When it comes to finances, mixing family and money isn’t always the best idea. But sometimes, selling your house to a family member might make sense – both financially and in terms of convenience.
Whether you’re trying to keep a sentimental home in the family or want to help out a younger relative, selling within your family could put you in a great position. In this article, we’ll cover our top four tips on familial transactions, some of the potential risks involved with selling to a relative, and more.
1. Agree on a price, but stay flexible
In a standard real estate transaction, the buyer and seller are on opposing teams. They both want to come out on top – or at least with most of their demands met. When your buyer is a friend or family member, however, you won’t have the luxury of thinking like that.
If both parties value their relationship as relatives, it’s always a good idea to get everything in writing. Essentials such as the inspection and appraisal should also be done fairly early into the process – preferably as soon as the buyer is pre-approved and knows their spending limit.
Let’s break down inspections and appraisals when selling to a family member:
An inspection, at its core, protects buyers from ending up with a damaged or unsatisfactory home. Insections are often put in place with the initial sale contract, but when the seller and buyer are related and friendly it can be an easy step to skip. Still, it’s never a bad idea to get an inspection anyway to ensure that you and your relative don’t miss anything.
Learn more about the ins and outs of home inspections here.
An appraisal, on the other hand, will be required by the lender to make sure the home is worth more than the loan amount. Sometimes the numbers will come in higher or lower than expected – especially if a realtor isn’t involved with the pricing. This is a common quality of real estate transactions done between relatives.
Learn our top five tips to boost your home’s appraisal.
With these things in mind, acting early and getting everything in writing will result in an easier experience for both parties. And if no one is flexible, things could get unnecessarily tense.
2. Selling below market value can get tricky
In some situations, the seller might want their transaction with a family member to look less like a sale and more like a gift. This can come with some complications.
If a home is sold more than 25 percent below market value, it’s likely that the buyer will get hit with a gift tax. However, there are a few alternative options:
- Sell the home at only a slight loss, but give the buyer/relative the maximum allowable tax-free gift ($17,00 in 2023) each year until the agreed-upon amount is reached.
- File a quitclaim deed to add the buyer’s name to the title. This is usually the simplest way to transfer property, but only when money is not being exchanged. In the event that the seller wants to be paid, the buyer will need to take out a home equity loan to pay the seller.
- Go the seller financing route. This option cuts out the lender entirely and puts the responsibility on the seller.
3. Stay on the IRS’ good side
The IRS likes to keep a close eye on transactions that take place between relatives, and for good reason. When the buyer and the seller are on the same side, the likelihood of fraud becomes much higher – often in the form of fake tax-deductible losses or fake short sales.
As far as the IRS is concerned, you can sell your property at a loss to a family member all you want. However, you can’t take a deduction on the loss or sell the property for less than you owe to the bank.
Learn more about the IRS’ rules on family property sales here.
4. Swap your realtor for a lawyer
While you can probably pass on a realtor for your family transaction, a qualified real estate attorney could be your best friend. Like a realtor, your lawyer will be able to fill any gaps in the process – like finalizing the right paperwork and organizing the title search and transfer.
Since your lawyer will be acting solely in your best interest, they’ll also have a much clearer idea of your options and what should be done to move forward.
Are There Downsides to Selling to a Relative?
Now that we’ve covered our top four tips, let’s look at some of the risks involved with selling to a family member. The short version? Your experience could be more complex. But let’s dive into a few common obstacles that are more specific.
- Family Issues. Right off the bat, selling your home to a family member could go sideways and result in tension, fallout, or even a botched transaction. With this in mind, always be sure to set expectations with your relatives and seek trusted legal counsel to ensure all parties are satisfied with the deal.
- Taxes. Depending on the price your property is sold for, the buyer may need to pay a gift tax. Selling significantly below market price will often result in further complications with your transaction.
- More Steps and Verification. Because your transaction will be between family members, the lender may take extra steps to verify your information and ensure that no fraud is at play – meaning your closing date could be pushed further than the average transaction.
Remember: every real estate transaction is unique, and not everything on this list may apply to you. Depending on your lender, your relative, and your goals, your transaction could turn out to be an easy one.
Explore Your Options With Total Mortgage
If you have any questions about selling your home to a relative, Total Mortgage is here to help. Loan experts across the country are on standby and would be happy to address your unique situation. Get in touch with one today.
Source: totalmortgage.com