Selling your home to a relative is a way to keep a valuable and sentimental asset in the family, while helping someone you care about buy a home. While it’s tempting to give family members a good deal on your home, selling a property for less than the fair market value has financial implications.
Key Takeaways:
- Selling your home to a family member can make it more affordable for them to buy a home and may save you money.
- If you’re planning on giving a family member a discount on the price, the home equity counts as a gift and is reported to the IRS.
- To help the sale go smoothly, work with a real estate agent and consider hiring a lawyer.
Why Sell Your Home to a Family Member?
There are good reasons to sell your home to a family member. One is to help a relative who otherwise would be unable to afford a mortgage to buy a home. Another is to keep a beloved property in the family as a kind of keepsake.It also can save the seller money on a sale.
“You can avoid real estate commissions by handling the transaction on your own,” says Kari Brummond, a tax preparer and accountant at TaxCure, based in Trumbull, Connecticut. “The seller may save money on repairs if the buyer agrees to take the property as is. The buyer may be able to save money if the seller agrees to sell the home below its fair market value.”
How Is Selling Your Home to a Family Member Different?
Selling a home requires plenty of documentation to transfer legal ownership of the property, which is designed to ensure a fair and transparent transaction. Selling a home at less than market value affects some elements of the sale, and is apparent especially to tax authorities, such as the IRS.
‘Arm’s length’ vs. controlled transactions
Selling a home to a buyer you have no prior relationship with is called an “arm’s length” transaction, while selling to a family member, friend, or professional acquaintance is called a controlled transaction. These are legal terms, with specific definitions used by the IRS for tax purposes.
Gift taxes
In a controlled transaction, the seller often sells the home at a bargain price or even gives the home to a family member.
In such a transaction, the value of the sale includes what’s called a gift of equity, since the buyer acquires home equity without paying for it.
“The gift of equity would be the difference between the current market value and the amount that you sell your home (for),” says Ryan Fitzgerald, a real estate agent and owner of Uphomes, based in Charlotte, North Carolina. “If you do sell it for lower than fair market value, you have to report the gift to the IRS.”
When you’re giving or selling your home to a family member for less than fair market value, you need to file a gift tax return if the gift amount exceeds the federal exemption. The annual gift tax exclusion in 2024 is $18,000 per individual and $36,000 for a married couple filing a joint return.
What’s unusual about gift taxes is they aren’t paid in the year they are filed. Instead, they’re deducted from the giver’s lifetime estate tax exemption — which is $13.61 million in 2024 — affecting how much estate tax they may have to pay when they die. Any amount you give that exceeds the exclusion counts toward the lifetime exemption.
“No one actually pays gift tax,” Brummond says. “Instead, the gifts they give away during their lifetime reduce their estate tax exemption.”
If your lifetime estate gifts exceed the lifetime estate tax exemption, then your estate will need to pay tax on the amount over the limit after you die. If you reported $6 million on gift tax returns during your lifetime, your exemption would drop from $13.61 million to $7.61 million, Brummond says. Obviously, most people never give away enough to need to worry about having to pay gift taxes.
Capital gains taxes
The IRS also examines controlled sales to make sure the sellers aren’t selling their home to family at a reduced price to avoid paying capital gains taxes on the sale.
The capital gains tax is levied on the profit or gains you make over what you paid for your home when you sell it. Single filers can exclude $250,000 of the gain on the sale of their home, and married filers can exclude up to $500,000, as long as they have used their home as their primary residence for at least two of the five years prior to the sale.
The IRS also distinguishes between short-term and long-term capital gains. If you’ve owned the property for less than a year, then your profit from selling the home is subject to the short-term capital gains tax, which means your gains are taxed as regular income.
If you’ve owned the home for more than a year, then your gains are subject to long-term capital gains tax, which is applied at different rates depending on your income:
- You’ll pay 0% on your capital gains if your annual taxable income is less than or equal to $47,025 for single filers, or $94,050 if you’re married and filing jointly.
- You’ll pay 15% on your capital gains if your annual taxable income is more than $47,026 but less than or equal to $518,900 for single filers. If you’re married and filing jointly, this range is over $94,051 and equal to or less than $583,750.
- You’ll pay 20% on your capital gains if your annual taxable income exceeds $518,900 for single filers and $583,750 if you’re married and filing jointly.
Property taxes
Property taxes are collected by state and local governments to pay for community services such as roads, utilities, and schools. The amount you pay in property taxes generally is based on the assessed value of your home, not what you paid for it. Even if you give a family member a discount on the sale price, the home’s fair market value typically still will be used to determine how much they pay in property tax.
State taxes
In addition to federal taxes, there are state tax policies to follow that vary depending on where the home you’re selling is located. You can usually learn more about state taxes by going to the website of the government or treasury with jurisdiction over the home.
Why Does the Government Care?
You might be wondering, What does it matter to the government whether I sell my home to a relative or a stranger? It matters because a home that’s sold below market value can reduce the value of homes in the surrounding area. Controlled transactions also may be signs of Medicaid fraud.
Effect on property values
The value of a property is largely determined by recent sales of nearby comparable homes — commonly known as comps. If you sell your home to a family member for less than market value, it can reduce or hold back property values for nearby homes. This means when your neighbors want to sell or borrow equity with a cash-out refinance, the good deal you gave your family member will drag down comp values and limit how much they can get. It also reduces the assessed value of homes in the area for property taxes — good news for taxpayers, but it drives down revenue for the local government.
Medicaid fraud
Another reason the government monitors controlled real estate transactions is because they have been used to hide assets when a homeowner applies for Medicaid.
A federal-state health care insurance program for low-income people, Medicaid is not free. It requires states to recover as much as possible the cost of an individual’s long-term services and support from their estates. Owning a home means you have an asset that Medicaid can seize and liquidate to pay for your care.
People who don’t want to sell their home to pay for medical services have tried to give or sell it to a family member at a discount, and then continue to live in it. The thinking is this would let the family keep the house, but take it off the books of the person seeking Medicaid.
Most states have what’s called a five-year look-back period that disqualifies anyone from Medicaid benefits if they gave their home to family or sold it for less than market value within the previous five years. Doing so means you could face penalties, and you could temporarily be ineligible for Medicaid.
8 Tips for Selling Your Home to a Family Member
There are several ways to make selling your home to a family member go smoothly. Most entail treating the transaction like an arm’s length sale.
“When selling to family, you can avoid costly estate agent fees,” says Anastasia Allmon Riley, a lead attorney at Farris, Riley & Pitt LLP, based in Birmingham, Alabama. “However, you will likely still need to find a real estate lawyer to sign off on the sale, and even look over a contract to ensure that it is watertight, but typically you will need their services far less, and at the end of the process, their fees should be far lower.”
Here are eight tips for selling your home to a family member.
1. Set a reasonable price
Setting a reasonable price reduces how much of your gift tax exemption you use because you’re giving your relative less home equity. It also provides documentation if the transaction is ever scrutinized. Additionally, you still may need money from the sale to buy your next home.
To determine a reasonable sale price, you can order an appraisal to assess the home’s fair market value. Your real estate agent also can help you conduct a competitive market analysis to see how much comparable homes have sold for recently.
2. Establish the transaction type
You’ll want to avoid misunderstandings or assumptions that can lead to conflict and create rifts within your family. Both parties should agree whether the transaction will be a gift, or more like an arm’s length transaction.
3. Find a mortgage lender
If the family member buying your home needs a mortgage, it’s a good idea to shop around and compare mortgage offers. The buyer also will want to understand the available loan types to find the best fit for their financial situation.
Seller financing options
Seller financing is an alternative to working with a lender or bank. With seller financing, the buyer moves into the home and makes payments directly to the seller instead of to a mortgage lender. The payments include interest and follow an amortization schedule, with the buyer taking full ownership when they pay off the loan. This can be a good option if the buyer might have trouble qualifying for a mortgage.
Just beware that if you as the seller charge an interest rate that’s too low, the IRS may consider it a gift that needs to be reported.
4. Get everything in writing
Even if you’re selling your home to a close family member, it’s a good idea to make sure you put everything in writing. This can prevent disputes or conflicts down the line if one party forgets or misremembers exactly what both parties agreed to. It also records the transaction in case the IRS requires documentation.
5. Get a real estate agent
Even though it’s unnecessary to use a real estate agent when selling your home to a family member, an agent can help with the process.
“An agent will be able to navigate through impasses, work with lender and appraisal issues, deal with title challenges, and be a resource throughout the transaction, regardless of whatever issues might arise,” says Michael Shapot, a residential real estate broker with Keller Williams NYC, based in New York.
6. Work with a lawyer
A lawyer can ensure that everything is in writing and assist you in preventing any future legal disputes or unexpected costs.
“You should certainly always hire a real estate attorney for both people even though it is a family member,” Fitzgerald says. “A professional can serve as the buffer between you and the family member to keep the process objective and offer advice to both sides.”
7. Have the home inspected and appraised
The home inspection and appraisal are important steps in the homebuying process — even if the buyer is your family member. During the inspection, a certified professional carefully examines the condition of the home and reports any defects, damage, or hazards. This gives the buyer full disclosure about the condition of the home and whether it needs repairs, so they know what they’re walking into.
An appraisal determines the home’s fair market value. Mortgage lenders typically require an appraisal to ensure they aren’t lending the buyer more than the home is worth. Even if your family member isn’t working with a lender, the appraiser can help you prove to the IRS that you sold the home to your family member for a reasonable price.
8. Close on the home sale
Closing day is when you sign all the final loan documents, closing costs are paid, and the title of the home is transferred to the buyer. Lenders typically require you to work with a title company to close a sale. Even if you complete the sale without a lender or bank, it’s a good idea to have a lawyer oversee the final transaction.
FAQ: How To Sell Your Home to a Family Member
Here are answers to common questions about selling your home to a family member.
It’s possible to assume the mortgage from your parents and essentially take over the remaining payments. This can be a major boon to the buyer if the home’s value or interest rates have gone up since their parents bought the home. On the other side, your parents give away their equity, or the money they would have made by selling their home on the market. Mortgage assumption is more common when the parents die, and their children or heirs take ownership of the home.
Real estate agents and Realtors help sellers find buyers, and help buyers find homes for sale. If you’re planning to sell your home to a family member, it’s possible to forgo hiring an agent or Realtor. While you no longer have to pay the agent’s commission, it also means more work for you. One possibility is to hire one agent instead of two to help you conduct the deal more smoothly.
The Bottom Line on Selling Your Home to a Family Member
There are definite financial and emotional benefits to selling or giving your home to a family member. While doing so can make buying a home more affordable for them, it’s important to remember that it is still a real estate transaction with legal and tax implications that need to be carefully considered.
Rory Arnold contributed to the reporting of this article.
