7 Steps To Selling A House To A Family Member

DISCLAIMER: As a friendly reminder, this blog post is meant to be used for educational purposes only, not legal or tax advice. If you need assistance navigating the legalities or tax implications of selling a house to a family member, HomeLight always encourages you to reach out to your own advisor.

Selling a house to a family member can be very rewarding.

Perhaps you’re trying to help a relative out by providing them with an affordable price on a home. Perhaps it’s an old family property you’d like to pass on. Or maybe this is a way of convincing a child to live closer to you by offering them a deal they can’t refuse.

Whatever the reason, it helps to know how to properly transfer the asset without running into any snags or damaging any relationships.

With some guidance from a top real estate agent and a veteran real estate attorney, we’ll cover seven important steps to consider when selling a house to a family member, as well as some questions you might have about the process.

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How to sell a house to a family member

Selling a house to a family member is typically a much quicker and simpler process than selling on the open market. In business terms, it’s known as a non-arm’s-length or controlled transaction. This means the buyer and seller have a pre-existing relationship of some kind (i.e. family, friend, business affiliate, etc.)

In contrast, an arm’s-length transaction is one where the buyer and seller are strangers acting independently and in their self-interest.

Even with a controlled transaction, there are a number of steps one should consider taking to ensure everything goes smoothly for everyone involved.

1. Agree on a selling price

The selling price will set the stage for how the transaction will be handled moving forward.

It will determine whether or not the buyer needs to acquire a loan and/or what sort of taxes the seller may face once the deal is complete.

There are several ways to receive an estimate of your home’s current market value.

The traditional methods are to get an appraisal or have a real estate agent conduct a comparative market analysis (CMA). Using one of these options is prudent when selling to a family member since controlled transactions are typically watched more closely by lenders and the IRS due to a higher risk of fraud. If the IRS decides to audit the transaction, then you’ll have documentation to prove your home’s fair market value at the time of the sale.

If you’re simply looking for a ballpark idea of what your home is worth, then you can use an Automated Valuation Model (AVM) tool like HomeLight’s free Home Value Estimator. AVMs use publicly available data and recent sales records to generate a value range based on the current market conditions.

If you wish to sell the home to your relative for less than its fair market value, then you’ll likely have to report the difference between the home’s value and the sale price as a gift of equity with the IRS (more on this later in the article).

2. Determine finances (confirm funds are available)

Once you’ve agreed on a price, the family member you’re selling to will need to verify they have the funds available to meet your selling timeline.

This may entail getting a new pre-approved mortgage, transferring the remainder of your mortgage, obtaining a private loan, or settling on owner financing, in which the seller finances the purchase directly with the buyer.

3. Sign a purchase agreement

Even among family members, it’s important to draw up a purchase agreement. This will legitimize the deal and outline any terms and conditions.

Here are some key elements you may wish to include in the contract:

• Financing terms
• Down payment amount
• Closing timeline
• Closing costs, and who will be paying them
• Buyer contingencies (inspection, appraisal, etc.)
• Repairs needed on the home to seal the deal
• Any items in the home the buyer would like included in the sale (i.e. fixtures, appliances)
• Reasons to cancel the agreement

4. Consider hiring a real estate agent anyway

Selling your home to a family member is one of the few real estate transactions where hiring an agent may not be worth it. If everyone is in agreement about the price and condition of the home, then paying an agent’s commission doesn’t make much sense.

However, going without an agent can backfire and create lasting family divisions, depending on how it’s handled.

An agent’s expertise can remove a lot of stress and heavy responsibilities from your shoulders. They’ll also know what pitfalls to avoid.

Some other notable benefits agents can bring to the table include:

• Acts as a liaison: An agent can facilitate and buffer all sales correspondence between you and your relative. This can help move the sale along, maintain healthy relationships, and reduce family drama.
• Keeps the sale fair: An agent is a professional third party who can make certain the deal is impartial.
• Avoid costly mistakes: An experienced agent will know the ins and outs of each step of the transaction, such as which deed to use and how to avoid tax or legal complications.
• Can maintain your selling timeline: Real estate professionals know how long each step of the transaction usually takes and can keep the sale on track to meet any timeline goals you might have.
• Will know local property sale requirements: An experienced agent will know about regional or state property sale requirements, such as whether an attorney is required by law, mandatory disclosures, or local taxes.

Hiring an agent for an intra-family sale won’t necessarily cost you much either. When you already have a buyer lined up, agents will often accept a lower commission or flat fee to assist with the rest of the transaction.

Rick Ruiz, a top-selling agent in Las Vegas, Nevada who sells properties 48% quicker than the average Las Vegas agent, says he almost always charges a low flat fee instead of a percentage of the sale when a client is selling to a family member.

“I don’t feel it’s just to charge somebody to sell a property that you’re really not selling,” Ruiz says. “You’re not selling, you’re facilitating. All you’re doing is handling the contract and overseeing that everyone sticks to the terms of the contract.”

HomeLight’s Agent Match platform can connect you with a qualified agent in your area. Our free tool analyzes millions of transactions and thousands of reviews to determine which agent is best for you based on your needs.

5. Perform a title search

This is an important preemptive step for the final closing process.

A proper title search will comb through the property’s financial history to make sure that the seller is indeed the owner and if there are any unpaid debts attached to it.

You can do this yourself by tracking down past deeds and tax records, or pay someone else to do it, such as a title company or real estate attorney. According to the 2021 National Association of Realtors Confidence Index survey, title and deed issues accounted for about 10% of closing delays and 3% of contract terminations.

6. Consult with an attorney

Depending on the complexity of the sale, it may be worth consulting with a real estate attorney.

They can be valuable if you wish to draft a deal-specific contract or if any issues with the title are found.

“If you think there is a problem with the title, then for sure use a lawyer because title companies don’t clean up problems in a chain of title, they just tell you what it is,” says Robert Pecharich, a real estate attorney and senior partner with Boyle, Pecharich, Cline, Whittington & Stallings P.L.L.C. in Prescott, Arizona.

Attorneys can also assist with the closing of the sale by ensuring everything is filed properly and resolving any last-minute disputes between the parties. Some states even require an attorney to be involved during the closing process.

“At the end of the day, I’d recommend getting an appraiser and an attorney, because that’s just the easiest, cleanest, and most affordable way to make sure everyone is treated fairly,” Ruiz says.

7. Close the home sale

Since you’re selling to a relative, there may be certain aspects of the typical home closing process that you choose to bypass, such as a home inspection or appraisal.

However, you’ll still want to do your due diligence to make sure there are no significant loose ends. This can include the following:

• Transfer property title
• Pay any final bills or taxes
• Change your address
• Cancel homeowner’s insurance policy
• Cancel utilities
• Pass along any documents for appliances or other items in the home

You’ll also have to select what type of deed you are using. A few common options are a quitclaim deed, warranty deed, grant deed, and gift deed. An experienced real estate agent can assist you in this. If you are not using an agent, it’s a good idea to hire an attorney.

Expert tips and cautions when selling a home to a family member

If you’ve considered all of the listed steps in this article for selling a home to a family member, then you should be in pretty good shape to move forward with the transaction.

For those looking to dig deeper, here are some details on specific aspects of the process that are good to know.

Owner financing options

Depending on the terms of your loan (if the mortgage is “assumable”), transferring a mortgage is one way to help a family member who is purchasing your property to save on financing costs. This allows them to avoid origination fees and other loan costs, and they will not need a down payment.

If you decide to make it an interest-free or reduced-interest loan, this will be considered a gift by the IRS and must be reported as such. Consult your tax or financial advisor for guidance on your home sale financing options.

If selling your home to a family member below market value

It’s completely fine to sell your home to a family member for a reduced price. Just keep in mind that any amount below fair market value is typically considered a gift of equity and may require you to report it on a gift tax return (more on this in the next section).

As a courtesy to your neighbors, list the transaction as a family sale in the public property records. This will let appraisers and agents know that it was a non-arm’s-length transaction if they research your property’s sale while checking comps (comparable home sales) in the area.

If gifting a house to a family member

Whether you sell a house to a family member for a slight discount or give it to them outright, any amount below fair market value is considered a gift in the eyes of the IRS. This typically means you’ll have to file a gift tax return using IRS Form 709 to disclose the gift.

Here are some explainers and things to keep in mind when gifting property:

• Gift tax: A gift tax is simply a tax on the transfer of money or property to another person for nothing (or less than full value) in return. There is a federal gift tax that everyone in the U.S. has to consider. The only state to have an additional gift tax of its own is Connecticut.
• Gift tax annual exclusion: The annual federal gift tax exclusion is $16,000 for single filers and $32,000 for married couples filing jointly. Meaning, that you can individually give up to $16,000 to as many people as you want in a given year without having to report it to the IRS. Spouses who combine their gift exclusion (known as “gift splitting“) must still file a gift tax return, but it typically won’t impact their lifetime gift tax exemption unless it exceeds the $32,000 threshold.
• Lifetime gift tax exemption: Under the current federal law, the lifetime gift tax exemption is $12.06 million. This means someone can give away up to that amount in their lifetime before having to pay any gift tax. Assuming no changes, this exemption amount is set to expire at the end of 2025. Starting January 1, 2026, the exemption will drop to $6.2 million.
• Gift letter: To properly give a gift of equity, the seller should draft and sign a gift letter listing all pertinent information regarding the gift. The letter should include the seller’s relationship with the buyer, the property’s address, and the amount of equity being gifted.

Do I have to pay capital gains taxes when I sell to a family member?

Like any real estate transaction, this depends on when you purchased your property, how much you paid for it, and how much you sold it for.

When you sell a house that qualifies as your primary residence, you can be exempt from capital gains taxes on the first $250,000 if you are single, and up to $500,000 if married and filing jointly. To qualify as your primary residence, you must have owned the home for two years and lived in it for two of the past five years. This exemption is only allowable once every two years.

Example:

1. You have lived in your home since 1997 and paid $150,000 for the house.
2. You sold your home to your child in 2021 for $500,000.
3. If you’re single at the time of the sale, then you’re eligible for the $250,000 exemption, bringing your taxable capital gain to $100,000. If you’re married filing jointly, then you and your spouse are eligible for the $500,000 exemption, resulting in no capital gains tax being owed.

Get sound advice before selling a house to a family member

There are benefits to selling a house to a family member, but there are also pitfalls to avoid, and financial and tax implications to consider.

The seven steps we’ve outlined above can be a helpful guide, but for the best results, we recommend you partner with the right professionals. These might include a real estate attorney, tax or financial advisor, and a top real estate agent who can act as a liaison, reduce drama, avoid mistakes, and keep the sale fair and moving along.

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