If handled correctly, selling your home to a family member can be a good way to help a loved one save money on a home and build wealth. However, an off-market transaction between family members requires careful planning and transparent communication to avoid misunderstandings and ensure a seamless process.
Why is selling to a family member different?
Selling your home to a family member is called a controlled transaction, while selling your home on the open market is referred to as an arm’s length transaction.
An arm’s length transaction is conducted between strangers, each acting in their own financial interest. The majority of real estate sales fall under this category and usually employ a buyer’s and seller’s agent who negotiate on behalf of their respective parties.
In a controlled transaction there is an established relationship between the buyer and seller. A controlled transaction can be subject to tighter IRS scrutiny, especially if the property is sold below fair market value. However, it might save both parties money on Realtor fees.
When deciding if selling your home to a family member is a good decision for you, there are some key considerations. If you’re hoping to maximize profit, you might not make as much as you would on the open market. Although you can sell your home for whatever price you like, a controlled sale may incur certain tax liabilities for both parties.
Finally, ask yourself if the relationship is likely to become strained if disagreements arise during the sale.
How to sell your home to a family member
It might be tempting to skip steps when selling to a family member because of the, “it’s just family” mentality, but take precautions and move through the process thoroughly to avoid complications, unintended tax penalties, and unnecessary scrutiny from the IRS. Regulations vary from state to state, so be sure all parties understand the process in your location.
1. Agree on how to proceed
Start the conversation early so you all agree on the logistics of the sale from the beginning of the process.
Put everything in writing. To prevent misunderstandings and settle disputes, keep a record of all the terms and agreements of the sale, just as you would with an arm’s length transaction.
Establish a timeline. Whether you’re a year away from selling or hoping to close in a few months, a timeline is important for all parties, especially if your family member needs to sell an existing home, secure financing, and arrange moving details.
Discuss financing. Does your buyer need to secure a mortgage? Are they buying with cash? An upfront discussion ensures everyone is on the same page.
Agree on contingencies. Contingencies in the agreement protect both parties if problems arise during the appraisal, inspection, or financing stages of the transaction. You’ll know who is responsible for what thanks to the plan of action you agreed upon in advance.
2. Assemble a team of professionals
You might think that if you and your family member have already agreed on the major selling points, a real estate agent is unnecessary to complete the transaction. However, an agent can help suggest a fair market value, draw up contracts, review documents, and ensure state-required protocols are followed.
You might also consult a real estate attorney for contracts and tax implications that accompany a home sale. A home inspector will inform the buyer of any significant problems with the home, while an appraiser will be required by the lender if your buyer is financing the purchase with a mortgage.
These professionals can act as a buffer between you and your family member, offering objective advice based on their professional experience and settling disagreements if emotions run high.
3. Determine your home’s value
Because controlled transactions tend to be subject to closer tax scrutiny, you’ll want to document the process you used when establishing the fair market value of your home.
You might begin with a ballpark online estimate, but you should also ask a real estate agent for a comparative market analysis, which compares your property to similar properties that have recently sold in your area.
Finally, get a professional appraisal, which will be required by a lender if your family member needs a mortgage. Even if your loved one is financing the purchase differently, a professional appraisal gives both parties an accurate assessment of the home’s current value.
4. Finalize a price
The fair market value of your home can act as a baseline when determining the final asking price, but you’ll need to decide whether you’re selling at market value, more than market value, or less than market value. The option you choose should be agreed upon by both parties and clearly outlined in the final purchase agreement.
Selling below market value is a financial advantage for your family member, but you may incur a gift tax. The buyer could also be subject to capital gains taxes when they sell the house, based on how they use the property and how long they hold it.
It’s a good idea to consult a real estate or tax attorney if you’re planning to gift your home or sell it at a discount to your family member so all parties understand the potential tax burdens and liabilities.
5. Close on the sale
In 2024, sellers report paying $8,000 in closing costs, which include title insurance, a credit check, document prep, and other fees necessary to complete the sale. Closing costs are typically 3% to 6% of the purchase price.
A real estate lawyer can be a valuable asset in drawing up the correct closing paperwork that protects both parties from future legal issues, potential taxes, or unexpected costs.
If you’re buying from a family member
On the flip side, buying a home from a family member can be a great opportunity too, provided it’s the right home and the right circumstances for you. As a buyer, it’s important to take steps to protect your interests, particularly if you’re feeling pressured to help a family member selling due to financial or health concerns.
Get a professional price estimate from an experienced appraiser, hire legal representation, and use a third party home inspector, just as you would with an arm’s length transaction. Most importantly, try to remain emotionally neutral. While buying your loved one’s home may be a generous act, if the timing, home, or neighborhood are not right for you, you’ll risk buyer’s remorse and potentially strained relations.
Luke Babich is the CEO of Clever Real Estate.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: zeb@hwmedia.com
