Selling a house isn’t always easy. On top of preparing your home for sale, holding open houses, and handling offers, and making counteroffers, there’s the emotional aspect. This isn’t just a house, after all. It’s a home filled with memories. You want to make sure the next owner appreciates it and treats it as well as you did.
Selling to a family member can help relieve some of those emotional worries. But it opens you up to financial and legal concerns that aren’t there when you sell to a stranger. Before considering your home a pending sale, let’s look at how to overcome the challenges of selling your house to a family member.
How Selling to a Family Member is Different
Selling your home to someone you don’t know is considered to be an “arm’s length” transaction. This term simply means that the two parties came to an agreement on the price and terms independently of one another. Neither party exerted influence over the other.
In an arm’s length transaction, it’s a given that each party negotiated for the most advantageous price possible. This is typically confirmed during the home appraisal process, before closing.
But when you sell to a family member, it’s no longer considered to be an arm’s length transaction by the IRS. Your home sale is now known as a controlled transaction. When you sell your home in a controlled transaction, the IRS will examine it more closely.
Fair Market Value vs. Gift Price
The main thing the IRS will look at is the price at which you sold your home. They’ll want to confirm that you sold your home for its Fair Market Value (FMV) and not for a gift price.
The fair market value of a home is its value under normal market conditions. For the IRS to consider the listing price to be its FMV, certain conditions must be met.
- Both the buyer and the seller are willing participants in the transaction.
- There is no compulsion or undue pressure.
- All parties have reasonable access to any facts affecting the value of the home.
If the market is in an extreme situation, this might be different than the current value of the home. In a hot seller’s market, for example, a home might be sold for over FMV. And in a very slow market, the home might sell for under FMV.
Typically, the fair market value of a home is determined by an appraiser, using various different factors. This can include facts about the house (square footage, age, etc.), recent listing price, a comparative market analysis (CMA), and more.
If you sell your house to a family member for less than its FMV, the IRS could consider it to be a gift. This could carry significant tax implications. Depending on the difference between the FMV of your house and the price at which you sell it, it might even be considered a gift.
Let’s say your home is worth $300,000 and you sell it to a relative for $200,000. The IRS could consider the $100,000 difference to be a gift. That would mean it’s subject to a gift tax. And you would be the one responsible for paying the tax, not the buyer.
If you are considering selling your house to a family member for a price below its FMV, you might want to consult a real estate or tax attorney first.
Steps for Selling Your House to a Family Member
Finances can complicate any relationship, especially with family members. To avoid the potential for resentments or a strained relationship, it’s crucial to conduct negotiations in a way that’s fair and impartial to all parties.
Here are some strategies to help you sell your house to a family member successfully. You can expect the process to take around 45 to 60 days.
Discuss What You Want
Of course, the main thing you want is to transfer ownership of the house. But outside of that, you should have an honest conversation about how you wish to proceed. Come to an agreement on timelines, whether you want inspections (and who will pay for them), and other items that matter to you or the seller.
Seek Professional Assistance
Even if you have a great relationship with your relative, contracts and fees can be difficult. Hiring professionals to help can make things smoother for everyone.
You might think you don’t need a Realtor since you already have a buyer. But there is a considerable amount of paperwork that needs to be prepared. And it needs to be in accordance with local laws and regulations.
You’ll also want a home appraisal from a professional, licensed appraiser. Your Realtor can help you find an appraiser, or you can find one via the websites of the appraiser organizations.
Agree on a Price
If you’re working with a real estate agent, they can use the CMA to help you determine a fair sale price for your home. The appraisal will confirm the price is accurate.
Remember that the IRS will look more carefully at your sale since it’s to a relative. You’ll want to be sure you have proof that it wasn’t a gift if you want to avoid the gift tax.
Sign a Purchase Agreement
Once you have decided on a price, you and your buyer should sign a purchase agreement. This simply puts all of your agreements in writing. It also protects both of you, should anything go wrong during the negotiations.
Your Realtor can help you write up your purchase agreement. It will probably be less involved than a traditional purchase agreement. For example, you probably won’t require an earnest money deposit. But it should include the sale price, contingencies, and a breakdown of who pays for fees.
Schedule a home inspection, if that’s what you decided on prior. Make sure you and the buyer are both clear on who will be paying the inspector. You’ll also want to decide ahead of time who will pay for repairs. This should be included in the purchase agreement.
Close on the Home
If your buyer is working with a lender, they’ll have to go through the traditional mortgage process. They’ll work with a title company and prepare their paperwork. Once the mortgage has been approved, your buyer will be “clear to close” and you can proceed. Understanding the closing process from start to finish will be essential.
Selling your house to a family member can be a simple process and easier than selling to a stranger. Follow these strategies to ensure a smooth transaction for everyone!
The above article on selling property to a family member was written byAnna Compagine Cohen. Anna is a Content Writer at UpNest, where agents compete and you win. Anna has an extensive background in the real estate industry. She is a published author who specializes in real estate, personal finance, travel, and wellness. When she’s not writing, Anna can be found reading, walking on the beach, or spoiling her teenagers and their rescue dogs.