How to sell your home to a family member off-market

Why selling your home to family or friends is different—and how you can prepare for a smooth transaction

Most home sales take place between two strangers who have not previously met. In these arms’ length transactions, two or more unaffiliated parties agree to do business in their own self-interest. 

When you sell to family or friends, the transaction will likely take place off the open market, which draws more attention and scrutiny from regulators. And if you sell for less than the fair market value on the open market, the IRS will implement a gift tax on the sale that the seller is responsible for paying. 

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Key Takeaways:

  • Selling to a family member requires additional tax documentation that isn’t otherwise required 
  • Providing a family member with a substantial discount on the home is considered a gift of equity 
  • Hiring a home inspector and appraiser will help determine your home’s market value, which is used to calculate your gift of equity 
  • You can sell your home for whatever price you’d like, as long as you understand the tax implications at play 

Should I sell to a family member? 

When you sell to family, you’re at peace knowing the home you’ve made countless memories in will stay in the family and be cared for appropriately. It could also provide your children or grandchildren the stability they need to begin their adult lives. 

However, for all the benefits of selling to a loved one, the drawbacks are related mainly to taxes and regulations. Both parties should consider all of the following before moving forward with the transfer of ownership:

  • Likely, you won’t make as much money as you would if you list on the open market 
  • Failing to report (or misreporting) the transaction could raise red flags with the IRS, creating a tax liability for either party in the future 
  • Should anything go array, the personal relationship between buyer and seller could become strained 

How is selling to a relative different? 

The government and third-party service providers treat real estate transactions differently depending on the relationship between the buyers and sellers. 

When you sell your home to someone with whom you don’t have personal ties, it’s considered an arm’s length transaction. Both parties enter a purchase agreement free and independent of each other, with each party looking to acquire the best deal for themselves. The expectation is that both the buyer and seller will negotiate to secure the best possible deal for themselves. The appraisal determines the home’s market value, guiding the listing and sale price. 

When you’re selling to someone you already know off the open market, it’s considered a non-arm’s length transaction or controlled transaction. The parties involved agree on a purchase price independent of typical market conditions. 

Suppose you sell the home for a considerable amount beneath market value. In that case, the IRS considers this a taxable gift, and you must report it on your disclosure forms during the sale.

For example, selling your home to your niece for a flat fee of $1 will require additional documentation to explain why you sold the home at that price. 

Non-arm’s length transactions aren’t necessarily between family members. Any two people with an existing personal or business relationship could agree to this kind of transaction. 

Although non-arm’s-length transactions are legal, they are at a higher risk of being fraudulent which is why the IRS pays close attention to controlled transactions. 

woman talking to a man
Selling your home to a family member is a great way to help someone you love gain equity and wealth over time, but there are specific tax implications to consider so the IRS does not think you’re hiding income

What is the gift tax? 

If you sell your home for less than you could on the open market, the IRS will lose out on the potential revenue from the full-price sale. They make up that difference by charging a gift tax.

The gift tax also ensures that people don’t commit tax fraud by giving away gifts or sums of money to avoid paying income taxes.

As of 2022, the annual limit for a tax-exempt gift is $16,000. Any amount above that is taxed at 18% and increases by 2% for every additional $20,000. These numbers are your annual tax-exempt limit. 

But there are also lifetime tax-exempt gift amount limits you should be aware of for estate planning. 

Does selling my home to a family member affect my estate?

You can pass $12.06 million of your estate on to your family tax-free. So if the amount of your estate plus the amount you’ve given away adds up to more than $12.06 million, your estate would be taxed on however much it’s worth above that lifetime limit.

For example, let’s say you sell your home to your daughter for $1, but the home is worth $1 million. You’ve gifted your daughter $1 million. If you were to die with an estate worth $12.06 million, in this example your lifetime gifts would equal $12.06 million plus the $1 million you gave away as part of the house (a total of $13.06 million). You would have passed your tax-exempt limit by $1 million and be taxed according to the federal and state tax rates.  

Another way to think about it is by deducting the gift amount from your estate. Suppose you have $12.06 million in an estate and give a family member $1 million in equity by selling that house for $1. In that case, you now have $11.06 million left of tax-free estate to leave behind. 

It’s nice to provide a family member with a home so they can begin to build equity or start a life. Still, you’ll want to plan your finances accordingly, especially if you have a sizable estate. 

How do I manage taxes when selling to a family member?

There are three concepts every seller should understand before selling a house to a family member. 

Equity 

When you sell your home for less than fair market value, the IRS views the equity in the house as the gift, not the house itself.

Rather than gifting someone money, you’re giving them a discount on the home’s value. If that price discount exceeds $16,000 in value, it’s considered a gift of equity. 

Using the same example as before, if you sell your $1 million home for one dollar, the buyer will automatically have $999,999 of equity in the property. In other words, they paid a dollar for something they could sell for nearly $1 million. 

Gift Price 

Their equity is the difference between how much your family member buys the home for and how much they could sell it later. The IRS calculates the gift value on the buyer’s equity. 

The best way to determine the home’s fair market value is to hire an appraiser and home inspector. Together, their evaluations will determine what the home is worth. Even if you already know how much you want to sell your home to a family member for, knowing the actual value of the home is essential for planning your tax liability. 

Capital gains tax 

When you sell your home, you’ll pay taxes on the money you make from the appreciated value. So if you sell your home at a discount or even give it to a family member outright, they may be slapped with a high tax bill when they go to sell it because of how much profit they’ve made. 

So, if your daughter buys your home for one dollar but then sells it a few years later for $1 million, she will have made $999,999 in taxable capital gains from the property. 

Her tax rate for that capital gain will depend on a few factors: her marital status, income, how long she owned the home, if she gained income from it by renting it, and the home’s tax bracket. 

Your daughter will have inherited the original tax bracket of the home from you when you gifted it to her. When she sells it, the home’s current value and any mill levy on the property determine the home’s new tax bracket. 

If you’re unsure what this might mean for you, consult a knowledgeable real estate agent before moving forward with the sale. 

Tips for selling to a family member

Whether selling to a family member or a stranger, you should ensure your home sale is well-organized. Here’s how you can avoid headaches later:

Put everything in writing: Document all terms and agreements of the home sale. Everyone does business differently, even if you have an excellent relationship with the person you’re selling to. Make sure to keep copies of verified documents throughout the transaction, as well as after the transaction has been completed. 

Hire professionals: Hire at least one real estate agent and one real estate attorney to help make sure documentation is filed correctly on closing day. It takes a lot of paperwork to sell a house, especially when selling below market price. Ensure all state-required property disclosures and tax documents are professionally handled and filed. 

Double check you’re complying with tax laws: The IRS may think you’re trying to avoid paying capital gains tax or income tax if you don’t properly disclose that you’re selling below market value. Your tax attorney will be able to guide you through this process, so make sure to consult with them before closing.

Selling off-market to a friend or family member

By selling your home to a family member or friend, you’ll be helping them establish wealth and equity for the future but make sure to do it strategically and legally. Consider the tax implications of a lower sales price. 

Real estate deals between family members are considered controlled transactions. This means lenders and the IRS treat these deals differently than they would an arm’s length transaction between two parties acting in their own interests. 

If you’re selling the home beneath market value, the IRS may consider the transfer of property a gift, in which case a gift tax may apply. Discuss how a gift tax affects your estate planning and tax liability with an accountant or financial planner.  

To ensure everything goes smoothly, get everything in writing, order a home inspection, hire an appraiser, and double-check compliance laws with a real estate lawyer or tax attorney. 

About the author: Vivian Tejada is a freelance writer and small business strategist based out of Providence, RI. She specializes in writing SEO blogs, property descriptions and website content for real estate companies. She’s also an avid traveler, location-independent and enjoys trying out new restaurants. 

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