✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home sellers.
Selling a house to a family member offers a way to save on commissions and keep your house within the family. As you won’t need a Realtor, you can keep an extra 5.66% on your family home sale in your pocket.
This means if your home is worth $405,000, you can save a whopping $22,923.
While selling to a family member promises financial benefits, remember that it comes with a few challenges that you must be aware of to ensure a successful sale.
📌Family Home Sale? Read This First!
- Selling a home to a family member is a non-arms length transaction that could be scrutinized by the IRS.
- The maximum discount you can give a family member is $18,000 per person ($36,000 for couples).
- Inform neighbors and the local authorities of the home sale to protect neighborhood prevent values from decreasing.
How to Sell Your House to a Family Member in 5 Steps
Here’s how you can ensure a successful sale of your home to a family member:
Step 1: Decide on the Process
Both parties can decide the relevant third parties needed for the transaction like a real estate attorney, a broker, a house inspector, etc.
It would be best if you also establish a decision-maker who is a third person to prevent other parties from modifying the agreement.
Step 2: Determine Finances
Discuss with the buyer how they will finance the purchase. Both of you can explore cash payments or even owner financing. This clarifies the budget and ensures the sale aligns with both parties’ expectations.
You can also ask your family member to get pre-approved for the mortgage as this will give you peace of mind that the sale will go through.
Step 3: Set the Price
Even if you are selling a house to a family member you need to set a reasonable price. You can check the prices of houses sold in your neighborhood, or get a comparative market analysis done for your property to set the price.
Step 4: Hire the Right Professionals
You could require assistance with paperwork like the purchase contract and federal and state-required seller disclosures. We recommend you hire separate real estate attorneys for better transparency to ensure impartial legal execution of the process.
Step 5: Close the Sale
If your transaction involves a lender, you will follow a traditional closing process. The traditional close includes a title company and the presence of a real estate lawyer.
You can also choose a self-finance arrangement in which you can draw up a promissory note. It must include the terms and conditions of the loan. Work with a lawyer to draw up the note to ensure it complies with legal regulations.
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🏠 Selling house to family member below it’s Fair Market Value (FMV)?
Disclose the sale to your neighbors and public records as a family sale. This can prevent misinterpretations that could negatively impact the property values in your neighborhood.
How Is Selling a House to a Family Member Different?
A home sale can be of two types:
- Arms Length: It’s a transaction where the seller and buyer don’t know each other.
- Non-arms length: A transaction where the seller and the buyer know each other. In such cases, the IRS will scrutinize the home sale if it is below fair market value.
What Is a Gift Tax?
If you are selling your house to a family member at a lower FMV, it triggers a gift tax. The maximum exclusion (discount on your house sale) you can give is $18,000 per person ($36,000 for couples).
For example: You sell your house to your grandson for $200,000, but it’s worth $300,000. The $100,000 is a taxable gift. But if you have given less than $13.61 million in your lifetime to your grandson, you won’t have to pay gift tax.
Want the easiest way to bypass this guideline from the IRS? Sell your house to your family member at a price closer to its fair market value.
Pros and Cons of Selling a House to a Family Member
These pros and cons can help you make an informed decision when selling a house to a family member.
✅ Pros
- Faster Selling: You will sell your home faster, as you won’t have to look for a buyer.
- Save Money: You will save on staging, photography, and listing your house.
- Sentimental Value: The house with precious memories stays within the family.
❌ Cons
- Incorrect Paperwork: You might take this sale casually and not do the paperwork required.
- Financial Disadvantage: You won’t make much money as you might sell the house to a family member below its market value.
- Relationship Strain: Disagreements around the sale may strain your relationship with the family member.
Should I Sell My House to a Family Member?
Selling your house to a family member can help you save on the agent commissions but underselling is a huge risk. You could leave money on the table, cause resentment in relationships, or even face tax implications.
To counter this risk you can consider not selling your house to a family member, and do a FSBO listing with Houzeo. This online platform helps you list on the MLS without a traditional agent, saving you money while still reaching potential buyers.
Eager to Know More?
We’ve got you covered. Check out the following video to understand why Houzeo is one of the best for sale by owner websites in the U.S.
Frequently Asked Questions
How to sell a house to a family member?
Consider your financial situation as well as that of the buyer before selling your house. You can also hire professionals, and a third party to be a decision maker when selling your house to a family member.
When to sell a house to a family member?
The ideal time to sell your house to a family member depends on market factors like inventory, median home prices, and whether its a seller's or a buyer's market.
What are the IRS rules for selling property to family members?
The IRS will only notice if you give your family member a discount. As per the guidelines of 2024, you don't have to pay gift tax if your discount is below $18,000. When you give a bigger discount, you have a limit of $13.61 million. If you exceed that amount you'll have to pay tax at an 18% to 40% rate.
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