Steps To Selling A House To A Family Member
Do you have a family member who has expressed interest in buying your home? Selling a home to a family member can involve a different process than the same transaction with a stranger.
Take a look at the following steps and tips so you can clear up any questions you have about the process of how to sell your house to a family member.
How Is Selling A Home To A Family Member Different?
Family home sales differ from the typical home-selling process. Take a look at the following definitions you may need to know:
- Arm’s length transaction: In the very common arm's length transaction, the buyer and seller (who don't know each other) act separately in their own self-interest to get the best deal they can. In other words, you, the seller, would try to make a large profit on the home and the buyer will try to pay as little as possible. The buyer and seller commonly meet in the middle to buy and sell a home at market value.
- Controlled transaction (non-arm’s length transaction): A controlled transaction, on the other hand, involves a deal between two people related to each other.
Note that when you sell a home to a family member, the IRS will examine the sale price of a controlled transaction to investigate whether the sale is considered a gift or if it meets fair market value.
How To Sell Your House To A Family Member
The following sections represent the recommended steps to take when selling a house to family. It's a good idea to keep lines of communication open between you, the seller, and your family member, the buyer, throughout the process.
1. Establish The Home-Selling Process
Make sure you and your family agree to the logistics of the sale and how you'll execute official decisions. Laying the groundwork for the sale in advance eliminates future conflict or confusion. You may want to discuss the following:
- The specific professionals you may want to have help you
- How your family member will buy the home
- The timetable you want to use
- What should happen if other parties get involved and try to change the agreement between you and your family member
Ultimately, both parties should stay on the same page so each person knows what to expect during the home selling process.
2. Hire Professional Help
Hiring a real estate agent or real estate attorney irons out the process for both parties. These professionals can enforce contracts and fees, draw up the paperwork, identify state-required property disclosures, review important documents and ensure that the home sells for fair market value.
A good agent provides counsel on what constitutes a good offer and what is negotiable. This sentiment is especially important to keep in mind when selling a house to a family member.
A professional can serve as a “buffer” between you and your family member, keep the entire process objective and offer key advice when both parties are real estate novices. The sale's final result can end up being a very objective, smooth process.
3. Determine The Home’s Value
A neutral third party should evaluate your home’s value. A professional appraisal can offer a more educated decision on your home's official market value – the home's value may have changed since you first bought it. Either you or your family member can pay for the home appraisal to get the home's official value.
Your real estate agent can also run a comparative market analysis using the MLS to find the home value.
4. Set A Price
You can choose from two primary options for setting a price when selling to family members: gift or fair market value. A "gift of equity" means that you sell property to your family member for a lower amount than the current market value. The gift of equity applies to the difference between the current market value and the amount for which you sell your home.
Selling it at lower than fair market value means that you will have to report the gift to the IRS. Under IRS rules, you can provide a gift of up to $15,000 as a gift of equity before you have to file gift taxes.
As the seller and gift-giver, you must pay the gift tax. You can easily identify a few drawbacks to gifting a home to a family member, including legal fees (a gift of equity requires a contract) and having to pay possible capital gains taxes.
Your sale might also have a negative effect on local real estate. For example, let's say you sell your home to your daughter for $100,000 less than the home's fair market value. The home is worth $200,000 and you sell it to her for $100,000. Let's say that after she moves in, your former next-door neighbors want to sell their home. Unfortunately, they might not get their full asking price of $200,000 because records show that your daughter bought the home for a full $100,000 below market value.
5. Close On The House
Closing on a house with a family member may differ from when you originally closed on your home. It's a good idea to hire a lawyer to oversee the accuracy of all closing documents.
However, if your family member will buy the home with a loan, the lender will mandate a traditional closing that involves a title company.
Tips For Selling A House To Family
Read through the following tips before you sell your house to a family member. You may need to apply all these ideas when you move through the sale process.
Put Everything In Writing
Keep organized notes of all of the terms and agreements of the sale. This can prevent misunderstandings between parties and makes things much easier for the title company.
Hire A Home Inspector
You should always order a home inspection prior to a home sale, even if you plan to sell your home to a family member. A certified home inspector will take a look at your home and identify health, safety or major mechanical issues.
Home inspections benefit both the home buyer and seller because it protects the buyer from ending up with major issues with the roof, plumbing, electrical systems or other issues. Set aside any feelings and get the inspection anyway.
The buyer’s lender will require an appraisal to make sure the home is worth more than the loan amount. The appraisal might come in high or low, particularly if you forgo a REALTOR®, which happens often with sales to relatives.
To sum up, it's always beneficial to complete both a home inspection and an appraisal.
Double Check Your Compliance To Tax Laws
The IRS may accuse the parties of trying to avoid the capital gains tax if you don't follow the law. No matter what, you want to follow IRS gifting laws if you sell your home for less than its fair market value. Your tax attorney can help you understand the relevant information regarding these gift laws.
Again, it's best to hire a tax attorney so both you and your buyer ensure that you follow all tax laws.
Keep Emotions At Bay
Selling your house to a family member can become more emotion-driven than selling your home to a stranger. Determining the sale price, for example, can lead to conflict or misgivings.
One common mistake sellers make involves treating the sale more casually than they would normally. They may ask for too little, then end up strapped for cash later. Asking a family member for an amount far below market value may lead to regret in the future.
Make financial decisions based on logic rather than emotion and keep the process formal. Insist on putting standard procedures in place, such as:
- Settling on a fair price
- Following all the appropriate steps
- Obeying the tax laws
- Hiring the professional assistance you need
Is It Worth It To Sell A House To A Family Member?
There are a lot of potential benefits to buying a home from a friend or relative, but mixing home sales and family can be a sticky business. The same goes for selling a house to a family member.
If you sell your home to someone you trust, it might make all the difference.
The drawbacks can include the following:
- Not making as much as you would have if you put the home on the market
- Skipping steps in the process because "it's family"
- Not understanding your home's fair market value
- Fumbling with gift tax laws (including raising red flags with the IRS) and more
Prior to making the decision to sell to a family member, both parties should weigh the pros and cons before moving forward with the home sale.
The Bottom Line
Selling a house to a family member involves a controlled transaction, which means you and the buyer are related to each other. Selling to a family member involves a different process than selling to a stranger.
You can uncover several benefits and drawbacks to the home selling process in this situation. The immediate benefit involves having a ready, eager buyer and a home sale that carries more meaning than simply selling your home to a stranger.
However, you might not make as much money if you sell to a family member compared to what you'd make if you put your home on the market. You also might be tempted to skip steps in the process by not hiring professionals. In addition, the IRS will examine the sale price to determine whether the sale meets fair market value.
Review how buying a home from a family member works before you choose to go this route. In addition, buyers and sellers can consult a Rocket Mortgage® Home Loan Expert to ask questions and get help completing the family sale process.