Selling Your House to a Relative – Things to Consider
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Alt-tag: Two men shaking hands.
When selling their homes to relatives, many people do not want to hire a professional to help them. They believe that not paying for assistance allows them to save money. Unfortunately, this isn’t always the case. If you’re considering selling your house to a relative, you must know what you need to do.
It is not easy to keep complications and stress to a bare minimum when selling a house. To achieve this, you must approach the process formally and professionally. You will save yourself time, maybe even money, if you do that.
How Much Is Your Home Truly Worth?
Whether you are selling or buying, it would be best if you contact a professional first. For example, it is good to have a professional determine the value of your home. Having a third party review everything before negotiating can save you a lot of hassle.
Even if there are no issues in your family, a significant transaction like this can cause complications. This is because disagreements over contracts and fees can quickly arise. Before negotiating with your relative, you should have your home appraised by a professional to determine its current market value.
Which Professional to Contact Before Selling Your House to a Relative?
The first step is to have your house inspected. The inspector’s report will provide you with an objective assessment of the home’s condition and shine a light on significant issues that could affect the sale price. In turn, you will rest assured that your home is in good shape for sale.
Caption: Before selling your house to a relative, you need to know its value.
Alt-tag: A man stacking coins
In addition to a house inspection, you should hire a realtor. Realtors can assist you in determining the market value of your home through Comparative Market Analysis. A good CMA can tell you what many homes similar to yours are selling for, how quickly they are selling, and how much they sold for compared to their original listing price.
Finally, we always recommend that you consult a professional appraiser. If your family member seeks a mortgage to finance the home purchase, a survey and appraiser are a must. Before you sign any paperwork, it’s a good idea to obtain an appraisal, especially if you are selling your home below market value.
Can You Offer a Discount on the House to a Family Member?
If you choose to sell for less than the current market value, The IRS will consider that “gift equity.” This is critical because the tax falls entirely on you if you decide to discount the house.
Individuals can deduct up to $15,000 in annual gift exclusions. Married couples can deduct up to $30,000 in yearly gift exclusions. This is the maximum amount you can discount a sale without reporting it to the IRS as a gift.
How Do You Determine the Price of Your Home?
There are no rules for determining the price when negotiating with a relative. You could agree on a price based on an appraisal or wait until after the inspection is complete. Regardless, you’ll want to have a purchase contract that includes relevant contingencies.
Caption: As long as you agree with your relative, any price is acceptable.
Alt-tag: A man is holding a toy house in one hand and typing on a calculator with the other.
The Emotional Factor and Family Dynamics
When considering selling your home to a relative, it’s crucial to consider the emotional aspects and family dynamics that can play a significant role in the transaction. Unlike a standard sale where you’re dealing with a stranger, selling to a family member can stir emotions and create expectations that might not be realistic or fair. It’s essential to have open and honest discussions to set clear boundaries and expectations. Failure to communicate effectively can lead to long-term strain on family relationships.
Drafting a Legal Agreement
Because you’re dealing with a relative, you might be tempted to be lax with legal formalities. However, treating the transaction as professionally as possible is vital to drafting a detailed legal agreement. Both parties should consult their legal advisors to ensure the agreement is fair and complies with local and federal laws. That also reduces the risk of misunderstandings or disputes later on.
Financing the Transaction
If your relative does not have sufficient funds to purchase the home outright, you’ll need to explore financing options. Could you act as a lender yourself, offering them a family loan? That could benefit both parties, but consult a financial advisor to understand the implications. Another option could be a co-ownership agreement where you retain some ownership until the relative can afford to buy you out. Regardless of the method, consulting with financial professionals is important to ensure that both parties are protected.
Consult with Tax Professionals
Selling a property often comes with its tax consequences. Since the transaction is with a relative, it’s more crucial than ever to consult a tax professional who can navigate the specific rules related to familial real estate transactions. They can help you understand how the transaction will affect your tax obligations and whether there are any exemptions or deductions you can take advantage of.
These may include the right to terminate the agreement if a family member cannot secure a mortgage by a specified date.
Is a “Purchase and Sale Agreement” Required?
Once you and your relative agree on the sale price, you must sign a purchase agreement. This agreement will guide both parties through the difficult period between offer acceptance and escrow or payment. The offer becomes legally binding when both parties execute the purchase and sale agreement.
The information that the purchase and sale agreement needs to contain:
- Determination of the parties to the transaction
- The legal description of the property that you are selling to your relative
- The financial details including buyer financing, the purchase price, and closing costs.
- Timelines of a contingency period, the offer’s expiration date, and the closing date
When selling to a family member, you can sign the agreement as soon as possible. That is the case because you know that transferring ownership to the intended buyer will not be disrupted. With that said, you should sign this only after agreeing on a fair price for both of you.
How to close the deal?
After you have decided everything, all that remains is to transfer the property titles. When transferring the title of your property, you should consult a real estate lawyer. They will explain the different methods with which you can transfer the title.
Caption: You should put everything in writing, regardless of your relationship with the buyer.
Alt-tag: A man signing a document
Each transfer method has its nuances. Which one is best for you depends on your specific circumstances and the tax implications of each. Depending on the property’s value, you or your relative may be subject to gift or capital gains taxes after completing everything.
How to Relocate After the Sale?
Selling a house is a stressful ordeal. It can also be expensive, especially if you want to do everything correctly. That does not mean that moving out of your house should add to the expenses. There is no reason why moving out should break the bank. You can make your relocation as affordable as possible if you do your best to cut expenses.
Conclusion
You should approach the process of selling your home to a family member the same way you would any other sale. While these types of real estate transactions can be inexpensive and straightforward, it is prudent to plan for complications.
Selling your house to a relative is a regulated transaction, just like any other of this nature. There are only subtle differences. But if you consider everything we’ve discussed here, you do not have to worry about anything. With these steps in mind, you will be able to anticipate all of the pitfalls and problems that may arise, whether you are dealing with a family member or anyone else.