Steps To Selling a House to a Family Member
Are you considering selling a house to a family member? Here are the steps you should take and everything that goes into it.
If you're considering purchasing a home, exploring the option of buying a house from a family member or accepting an offer from them to sell their home to you is worth thoughtful consideration. Selling a home to a family member involves a unique process compared to a transaction with an unfamiliar party.
Selling a house to a family member can be more intricate than anticipated. While some may attempt to navigate it without professional assistance to save costs, potential challenges could arise, which might be avoided through the conventional home-buying process with a real estate agent.
Given the sentimental value often associated with homes, it's no surprise that many individuals opt to sell their properties within the family. While it's a legal and viable option, there are essential considerations to consider when engaging in such transactions, particularly in real estate.
Nevertheless, selling a house to a family member can be swifter and more straightforward than selling on the open market. Even within a controlled transaction, several essential steps and factors must be deliberated to ensure a smooth experience for all parties involved.
Here are the steps to selling a house to a family member.
1. Agree on the Process
Before determining your home's price, establishing a clear and agreed-upon process is essential. This will help to minimize confusion and potential conflicts in the future by addressing critical aspects such as involving professionals, discussing buyer financing, and setting a timeline.
Identifying the decision-makers for both the buyer and seller is crucial to avoid any misunderstandings if other parties become involved and attempt to alter the agreement.
Selling to a family member is often faster and simpler than a standard sale. Nonetheless, it's vital to approach the transaction as if you are dealing with strangers to ensure that both parties' needs are met. Reaching a mutual understanding of the process upfront can effectively address any potential misunderstandings.
2. Hire Professionals
Ensure a smooth and fair transaction when purchasing a home, even if you have a great relationship with a family member. While you might consider not using a real estate agent, it's still crucial to have someone oversee the paperwork and ensure everything is done correctly.
This includes drawing up the purchase contract, making all necessary property disclosures, and ensuring the home sells for a fair market price. Sometimes, an agent may work for a flat fee or offer a deeply discounted commission for both parties, making it beneficial for everyone involved.
Additionally, having a real estate attorney review key documents can provide extra peace of mind. If the transaction doesn't involve a lender, getting an appraisal to ensure a fair price is still a good idea.
3. Evaluate the Home
It's essential to have a neutral third party assess your home's value to ensure fairness. A professional appraisal provides an informed and official market value for your home, considering any changes in the market since your purchase. It's crucial to receive the value you deserve.
You or a family member can arrange and cover the home appraisal cost. Additionally, your agent can conduct a comparative market analysis using the multiple listing service (MLS) to help establish the fair market value of your home. This process will ensure that you clearly understand your home's worth.
4. Agree on Price
When selling your home, it's crucial to consider the sale price carefully. Aligning the price with the property's value is important to start on the right foot. However, you also have the option to utilize the gift tax exemption if you wish.
It's always a good idea to seek an independent appraisal or work closely with a real estate agent to gather comparable property information. This will not only validate the sales price but also provide essential documentation. Your efforts will significantly contribute to a successful and satisfying selling experience.
The easiest way to bypass problems with the IRS is to agree on a price close to fair market value. A real estate agent is your best choice to determine the market value. You can sell your home to a family member for however little you want; however, just remember that the IRS will consider it a gift, and you might be required to pay gift taxes.
5. Close on the Sale
When closing on a house with a family member, the process may differ from when you initially closed on your home. To avoid any confusion, it is a good idea to hire a lawyer to ensure the accuracy of all closing documents.
Since selling to a relative, you may skip certain aspects of the typical home closing process. However, it's still important to do your due diligence to ensure that there are no significant loose ends, such as:
- Transfer property line
- Pay any final bills or taxes
- Change your address
- Cancel your homeowner's insurance policy
- Cancel utilities
- Pass along any documents for appliances or other items in the home
You may need to choose the type of deed you are using. Standard options include quitclaim deeds, warranty deeds, grant deeds, and gift deeds. An agent can help you select the correct type. You may want to consult with a real estate attorney if you are not using an agent.
6. Transfer Property Titles
Upon the transfer of home ownership, the title must be conveyed to the new owner. The title is a legal representation of one's property ownership rights. It is transferred through a deed, a formal document that facilitates the transfer of ownership from one party to another.
When a prospective buyer acquires a property, they seek protection against any existing liens that may be imposed on the property by the current or previous owners. A lien is established when a creditor to whom you owe money claims a legal right to your property as collateral. Money claims a legal right to your property as collateral.
How to Transfer a Property Title
Transferring a title involves a few simple steps, but remember that a title company will perform most of these steps if you hire one.
- Obtain the most recent deed from the county clerk's office
- Draft a new deed that transfers ownership to the buyer
- Sign the deed in the presence of a notary
- Mail or hand deliver the deed to the recipient
- File the deed with the county clerk's office
Cost of Transferring
It is essential to consider the various transfer-related fees that need to be accounted for in your budget. These may include expenses for obtaining copies of the old and new deeds and a notary fee.
Engaging a real estate attorney to prepare the deed will also involve costs. While creating your deed online is an option, it is essential to note that this approach also incurs expenses. Moreover, if not executed correctly, it may pose potential legal and financial risks in the future.
Additionally, certain states and local governments impose transfer taxes based on the property's value. It is worth noting that some states exempt the collection of transfer taxes when a title is passed to a family member.
7. Overall Tips
When considering selling a house to a family member, it's essential to understand the necessary steps and helpful tips to ensure a successful transaction that benefits both the buyer and the seller. Here are some tips to remember when selling a house to a family member.
1. Put everything in writing
Ensure you keep organized notes of all the terms and agreements of the sale. This can prevent misunderstandings between parties and make things easier for the title company.
2. Hire a home inspector and appraiser
You should always order a home inspection before a sale, even for a family member. A certified home inspector will look at your house and identify any hazards or concerns you should look at.
Home inspections benefit buyers and sellers by protecting both, so it is worth ensuring you do not skip this step for your own sake.
3. Double-check your compliance with tax laws
The IRS may accuse the parties of trying to avoid the capital gains tax if they do not follow the law. No matter what, you want to follow IRS gifting laws if you sell your home for less than its fair market value, so hiring an attorney can help you understand this information and ensure you follow the rules.
4. Keep emotions at bay
Selling to a family member can be more emotionally charged than selling to a stranger. One mistake sellers make involves treating the sale more casually than usual. They may treat it as too little, which can lead to further issues. Make your financial decision based on logic and pretend it is like any other selling process.
5. Understand limits on gifts of equity
When considering selling to family members, you have two beautiful price options. Firstly, you can choose to make a generous gift of equity or offer your family member the opportunity to purchase your home at its fair market value.
Opting for a "gift of equity" involves selling your property to your family member at a price lower than its current market value, considering the difference between the two values.
It's important to note that selling at a lower price will require you to report the gift to the IRS and provide additional information as per the rules. As the seller and gift giver, it's essential to be aware of these tax implications and regulations to navigate this process smoothly and responsibly.
Methodology
We used information from different sources and our data to create this guide on selling a house to a family member. We combined various data sets to help you learn more about all the steps and everything that goes into selling to a family member.
We used The following sources to gather most of our information about selling a house to a family member.
FAQS
What are the IRS rules for selling property to family members?
Adding a family member to the deed as a joint owner for no consideration is considered a gift of 50% of the property's fair market value for tax purposes. The donor must file a gift tax return if the gift value exceeds the annual exclusion limit ($16,000).
Do you have to pay capital gains if you sell to a family member?
Consult a tax professional, but in general, if you are selling at or above fair market value, you need to worry about capital gains tax.
How is selling your house to a family member different?
It's essential to proceed cautiously when selling to family members due to the emotional attachments involved, which can lead to complications if things don't go as planned. Additionally, lenders and the IRS scrutinize non-arms-length transactions more closely because of the potential for tax or mortgage fraud.
Steps To Selling a House to a Family Member - The Bottom Line
Selling a property to a family member can yield significant financial advantages for all parties involved. Nevertheless, this transaction can also give rise to financial complications and familial discord. If uncertainty surrounds the appropriateness of this decision, seeking counsel from a reputable real estate agent is advisable to gain insight into the necessary steps.
It is crucial to understand the rules and laws governing property sales, especially when selling to a family member. Although this type of transaction can have advantages, it's essential to be aware of potential mistakes. Being familiar with the necessary procedures and recommendations is critical if you're considering selling property to a family member. According to data, 50% of for-sale-by-owner deals involve parties who know each other, such as family, so it is a very popular thing to do.
If you are considering moving or selling, contact us or visit our website. Our team at Raleigh Realty is here to help you with any home buying or selling needs.
