Selling your home to your child could offer some great benefits to you as the seller, and to your child as the buyer. But what should you be taking into consideration? Check out these five things that you need to know before entering an agreement.
Selling to someone close to you should be easier than working with a realtor, right? Why work with someone when you know the buyer?
You might assume that when selling your house to your child, you can skip all of the steps you would take when selling to a normal buyer. That’s not the case, or at least it shouldn’t be. There are five key things you should be taking into consideration and talking to a licensed real estate agent about before selling your home to your child.
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Price and Financing
When a seller knows the buyer, the seller is going to be more inclined to offer a discount or go further down in price than if selling to a normal buyer. This has the potential to put sellers in a position where they’re taking a loss on the sale. This ultimately could mean less money for a new mortgage or down payment on the next home for the seller.
If you are going to sell your home to your child, and don’t want to gift it in the eyes of the IRS, you need to price as close to the property’s market value so there are no extra tax considerations. Be sure to get an appraisal and work with a real estate agent to find the best price that benefits both parties, especially when working with your child as the buyer. This also means making sure your child is able to qualify for a loan before going down the path of selling.
But, hiring a licensed appraiser to give a professional appraisal can be pricey. Instead, talk to a real estate agent who can give you a comparative market analysis.
When selling your house to your child, you also have the option to take a less expensive approach to selling and financing through an owner-financed sale. This allows your child to make monthly payments directly to you instead of operating through a lender and saves him or her thousands in interest. For questions about how to do this, get in touch with an experienced real estate agent who can walk you through the process.
When selling your home to your child, there are tax consequences for both parties that you should be aware of before entering an agreement.
Considering selling your home to your child at a discount? If there’s a significant difference between your home’s fair market value and the selling price, the IRS will consider the transaction a gift. If the difference is more than the $14,000 annual exclusion allowed, you will have to file gift tax forms when you file your federal income taxes.
If your child purchases your home at a discounted price and then later sells it for a large profit, your child might have to pay capital gains tax. Also note that the IRS will expect some amount of the loan your child takes out, whether it’s owner-financed or through a lender, to be paid back in interest or it may consider the loan a gift, therefore applying a gift tax.
Be Upfront About the Relationship
In most situations, a lender won’t deny an application for a loan because of a buyer/seller relationship. However, not disclosing this information up front can cause big problems.
If there’s an existing relationship, The Federal Housing Authority requires all applicants to complete an Identity of Interest Certification form. Not disclosing the relationship could cause the application to be denied and in some cases could be enough to constitute mortgage fraud.
Put It on Paper
Selling your home to your child means that you have the ability to be more flexible with repayment terms, but that doesn’t mean you shouldn’t approach the terms as you would with any other buyer. Be sure to put all terms in writing and work with an attorney to create a mortgage note that you and your child can sign. The agreement should include an outline of the loan with payment due dates, penalties and interest rate.
A Quitclaim Deed
If you’re mostly looking to sell your home to your child to establish assets in your child’s name, and he or she doesn’t have the money to pay you upfront, you can draw up a quitclaim deed. This allows you to add your child’s name to the title of your home.
A quitclaim deed is a way to transfer interest in real estate properties. It allows you, the grantor, to transfer interest to your child, the grantee. To make payments to you, your child can take out a second mortgage.
Ultimately, you need to take the right steps when selling your home to your child. Get in touch with a Clever Partner Agent to save on a listing commission and to get help as you navigate the right approach.