Selling directly to your family without real estate agents could make sense. And it has its benefits. You can save time and money by avoiding a public listing — no marketing or listing services are required.
Indeed, selling a house to a family member can cause problems that probably wouldn’t arise during a traditional sale:
- There are major tax implications. The IRS will be watching closely for possible tax evasion, even if it’s just an oversight. Consult with a tax expert before even considering it.
- You could permanently damage the relationship with your relative. Disagreements in real estate happen all the time, whether it’s over price or contract terms. It’s best to only sell your home to a relative you are close with and trust.
- You may not sell at a desirable price. Your family member may be expecting to buy your house at a discounted price, so you may not earn as much compared to a traditional sale.
Our guide provides a step-by-step process to selling a house to a family member, the pros and cons, potential tax implications, and alternatives.
If you are looking to attract the maximum profits, we recommend you check out our friends at Clever Real Estate. It offers a free service that matches you with top-rated local agents and pre-negotiates big savings on your behalf. Clever’s full-service partner agents will sell your house for just 1.5% commission!
How to sell a house to a family member
Looking to avoid disagreements that could cause a rift in your relationship? We recommend following the traditional steps in the home-selling process. While we don’t offer legal advice, the process is complex. If you find you could use legal support, check out Nolo.com. You can find an experienced real estate attorney who is familiar with your state’s laws.
Step 1: Agree on the process
You can sell your house to your family in 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 keep you on track 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 pros and cons of a FSBO sale when selling a house to family.
Step 2: Agree on a price
When selling your home to a family member, you have two options: sell at fair market value or below market value. Selling at market value may be the simplest choice for tax purposes.
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.
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.
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.
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.
If you sell it for $1, your profit is 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 3: 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.
Using seller financing to provide a loan
During seller financing, a seller lends a buyer the money needed to purchase a home, eliminating the need for a bank loan.
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.
The risks of seller financing
If the buyer stops making payments and won’t leave the property, you might have to initiate the lengthy foreclosure process.
The IRS may also consider an interest-free or reduced-interest loan as 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.
Transferring a mortgage
If you transfer your mortgage, the buyer won’t have to pay new mortgage costs, such as origination fees, or come up with a down payment.
Transfers are typically only allowed if your mortgage is “assumable,” meaning someone else can take over future payments and responsibilities.
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.
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.
Step 4: 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.
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.
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.
👉 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.
However, a general warranty deed is 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.
How to transfer a property title
Transferring a title involves a few simple steps. Keep in mind that 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. You can find a notary at a local library, UPS Store, bank, college, or accountant’s office.
- Mail or hand deliver the deed to the recipient. The recipient may also need to sign the document.
- File the deed with the county clerk’s office. This is usually the recipient’s responsibility, 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. You’ll likely have to pay for a copy of the old and new deeds, as well as a notary fee. Hiring a real estate attorney to prepare the deed will also cost you.
Creating your own deed through an online service like LegalZoom might only cost you a few hundred bucks. 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.
Selling a house to family: Possible tax implications
When you gift or sell your house to a family member, gift taxes and capital gains taxes may apply.
What is gift tax?
The gift tax is a levy on the transfer of property when a donor receives nothing, or less than full value, in return. In 2023, you can give up to $17,000 per person during the year without paying the gift tax.
Gifts of more than $17,000 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 altogether.
How to avoid paying gift tax
If you don’t want to pay taxes when you sell your house to a family member, you can apply the excess of your gift — anything over $17,000 — 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.
The IRS allows individuals to give $12.92 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?
If you sell your house to family, the buyer should be prepared for some tax implications.
As the seller, 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, given the IRS’ capital gains tax exclusion.
One way to minimize your relative’s future capital gains tax is to let your family member inherit the home by leaving it in your will. The inherited property does not face the same taxes as gifted property.
Should you sell your house to a family member?
- You may sell faster because you won’t need to find a buyer.
- 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 get to keep something sentimental in the family. You may even get to visit your old house on occasion.
- You can feel good knowing you helped a family member financially.
- You could permanently damage the relationship with your relative if disagreements arise during the sale.
- 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 could run into trouble with the IRS if it suspects you of avoiding taxes associated with the sale.
- 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 1.5% on homes over $350,000.
Selling a house to a family member vs. a traditional sale
The biggest difference when you sell your house to a family member is that it’s a controlled transaction, rather than an arms-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 (most real estate transactions). Each party acts 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.
Main differences between controlled and arm’s-length deals
Controlled transactions are less common, and they have a few major differences.
More scrutiny from the IRS
The IRS sees a greater risk of fraud in controlled transactions. Some people may attempt to avoid taxes by selling their homes to a relative at a loss.
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.
Reduced commission rate from agents
You may not have to pay the buyer’s agent commission with a controlled transaction, since you already have the buyer lined up.
If you choose to hire an agent to help, you can probably get them to take a lower listing agent commission, since the home isn’t being marketed to the public.
Some sellers choose to sell for sale by owner (FSBO) to family to avoid commission altogether. However, selling without a realtor is complicated and carries many risks, so you may still want a realtor to help with paperwork and negotiations.
Check out our tips on how to find a realtor to help with your home sale.
How to sell your house to a family member: 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. In 2022 you can give up to $16,000 per person during the year without paying the gift tax.
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 $16,000, 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 you determine your home's fair market value by performing a CMA, which examines comparable properties that have sold recently in the same neighborhood. Learn how to find a realtor to get a CMA report on your home.
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 ($500,000 for married couples).
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.
Want to learn more about selling your home? Check out these articles.
How to Find a Realtor: Learn how to find an expert real estate professional to help you with your home sale – even if you plan to sell directly to a family member.
How to Sell Your Home in 2022 – The Ultimate Guide: Check out our guide to selling a house in 12 steps. We spoke to the experts to learn the best way to sell your home (with or without a realtor).
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.