Edited February 27th, 2019
Transferring ownership of one of your most valuable assets to a member of your family can be tricky. As you can probably imagine, when people with close, personal relationships carry out high-stakes, financial transactions, things can go south pretty quickly.
In order to ensure the process goes smoothly and everything remains above the board, there are some steps and procedures you’ll definitely want to follow. First and foremost, you’ll want to find an experienced real estate agent to help guide all parties involved through the sale.
Clever Partner Agents are full-service, local agents from major brands and regional brokerages (Keller Williams, Coldwell Banker, RE/MAX, Century 21), meaning they’re experts when it comes to handling real estate transactions between family members.
But unlike traditional agents, they offer the full array of realtor services and support for a significantly reduced rate.
In other words, thanks to the discounted commission fee, you don’t have to gouge a family member on price in order to come away with a decent margin of profit on the sale.
Of course, finding a great agent is just one step of many to ensure a smooth and drama-free transaction. Here are a few other things to know.
Involve a Lawyer from the Beginning
If you value your relationship with your loved one, then you can’t go into this kind of home sale thinking of it as a typical transaction.
Usually, there is little cooperation between the buyer and the seller of a home. Both parties have demands and expectations about the process and negotiate with each other until they reach an agreeable compromise.
Because of the emotional connection involved in selling a home to a family member, it’s a good idea to have a lawyer involved from the beginning of the process.
As you have already located a willing and acceptable buyer, you might not need a Realtor to sell your home; however, you still need someone to look over all of the documents of sale and advise you of any tax implications.
As with any major financial transaction, always get everything in writing and never make assumptions about what the other party is thinking or wants.
Set a Fair (But Not Killer) Price
You should also hire a home appraisal agent early in the process so that your family member knows exactly what the fair market value of your home is.
A home appraisal is different than an inspection because it’s not to check the home for potential problems that need to be fixed, but rather an examination conducted by the buyer’s lender to make sure that the home in question is worth more than the loan amount.
It is a good idea to complete this step when the interested buyer is in the process of becoming approved by their lender and understands their spending limit. This way, you can reach an asking price that hopefully works for both of you.
Giving your family member a great deal on your home might be tempting, but there are still tax implications that you need to keep in mind.
If Your Home Is Not a Gift, Don’t Make It Look Like One
Uncle Sam knows all of our tricks. If you are selling your home to your family member, but in reality, the home sale is really more of a gift, the IRS is going to figure it out.
Another important reason to have your home assessed is so that you can truly know its fair market value. This is because if you sell your home to anyone at more than 25% less than this number, it is extremely likely that the person who buys it from you will have to pay a substantial “gift tax.”
The government does things like this in order to penalize people who avoid the Federal Estate Tax by simply giving away their assets.
However, if you still want to help your family out, there are a few different things you can do:
1. Sell the Home at a Loss
Even so, you can still allow the relative credit of the maximum allowable tax-free gift (about $13,000) each year until you pay the mortgage off.
2. Lodge a “Quitclaim Deed”
Quitclaim deeds are used to add the buyer’s name to the title of the home. These types of deeds are the most straightforward way to transfer property but typically when it doesn’t involve money.
3. Use Seller Financing
While only about 10% of people who sell their home become the lender, this option does cut out the middleman for family members and can mean excellent rates and terms for the buyer.
Make Sure You Abide By All Tax Laws
As mentioned, the US government keeps a close watch on large financial transactions between family members. To avoid being flagged or investigated, here’s a good rule to follow:
If you sell your property as a loss to your family member, you can’t take a deduction on that loss. You also cannot sell your property to your family member for less than the amount of money that you currently owe on your mortgage.
For tax purposes, “relatives” includes your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). So, for example, cousins and in-laws are not relatives for tax purposes. However, when selling to an in-law, it is still wise to tread lightly.
Let’s say John owns a $100,000 house and sells it to his daughter Jane for $80,000. He is not allowed to deduct any of his $20,000 property loss on his taxes.
Let’s say Jane then sells the home at $90,000 to an unrelated buyer, resulting in a $10,000 gain in financial capital for her. ($90,000 sales price let $80,000 purchase price = $10,000 gain).
Jane is then able to claim a tax deduction on her gain $10,000 of the $20,000 loss that she missed when she bought the home from her dad. The remaining $10,000 of this loss disappears.
As always, it’s important to consult with a lawyer about the tax implications and requirements your particular situation, just to be safe.
Selling a home to a family member but need some advice?
Clever is here for you! With thousands of experienced, full-service agents to choose from, Clever’s low-commission service makes it a no-brainer. Call us today at 1-833-2-CLEVER or fill out our online form to get started.