7 Steps To Selling A House To A Family Member

5. Perform a title search

This is an important preemptive step for the final closing process.

A proper title search will comb through the property’s financial history to make sure that the seller is indeed the owner and if there are any unpaid debts attached to it.

You can do this yourself by tracking down past deeds and tax records, or pay someone else to do it, such as a title company or real estate attorney. According to the April 2024 National Association of Realtors Confidence Index survey, title and deed issues, among other reasons, accounted for about 11% of closing delays and 4% of contract terminations.

6. Consult with an attorney

Depending on the complexity of the sale, it may be worth consulting with a real estate attorney.

They can be valuable if you wish to draft a deal-specific contract or if any issues with the title are found.

“If you think there is a problem with the title, then for sure use a lawyer because title companies don’t clean up problems in a chain of title, they just tell you what it is,” says Robert S. Pecharich, a real estate attorney and senior partner with Boyle, Pecharich, Cline, Whittington & Stallings P.L.L.C. in Prescott, Arizona.

Attorneys can also assist with the closing of the sale by ensuring everything is filed properly and resolving any last-minute disputes between the parties. Some states even require an attorney to be involved during the closing process.

“At the end of the day, I’d recommend getting an appraiser and an attorney, because that’s just the easiest, cleanest, and most affordable way to make sure everyone is treated fairly,” Ruiz says.

7. Close the home sale

Since you’re selling to a relative, there may be certain aspects of the typical home closing process that you choose to bypass, such as a home inspection or appraisal.

However, you’ll still want to do your due diligence to make sure there are no significant loose ends. This can include the following:

• Transfer the property title
• Pay any final bills or taxes
• Change your address
• Cancel your homeowner’s insurance policy
• Cancel the utilities
• Pass along any documents for appliances or other items in the home

You’ll also have to select what type of deed you are using. A few common options are a quitclaim deed, warranty deed, grant deed, and gift deed. An experienced real estate agent can assist you with this. If you are not using an agent, consider hiring a real estate attorney.

Expert tips and cautions when selling a home to a family member

If you’ve considered all of the listed steps in this article for selling a home to a family member, then you should be in pretty good shape to move forward with the transaction.

For those looking to dig deeper, here are some details on specific aspects of the process that are good to know.

Owner financing options

Depending on the terms of your loan — and if the mortgage is “assumable” — transferring a mortgage is one way to help a family member who is purchasing your property to save on financing costs. This allows them to avoid origination fees and other loan costs, and they will not need a down payment.

If you decide to make it an interest-free or reduced-interest loan, this will be considered a gift by the IRS and must be reported as such. Consult your tax or financial advisor for guidance on your home sale financing options.

If selling your home to a family member below market value

It’s completely fine to sell your home to a family member for a reduced price. Just keep in mind that any amount below fair market value is typically considered a gift of equity and may require you to report it on a gift tax return (more on this in the next section).

As a courtesy to your neighbors, list the transaction as a family sale in the public property records. This will let appraisers and agents know that it was a non-arm’s-length transaction if they research your property’s sale while checking comparable home sales, or “comps,” in the area.

If gifting a house to a family member

Whether you sell a house to a family member for a slight discount or give it to them outright, any amount below fair market value is considered a gift in the eyes of the IRS. This typically means you’ll have to file a gift tax return using IRS Form 709 to disclose the gift.

Here are some explainers and things to keep in mind when gifting property:

• Gift tax: A gift tax is simply a tax on the transfer of money or property to another person for nothing (or less than full value) in return. There is a federal gift tax that everyone in the US has to consider. The only state to have an additional gift tax of its own is Connecticut.
• Gift tax annual exclusion: The annual federal gift tax exclusion for 2024 is $18,000 for single filers and $36,000 for married couples filing jointly. Meaning, you can individually give up to $18,000 to as many people as you want in a given year without having to report it to the IRS. Spouses who combine their gift exclusion (known as “gift splitting“) must still file a gift tax return, but it typically won’t affect their lifetime gift tax exemption unless it exceeds the $36,000 threshold.
• Lifetime gift tax exemption: Under the current federal law, the lifetime gift tax exemption is $13.61 million. This means someone can give away up to that amount in their lifetime before having to pay any gift tax. Assuming no changes, this exemption amount is set to expire at the end of 2025. Starting January 1, 2026, the exemption will drop to about $7 million.
• Gift letter: To properly give a gift of equity, the seller should draft and sign a gift letter listing all pertinent information regarding the gift. The letter should include the seller’s relationship with the buyer, the property’s address, and the amount of equity being gifted.

Do I have to pay capital gains taxes when I sell to a family member?

Like any real estate transaction, this depends on when you purchased your property, how much you paid for it, and how much you sold it for.

When you sell a house that qualifies as your primary residence, you can be exempt from capital gains taxes on the first $250,000 if you are single, and up to $500,000 if married and filing jointly. To qualify as your primary residence, you must have owned the home for two years and lived in it for two of the past five years. This exemption is only allowable once every two years.

Example:

• You have lived in your home since 1997 and paid $150,000 for the house.
• You sold your home to your child in 2021 for $500,000.
• If you’re single at the time of the sale, then you’re eligible for the $250,000 exemption, bringing your taxable capital gain to $100,000. If you’re married filing jointly, then you and your spouse are eligible for the $500,000 exemption, resulting in no capital gains tax being owed.

Get sound advice before selling a house to a family member

There are benefits to selling a house to a family member, but there are also pitfalls to avoid, and financial and tax implications to consider.

The seven steps we’ve outlined above can be a helpful guide, but for the best results, we recommend you partner with the right professionals. These might include a real estate attorney, tax or financial advisor, and a top real estate agent who can act as a liaison, reduce drama, avoid mistakes, and keep the sale fair and moving along.

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