If you're thinking of selling your house to a family member, first, congratulations are in order. You've found a buyer! The most strenuous part of the home-selling process is already over. So now what? How do you actually sell a piece of real estate to a member of your family?
To hire — or not hire — a real estate agent
It's all in the family, right? It can be tempting to bypass the regular process of hiring a real estate agent to broker the deal. And indeed, this is one of the very few home sale circumstances when it could be an acceptable plan.
Then again, even seemingly simple and straightforward real estate transactions can get contentious, and that's really ugly when the buyer is a family member. Hiring an agent as an informed third party to help navigate the negotiation process can actually make things easier -- and keep the family happier.
Although agents usually work on a commission basis, if you and your family member have already agreed on the price, you may be able to find one who will work for a flat fee to help you through the process. After all, the agent doesn't need to spend time marketing the property—you already have a buyer!
Hire an appraiser
Even if you've agreed upon a selling price, you'll need to have the home appraised if your buyer is seeking a mortgage. Lenders typically require appraisals to ensure the value of the home is high enough to match the value of the mortgage.
Michele Lerner, author of "Homebuying: Tough Times, First Time, Any Time," recommends getting the appraisal done before signing any paperwork, just in case you find out you're undervaluing your home.
Hiring a lawyer is highly recommended
Another person the experts say you must hire is a real estate attorney to help guide you through the selling process. A lawyer can provide clarity if any legal issues arise during the sale of the home. Typically, they also perform a title search to ensure there aren't any liens on the property and determine any zoning restrictions that prohibit your family member from making future improvements on the house.
What about gift tax?
You may want to give a family member a break on the price of the house, but don’t be too generous. There are tax consequences if you're selling a house to a family member at less than fair market value. Why? Because rules are put into place specifically to keep people from avoiding the federal estate tax by giving away their assets.
So that sweet deal you cut your family member is actually seen by the Internal Revenue Service as a gift, and any discount in price will be subject to a federal gift tax. In other words, if you sell your home to a family member for less than the fair market value, it's a gift.
The IRS allows anyone to give up to $14,000 per year to any number of people without having to pay gift taxes. So, if your the difference between your home's market value and the selling price is more than $14,000, you'll owe taxes on the sale.
Selling to a family member? We’re happy to guide you through the selling process. Contact us to connect with one of our licensed real estate professionals.