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….