Selling to family vs. traditional home sale | Tax implications | How to sell a house to family | Should you sell a house to a family member? | FAQs
If you’re not afraid to mix family and money, selling your home to a relative can be a convenient and rewarding option. Not only will you save time and money by having a buyer already lined up, but you’ll also have the satisfaction of helping someone you love.
However, selling a house to a family member can cause problems that wouldn’t arise during a traditional sale. For one, the IRS will be watching closely for possible tax evasions. More importantly, you could permanently damage the relationship with your relative if disagreements arise during the sale.
Prevent family drama by hiring a professional real estate agent to manage the transaction. Our friends at Clever Real Estate can connect you with top agents from trusted brokerages who can inform you of tax laws and provide an experienced, objective voice during the sale.
Plus, you’ll receive a range of full-service benefits for just a flat fee of $3,000 or 1% for homes worth more than $350,000. The service is free, and you can walk away at any time.
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🔑 Key Takeaways
- If you own your home free and clear, you can give it to anyone you want. No money needs to change hands.
- To avoid paying taxes on gifts, give no more than $15,000 to a single individual each year. Put any excess toward your lifetime exemption of $11.7 million.
- If you sell your home to a family member at a discount price, your relative may be subject to capital gains taxes when they sell.
- The easiest way to avoid problems with the IRS is to sell your house near fair market value. Get a comparative market analysis (CMA) or an appraisal to keep on file.
How is selling a house to a family member different from a traditional home sale?
When you sell your house to a family member, the transaction is a bit different from a traditional home sale. It’s a controlled transaction, rather than an arm’s-length transaction.
- Controlled transaction — A deal between parties that have a relationship, such as family members, friends, or co-workers.
- Arm’s-length transaction — A deal between strangers. Each party is expected to act in its own self-interest to get the best deal. For example, a seller would list for a high price, and a buyer would try to pay a low price.
Controlled transactions are less common than arm’s-length transactions, and they have a few major differences.
- More scrutiny from the IRS. There’s a greater opportunity for fraud in controlled transactions, according to the IRS. The agency is on the lookout for anyone who sells their home to a relative below market value to manufacture a loss for the sole purpose of avoiding taxes.
- Greater tax implications for you and the buyer. If you cut your family member a deal, you may owe gift taxes. Your relatives may be on the hook for capital gains taxes when they decide to sell.
- Fewer realty services are needed, which could save you money. Many real estate agents include marketing costs in their commission. But you’ll already have a buyer, so you shouldn’t have to pay those fees. That’s why some people choose to sell for sale by owner (FSBO) to family. However, you may still want a realtor to help with paperwork and negotiations.
- Increased chance for family strife. This can be a problem if a family member tries to take advantage of another by inflating the price or persuading the buyer to forgo an inspection on a damaged home.
Tax implications when selling a house to family
Before you give or sell your house to a family member, you’ll want to know what taxes may apply. The most common two are gift taxes and capital gains taxes.
What is gift tax?
If you give your home to a relative, the transaction will be subject to gift taxes from the IRS. The gift tax is a levy on the transfer of property when a donor receives nothing, or less than full value, in return. In 2021, you can give up to $15,000 per person during the year without paying the gift tax.
Gifts more than $15,000 are taxed at a rate of 18–40% depending on how much over the limit you give. The donor is responsible for paying taxes associated with the gift, but there are ways to avoid paying them all together.
How to avoid paying gift tax
If you don’t want to pay taxes, you can apply the excess of your gift — anything over $15,000 — toward your lifetime gift and estate tax exemption. This is the dollar amount individuals can give in cash gifts, real estate, and other assets during their lifetimes before taxes apply. The amount changes yearly depending on inflation and changes to the tax code.
In 2021, the IRS allows individuals to give $11.7 million tax free over their lifetimes. Unless you’ve given (or plan to give) more than that amount, you can apply any sum toward your exemption without paying taxes. However, you must file a gift tax return, even if you won’t pay taxes on that gift.
What is capital gains tax?
Capital gains tax is a levy on the profit made from the sale of an asset, such as a home. You probably won’t face capital gains taxes when selling your home to a family member, especially if you’re doing so under market value.
However, gifting or selling your home below market value increases the odds the giftee will face capital gains taxes. That’s because your tax basis — the initial cost of the property — becomes the recipient’s tax basis.
Let’s say you bought your house for $50,000 and gave it to a family member several years later. If the home appreciated and was worth more at the time of the transfer, the new owner’s tax basis would still be $50,000.
If your relative later sells for $400,000, the IRS will calculate the profit as $350,000. Luckily, they can deduct the first $250,000 in profit if they’ve lived in the home for more than two years.
But your family member would still be on the hook for taxes on roughly $100,000, with a tax rate of 0–20%. Some states may also charge capital gains taxes, but it depends on where you live.
Sale price – purchase price = profit
$400,000 (sale price) – $50,000 (purchase price) = $350,000 (profit)
Profit – annual exclusion = taxable income
$350,000 (profit) – $250,000 (exclusion) = $100,000 (taxable income)
📚 READ: How Do I Avoid Capital Gains Tax When Selling a House?
👉 More info: Selling a House After 1 Year or Less? You Need to Read This
To minimize your relative’s future capital gains tax, let your family member inherit the home by leaving it in your will. Inherited property does not face the same taxes as gifted property.
💡 Learn: Selling an Inherited Home: What You Need To Know
How to sell a house to a family member
To avoid disagreements that could cause a rift in your relationship, we recommend following the traditional steps in the home-selling process.
Step 1: Agree on the process
You can sell your house to a family member two main ways — with a real estate agent or on your own. Although a FSBO sale is possible, selling your home to a relative can be more complicated than it initially seems. A realtor can help you take the sale seriously when it may be tempting to cut corners.
It’s important to agree on the process beforehand. Determine if either party should hire an agent or enlist the help of professionals, such as an appraiser, inspector, or real estate attorney. Specify who will pay for each service.
Before you dive in, consider the benefits and drawbacks of a FSBO sale when selling to family.
| Pros and cons of selling without a realtor |
|---|
| ✅ You could save thousands on commission fees. If you're losing money by selling below market value, this could stymie your loss. |
| ✅ If you're selling to family, you already have a buyer. You don't need an agent to list your home on the Multiple Listing Service (MLS), schedule showings, or host an open house. |
| ❌ Negotiating with a family member can get ugly. An agent can help keep the peace. |
| ❌ A FSBO sale involves a lot of paperwork. If you have missing documents, you could experience financial trouble or delay the sale. An agent can keep track of the paperwork for you. |
| ❌ Selling to family involves complex tax and property matters. An agent can help inform you of tax implications. |
| ❌ Selling below market value to a family member may attract the attention of the IRS. An agent can provide a CMA to help you price your home accurately. |
| ❌ You won't have a built-in network. An agent has relationships with appraisers, inspectors, and title companies. Without an agent, you'll have to find those professionals on your own. |
If selling FSBO becomes overwhelming, you can hire an agent at any time. With a buyer already lined up, you won’t need an agent’s marketing services and could negotiate a lower commission rate.
💡 LEARN: 26 Negotiation Strategies for Home Sellers
Or skip the negotiations and let our friends at Clever broker discount rates for you. Clever Partner Agents offer full-service support for a flat fee of $3,000 or 1% for homes over $350,000.
You could save thousands and avoid the hassle of a FSBO sale. The service is free, and there’s zero obligation.
Step 2: Think about gifting your home
Depending on your financial situation, you may not need to make money on your home sale. If you own your home free and clear, you can give your home to a family member as a gift. No money needs to change hands.
Gifting your house is a great way to financially help a relative who may not qualify for a loan or have the funds for a down payment and monthly mortgage. However, once you legally hand over the keys, you lose all control over the asset. Your relative is not obligated to abide by any long-term plans you had for the property.
Step 3: Agree on a price
Don’t want to gift your house? You can still sell your home to a family member. You have two options: sell at market value or below market value.
Selling at market value may be the simplest choice for tax purposes. It will also give you the most cash to put toward your next home purchase, investment account, college fund, or retirement plan.
If you can’t afford to gift your house, but still want to give your relative a discount, selling below market value may be the right choice for you. Try this option if you’ve attempted to sell on the open market but haven’t closed any deals.
Weigh each option carefully and choose what’s best for your budget and financial goals.
How to sell my house to a relative at fair market value
The easiest way to bypass problems with the IRS is to agree on a price that is close to fair market value.
The IRS defines fair market value as “the price at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.”
A real estate agent can help determine market value by performing a CMA, which examines comparable properties that have sold recently in the same neighborhood. An appraisal can also determine what a home is worth. These documents can show market value if the IRS audits the transaction.
💡Learn: 21 Surprising Things That Affect Home Values
The good news is audit numbers have veered downward in recent years. Fewer than 0.5% of all individual tax returns were audited in 2020, so your chances of being investigated are slim. However, the IRS is cracking down on individuals who make large gifts and fail to file them on their taxes.
Can I sell my house to a family member for $1?
You can sell your home at any price below market value, even $1. But the IRS may consider it a gift, and you might be required to pay gift taxes.
For example, if the fair market value of your home is $300,000, and you sell it for $1, you’ve just made a gift of $299,000. That’s well over the $15,000 limit for non-taxable gifts. You’ll need to pay taxes on that gift or put it toward your lifetime exemption.
If you’re selling your home to a family member at a discount price, you’ll also want to consider your relative’s capital gains tax liability.
Step 4: Determine finances
If you’re not giving away your house for free, the buyer will need to pay cash or secure financing through a lender. But not everyone will qualify for a conventional mortgage. In that case, you can help your relative secure financing by providing a private loan or transferring the remainder of your mortgage.
Financing a family member’s loan
A property owner can lend a buyer the money needed to purchase a home, eliminating the need for a bank loan. This practice is known as seller financing.
Consider this option if your family member doesn’t have enough money for a down payment or doesn’t qualify for a conventional mortgage. It may also benefit buyers who are only approved for loans with unfavorable terms, such as high interest rates, because of poor credit and other factors.
With seller financing, you can offer flexible interest rates and better terms that will help you sell faster and make home buying more accessible for your family member.
However, an interest-free or reduced-interest loan may be considered a gift. The IRS won’t be fooled by a large gift disguised as an interest-free loan in an attempt to bypass gift and estate taxes.
Seller financing can be a great way to help your relative, but it comes with risks. If the buyer stops making payments and won’t leave the property, you might have to initiate the lengthy foreclosure process. That’s a sure-fire way to make your next family gathering an awkward affair.
To offset their risk, some sellers charge higher-than-normal interest rates, which can be an additional source of income to help you build wealth.
Transferring a mortgage
Transferring ownership of a home with a mortgage is tricky and may not be possible depending on the terms of your loan. Transfers are typically only allowed if your mortgage is “assumable,” meaning someone else can take over future payments and responsibilities.
In some scenarios, transfers are allowed by law, even if a mortgage is not assumable. Those circumstances include transferring a mortgage to a family member, such as a spouse or child.
Ask your lender if you qualify. Lenders will usually need to evaluate the new borrower’s credit score and debt-to-income ratio before approving the transfer.
In general, some Federal Housing Administration, Veterans Affairs, and U.S. Department of Agriculture loans can be transferred, but most conventional loans are not assumable.
If allowed, transferring a mortgage can be a great way to pass savings to family members.
- They won’t have to pay new mortgage costs, such as origination fees, lender’s fees and closing fees.
- They’ll assume your interest rate. If your rate is lower than the current rate, they’ll save.
- They won’t have to cobble together a down payment.
Step 5: Transfer your property title
Every time a home changes hands, the title must be transferred. The title represents ownership rights you have over your property. Titles are transferred through deeds, a legal document that passes ownership from one person to another.
Titles cannot be transferred if there are liens on the property. A lien is placed on your home when someone you owe money claims a legal right to your property as a form of collateral. Liens may be granted for unpaid contract work, back taxes, or overdue utility bills.
When a buyer purchases a home, they’ll want to protect themselves from liens that you or previous owners may have accrued on the property.
👉 MORE INFO: What is a Property Title Search?
Choose the right deed
Different deeds offer different levels of protection. If you’re using an agent, they’ll take care of this for you. If you’re selling FSBO, you’ll need to choose the type of deed yourself.
The most common type of deed is a general warranty deed because it’s the most secure. With a general warranty deed, the seller pledges that no one else has a stake in the property and it is free of any outstanding liens.
A general warranty deed can be a sign of good faith because it promises you will defend the title on the buyer’s behalf or be liable for any damages. However, they are rarely used to transfer a title to a family member when no money is involved. That’s because they are complicated to draft. If you don’t have an agent, you’ll likely need to hire an attorney.
Sellers can use a gift deed to transfer the title to a family member when no payment is exchanged for the property. The document must simply be signed and witnessed by two disinterested parties. For example, if a parent gives a house to a child, the child’s spouse cannot witness the transaction.
How to transfer a property title
Transferring a title involves a few simple steps. Keep in mind, a title company will perform most of these steps if you choose to hire one.
- Obtain the most recent deed from the county clerk’s office. You’ll need information, such as the legal description of the property, from that deed to create a new one.
- Draft a new deed that transfers ownership to the buyer. You can write it yourself or hire an attorney to do it for you.
- Sign the deed in the presence of a notary.
- Mail or hand deliver the deed to the recipient, who may also need to sign the document.
- File the deed with the county clerk’s office. This is usually the responsibility of the recipient, but you should obtain a copy of the newly recorded deed.
How much does transferring a title cost?
There are several transfer-related fees you’ll need to include in your budget. For example, you’ll likely have to pay for a copy of the old and new deeds, as well as a notary fee. If you hire a real estate attorney to prepare the deed, that will also cost you.
You may be able to save by creating and downloading your own deed through online legal document services, such as LegalNature and LegalZoom. LegalNature provides a single-document download for just $35, while LegalZoom offers a range of services — such as a title search and deed filing — for a few hundred dollars.
Writing your own deed may save you money, but if not done correctly, you could put yourself at risk of legal and financial problems in the future.
State and local governments also charge transfer taxes based on the value of your home. Each state has different rates that may cost the seller anywhere from hundreds to thousands of dollars.
Some states do not collect transfer taxes when the title is passed to a family member. Others don’t charge it at all. Transfer taxes aren’t levied in 13 states:
- Alaska
- Idaho
- Indiana
- Louisiana
- Kansas
- Mississippi
- Missouri
- Montana
- New Mexico
- North Dakota
- Oregon
- Texas
- Utah
- Wyoming
Should you sell your house to a family member?
Selling your home to a family member can be beneficial for both parties. But the right decision will depend on many factors, such as your financial situation, giving history, and family dynamic.
Having tough conversations about money with people we know can be awkward, and selling to a family member may not be right for everyone. Weigh the pros and cons before you agree to sell to a relative.
| Pros | Cons |
|---|---|
| ✅ You may sell faster because you won't need to find a buyer. | ❌ You could permanently damage the relationship with your relative if disagreements arise during the sale. |
| ✅ You won't have to spend money on making your home "show ready." You'll pocket the cash you would have spent on photography, staging, and creating curb appeal. | ❌ You (probably) won't make as much money as you would on the open market. This could leave you strapped for cash in the future. |
| ✅ You get to keep something sentimental in the family. You may even get to visit your old house on occasion. | ❌ You could run into trouble with the IRS if it suspects you of avoiding taxes associated with the sale. |
| ✅ You can feel good knowing you helped a family member financially. | ❌ You may approach the sale too casually. Don't assume you can rely on verbal agreements or skip steps of the process. |
Take steps to prevent family drama by consulting a professional agent. Our friends at Clever can connect you with a local, full-service realtor who can keep the peace and help you save thousands. Clever pre-negotiates discount commission fees, so you pay a flat rate of $3,000 or 1% on homes over $350,000.
FAQs
Can I sell my house to a family member for $1?
You can sell your home for $1, but you may be required to pay gift taxes. For example, if the fair market value of your home is $300,000, and you sell it for $1, you've just made a gift of $299,000. You'll need to pay taxes on that gift or put it toward your $11.7 million lifetime exemption.
Can I give my house to my children?
Yes. If you own your home free and clear, you can give your house to anyone you want. No money needs to change hands. However, if you make a gift over the annual limit of $15,000, the IRS will levy a gift tax on the donor.
How can I avoid trouble with the IRS when selling my home to a family member?
The easiest way to bypass problems with the IRS is to agree on a price that is close to fair market value. A real estate agent can help determine market value by performing a CMA, which examines comparable properties that have sold recently in the same neighborhood. An appraisal can also determine what a home is worth.
Will I pay taxes if I sell my house to a family member at fair market value?
When you sell an asset like your house, you may need to pay capital gains taxes on your profit. Most home sellers don't need to pay capital gains taxes because the first $250,000 of profit for individuals is tax free if you've lived in your home for more than two years.
Will my children pay capital gains tax if I give them my house?
It's possible. When you gift your home, your tax basis — the initial cost of the property — becomes the recipient's tax basis. If you bought your home for cheap, gave it to a family member, and the value of the home increased by more than $250,000, they'd have to pay taxes based on the initial purchase price.
Related reading
Want to learn more about selling your home? Check out these articles.
How to Sell Your House Without a Realtor: What to Know in 2021: Selling your own home is tough. Our step-by-step guide makes it easier.
Do I Need A Real Estate Agent? Learn The TRUTH: This thorough primer explains how realtors can help you buy or sell a home.
What Companies Offer the Lowest Real Estate Commission Fees? Find out which companies provide the best savings, service, and overall value.
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