IRS.
Step 2: Sign a Purchase and Sale Agreement
Another crucial step on how to sell a house to a family member is to sign a purchase and sale agreement. In fact, this is one of the critical steps in selling your home to anyone. Regardless of who is purchasing the house, having an agreement or contract makes the sale formal.
Once the offer from an intending buyer has been accepted by a seller, signing a purchase agreement is a necessary step. This agreement is necessary to guide both parties during the precarious time between offer acceptance and entering escrow or receiving payment. When both parties sign the purchase and sell agreement, the offer is officially under contract.
Like all written contracts, the purchase agreement contains relevant information. The vital information normally includes:
- Identification of participating parties in the deal (buyer and seller)
- The legal description of the property
- Financial details of the transaction, including buyer financing, purchase price, and closing costs (including how they will be shared among the participating parties).
- Conditions, terms, or specifics of the transaction, including contingencies, as well as additional items included in the sale, like appliances, furniture pieces, fixtures, and more.
- Timelines, including a contingency time frame, the expiration date of the offer, and the closing date.
It is normal to include the home’s condition, property disclosures, relevant seller concession, and a few other additional details in the agreement. Once the agreement is signed and the earnest money is deposited, the buyer has every legal right to buy the house once the other agreed-upon conditions are met. The process of returning the signed purchase agreement with the buyer’s earnest money is referred to as moving the sale into escrow.
When you are selling to a family member, you can sign the agreement as early as possible. Since you expect that the process of transferring ownership to the intending buyer will not likely be disrupted, signing this should be done once you have agreed on a price that is fair to both of you and won’t incur penalties come tax time.
Step 3: Consider Hiring a Real Estate Agent
When you are selling to a family member, it is understandable that you may feel that you don’t need a real estate agent. After all, you don’t have to list your home and market it to attract many potential buyers. You already have a buyer, someone close to you who you are willing to offer the house at the fairest possible price. But does that make the entire process of selling a house any less complicated?
While there are many things you can avoid when you sell your house to a family member, there are several other things that can become complicated as a result of the relationship you have with the potential buyer. Unless you are gifting the house to a family member (which is subject to gift tax), you need to be extra careful with every detail of the transaction to prevent the appearance of impropriety when the IRS examines the transaction.
Hiring a realtor when you want to sell a house to a relative is not compulsory at all, but it can be helpful in many ways. For example, the involvement of an expert in the transaction will serve as a buffer between you and your relative. The involvement of a real estate agent will also make it easy for the participating parties to feel that the deal is impartial. They can help eliminate any form of drama that can cause bad blood between you and your family member(s).
Most people who avoid hiring realtors when they want to sell to family members do so because they feel they will save some costs. The decision to go it alone can backfire, however. Considering that realtors can accept a lower commission when you already have a family member as a buyer, it is advisable to get an expert involved and try to negotiate a lower commission. A real estate agent will also take the weight of the transaction off your shoulders, facilitating a smooth and flawless experience.
Step 4: Work Through the Mortgage Process
Most people buy their homes through a mortgage. Unless your family member has a lot of cash to splash, it is most likely that he/she will turn to a mortgage to make the purchase from you.
Remember that selling to a family member is regarded as a non-arm’s-length transaction. Mortgage lenders also charge higher interest when transactions are happening between family members. But they will also want to make sure that the value of the home is not below the mortgage amount the intending buyer is seeking. They’ll also ensure that the home is fairly priced. This is why it is important to have the home appraised before setting the price and signing a purchase and sale agreement.
The mortgage lender may take steps to validate the valuation of the house. Most lenders will also require that you (the seller) verify that you are not delinquent on the existing mortgage or a lien if there is one. Granted, the process can be a little awkward and even challenging for you and your family member who intends to buy the house. But checking all the legal and regulatory boxes means a smoother transfer for you both.
The preparedness of the prospective buyer, as well as your equity on the home, determines how smoothly the process of getting a mortgage will be. Most mortgage lenders will also require a slightly high down payment to secure a mortgage for non-arm’s-length home transactions. Securing with an FHA loan, for instance, typically requires a down payment of at least 3.5% of the purchase price, while conventional loans can start around 3-5%.
Involving experts in your transaction can also make this step easier for you and your loved one. An experienced real estate agent or a lawyer can offer the right advice and help that will make the process less frustrating.
Step 5: Consider Owner Financing
Owner financing is one of the best ways for wealthy homeowners to help their family members buy homes from them. It involves the seller giving the buyer a mortgage for the home. This may sound like a gift, but it isn’t, especially since the buyer will have to pay for the full value of the mortgage and accompanying interest as applicable.
Even if you are not wealthy, owner financing is still a viable option when you want to sell your home in a tight credit market. When it is done correctly, this option can help both you and your loved one who is buying your home.
While owner financing helps you move a home faster and earn a sizable return on the investment, it will also help the buyer (your family member) avoid the frustration of stringent qualifying requirements for a mortgage. You can also agree on flexible rates and a better loan term than an average lender might offer.
It is essential to state here that owner financing is a risky way to sell a home, even to your family member. The risks are significant, and there is a chance that the decision could ruin your relationship with some of the people you love and trust.
Such a deal is also riddled with legal, financial, and logistical hurdles. To sell a home to your family member through this option, you will have to get the right professionals involved – including real estate agents and lawyers.
Step 6: Hire Separate Attorneys
In the previous steps, we stressed the importance of hiring the right professionals to help navigate the difficult waters of selling a home to your loved ones. Besides experienced real estate agents, attorneys are most relevant to the success of this type of transaction.
Some people taking this complicated journey of selling a house to a loved one make the mistake of assuming that the same attorney can handle the deal smoothly. Some attorneys will claim they will do that. Frankly, a single attorney can handle such deals, but the aftermath can turn ugly. It is best for the two of you to hire separate attorneys.
You may have good intentions and a verbal agreement with the family member you intend to sell your house to, but you can’t be sure that the relationship will remain so rosy for years to come. Some issues may arise in the future as a result of the deal. When such happens, you will realize the importance of hiring separate attorneys for the deal.
When you both hire individual attorneys to protect your interests in the transaction, bias can be avoided. There will be exact solutions for potential hiccups. The two attorneys will also work together to ensure that the transaction does not incur any legal problems.
Step 7: Transfer Title, Pay Taxes, and Close on the Home
This is the final step on how to sell a house to a family member drama-free. This should come after all details of the deal have been sorted and finalized. Depending on the nature of the transaction, you should receive the down payment from the family member who wants to buy or the full payment from his/her lender.
Upon closing the sale, you are expected to transfer the title of the house to the new seller. This marks the transfer of ownership after all conditions of sale has been made. You are also expected to pay whatever tax is due for the deal.
When you work with an experienced professional, you can be sure that you will only pay what is necessary to the IRS. This way, you can avoid losing your money by paying more than necessary or paying less and getting into trouble with the IRS.
Common Questions About Selling a House to a Family Member
Have more questions about selling a house to a family member with as little drama as possible? Consider these Q&As.
Can you buy a property from your parents for less than market value?
Yes, it is possible to buy a house from your parents for less than market value, but that can come with scrutiny from the IRS. Buying a house from your relative is treated as a non-arm’s-length transaction. The IRS is interested in such transactions, and if the price is far below the market value, there could be severe consequences.
If you must buy a property from your parents, make sure that value is close to the market value. Your loved one can also decide to sell you the house as a gift, which means they’ll need to file separate tax paperwork on the gift amount.
Can you sell a house to a family member for $1?
Yes, you can sell a house to a family member for $1. Of course, that is more like a gift to such a person. In fact, the IRS will be aware of any discount you offer to a family member or close relative that is lower than the market value as a gift. In essence, you may be required to pay gift taxes on the home value.
As of 2019, you can gift as many people as you want up to $15,000 without paying a gift tax, as long as you’ve not exceeded the $11.4 million total over your lifetime. Anything more than a $15,000 discount in a year or beyond your lifelong gift bracket, you will pay the accompanying gift tax.
Is it illegal to sell a house to a family member?
It is legal to sell a house to a family member. However, you have to do it as the law dictates. Hiring attorneys separately and involving other professionals like real estate agents and appraisers will help you avoid costly mistakes.
Can parents gift a house to their kids?
Yes, parents can gift a house to their kids. However, they may have to pay gift tax if the value of the house or the discount they offer their kids is beyond $15,000, or they have exceeded the $11.4 million worth of gifts they can give over their lifetime. Keep in mind, this is different then inheriting a house after your parents pass away.
Do you have to pay a gift tax if you sell a house to a family member?
Not necessarily. It all depends on the value of the house, and the discount offered to the sellers. If the discount is more than $15,000 or you have exceeded your lifetime gift limit of $11.4 million, you will have to pay gift tax.
Do you have to pay capital gains taxes on a home you sell to your family?
Maybe. Regardless of who you sell to, it is always possible that you will have to pay capital gain tax. The IRS allows an exclusion of $250,000 of capital gains on real estate for singles and as much as $500,000 for married people. It is unlikely that you will pay capital gain for a house that sells and your profit for less than these amounts.